Risk Management, Trading & Portfolio Strategies

Will the new EU bank resolution rules effectively reduce global risk?

A new set of EU rules is designed to ease investor concerns over problematic banks.

A new set of EU rules is designed to ease investor concerns over problematic banks.

In order to reestablish investor confidence in global markets, international finance authorities have struggled to come up with methods to handle the failure of systematically important banks in ways that don't impair creditors, depositors and taxpayers too severely. Since the sovereign-debt crisis emerged in the European Union (EU), leaders in that bloc have been forced to rely on unorthodox practices to address those issues in a way that has been interpreted by most market participants as profoundly ad hoc. As a result, risk premiums in credit markets have surged and investors worldwide remain convinced that the next big loss is right around the corner.

Officials from the European Commission, the EU's executive branch, announced on July 10 that the organization had developed a series of bank resolution rules that will be used in the future if a member state's banks are on the verge of collapse. The need for codification arose following the Cypriot banking crisis, when the nation's two largest banks were forced to merge and thousands of depositors suffered losses. While there was an implicit understanding that taxpayer funds would not be employed during that time, the new rules explicitly state that creditors – and then depositors – must be impaired before emergency support from either a national central bank or the European Central Bank is explored.

"Today's changes of the crisis rules are based on the good practices of the last years in dealing with bank bail-outs and restructuring," Joaquin Almunia, who heads the European Commission's anti-trust unit, said in a statement. "Bank owners and junior creditors will need to contribute before any more taxpayers' money is spent on bank bail-outs."

This action aims to reassure investors that European nations won't buckle underneath the pressures of their financial sectors should problems arise. However, it's unclear precisely how these policy tools will work seamlessly if risk levels begin to spike in sovereign debt markets or their corresponding stock markets.

Because global systemic risk shows no signs of abating, investors should turn to online tools that help them protect profits through the use of portfolio alerts. SmartStops enable investors to evaluate and react to market developments in a timely manner. For example, our Risk Signals can show you where and when a stock or equity is exhibiting signs of elevated risk so that you can make a more informed decision. 

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