Faculty of law blogs / UNIVERSITY OF OXFORD

Pandemic Crisis and Financial Stability


Christos V. Gortsos
Professor of Public Economic Law, National and Kapodistrian University of Athens and President of the Academic Board, European Banking Institute (EBI)


Time to read

3 Minutes

The recent e-book on Pandemic Crisis and Financial Stability, which was published by the European Banking Institute (EBI) and which I co-edited with Georg Ringe (Hamburg University) contains as Chapter 11 my own contribution entitled ‘The application of the EU banking resolution framework amidst the pandemic crisis’. The chapter sheds light on an aspect to which less attention has been paid up to now, even though the solvency crisis management framework (not yet tested under conditions of a systemic crisis) is an element of primary importance, since the probability that it will be widely activated amidst the current crisis and in its wake is significant.

My article first discusses the Single Resolution Board’s (SRB) approach in view of the uncertainty and disruption the crisis has caused , setting out its remit on potential operational relief measures, its actions to support efforts to mitigate the economic impact of the crisis and its dealing with MREL targets. I view this approach as based on two complementary pillars, ‘preservation of financial stability’ and ‘flexibility in the application of the resolution framework’. 

The focus then shifts to the implementation of the framework during the crisis in relation to resolution action. I argue that it is premature to assess to what extent resolution action will be undertaken in relation to credit institutions which will meet the ‘failing or likely to fail’ criterion, an aspect of significant concern from the end of this year onwards due to an expected rise in the rate of non-performing loans (NPLs) as a consequence of the severe economic downturn. In my view, it is also questionable whether, at least temporarily and on a generalised basis, the bail-in resolution tool will de facto become ‘non-preferable’ as an instrument in the arsenal of resolution authorities when they take resolution action because of the amplifying effect of the tool for (already) distressed individuals and businesses in the real economy.

The potential application of any of the three alternatives for the provision of public support to ailing credit institutions (the ESM direct recapitalisation instrument (DRI), Government Financial Stabilisation Tools (GFSTs, under the BRRD) and precautionary recapitalisation (under both the BRRD and the SRM Regulation) is also an issue of concern. In this respect, I consider of particular interest whether the conditions for resorting to precautionary recapitalisation will be interpreted in a flexible (and hence broader) way in order to accommodate to the needs arising amidst the current crisis, taking into account the recent relative laxity in the application of the EU State aid framework and, in particular, the Commission Banking Communication of 2013. I also note that the adoption of the common backstop to the Board for the SRF, which is long overdue, may be further delayed due to the primary focus of the ESM on the operationalisation of the ‘Pandemic Crisis Support’ instrument, which will absorb a significant amount of its funds. This would be regrettable, since the existence of this backstop may prove imperative in the forthcoming turbulent months (and especially by next year).

In concluding, I take it as a given that the ultimate public policy objective, namely the preservation of financial stability, should not (and is not expected to) be compromised. Taking into account the existing set of tools available in order to achieve that goal and considering that any major amendments to the relevant existing regulatory framework, will not take place at least in the medium term, I argue that the effectiveness of policy reaction under the current conditions will mainly be tested against one benchmark: how the triggers embedded in the framework to activate these tools will be used, in view of the necessary flexibility that has to be (and is being) applied.

The burden falls, first, on banking supervisory authorities which will have to make appropriate use of all their supervisory and early intervention powers, including their powers in relation to mergers and acquisitions in the banking sector, and adequately assess the occurrence of ‘failing or likely to fail’ conditions. In addition, banking resolution authorities will have to take delicate decisions once the first resolution condition is met by credit institutions (on top of their power to make this determination themselves). My final comment is that neither the duration of the current pandemic crisis, which in contrast to the global financial crisis of 2007-2009 was undoubtedly not triggered by the financial system, nor its economic impact can be determined, yet, given that the crisis is currently in its first phase and there seem to be several ‘unknown unknowns’. I argue, however, that it is quite reasonable to consider that in the medium term, rather than in the long-run, it may have a heavy negative impact on the banking sector (on a global scale, and not only in the EU) and lead to extensive restructurings therein.

Christos V. Gortsos is a Professor of Public Economic Law at the National and Kapodistrian University of Athens and President of the Academic Board of the European Banking Institute (EBI).


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