BlueVal’s Partner Andreas dal Santo is the co-author of a paper published by the Central Bank of Italy (Banca d’Italia) on “The EU bank insolvency framework: could less be more?”. The paper analyzes the framework for bank crisis management in the European Banking Union (EBU). The paper concludes that the EBU multiple criteria, when combined, can generate unintended consequences that undermine the effectiveness of the system. The paper suggests that a piecemeal reform of the EBU is inadequate to tackle the framework’s shortcomings and that a broader effort is required to streamline the current criteria into a single rulebook. The paper indicates that the successful experience of the US framework for bank failure management provides a useful benchmark. It shows that the generalized, if not exclusive, reliance on a single, clearly defined, easily measurable and quickly actionable criterion – the Least Cost Test – makes it possible to offer full protection to taxpayers and contain the destruction of value caused by bank failures, thereby safeguarding the economy. The paper concludes that adopting this criterion by the EBU would help frame a common approach to failing banks of all sizes and provide a unifying force and a solution to the geographic and institutional fragmentation of the current set-up.

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