The insolvency of cross border banking groups: problems and perspectives

This thesis discusses the current range of legal and economic problems related to the insolvency of cross border banking groups. The first aim is to show how the actual structure and internal organisation of such groups make them «too big to fail» institutions. Their funding preferences, their soft budgets constraints and their presence in different member States increase the likelihood of contagion and the adverse systemic impact of their failure. A great role is played also by the time inconsistency of States’ “no bail out policies”. The second aim is to prove how the lack of a formal EU regime on the matter, which is left to Mou’s agreements and poor enforcement authority, is completely inefficient. In fact, the existent legal and operational differences between Member States and the agency conflicts among competent Authorities give raise to serious coordination problems, ring fencing and sub-optimal crisis management. To ensure a better outcome, a proposal on the design of ex ante tools and the different contents, role and timeframe for action of burden sharing agreements, intra-group transfers and “living wills” (i.e., recovery and resolution plans) is spelt out. Lastly, despite European efforts to mediate such conflicts and create a level playing field, when those crises occurs member States resolve them with ad hoc measures and on a case-by-case basis. In the shed of the current economic crisis Member States intervened with plans to sustain the sector. However the final outcome of such measures would be a new financial structure where competition may be hindered. Further, those plans do not avoid moral hazard, do not envision state exit neither bank repayments nor minimize big banks’ incentive to behave.