- The EU has shifted from a bailout to a bail-in approach to bank failures
- The BRRD directive focuses on early interventions to avoid costly resolutions
- The system seems to work for “idiosyncratic” failures but is untested by a major one
Faced with a cascade of banking failures in 2008-2012, European authorities decided to rescue most lenders through multibillion-euro government bailouts. Crisis management had to occur on a political level, mostly under extreme time pressure, with the absolute priority of preventing chaos from spreading into a wider economy that was already severely depressed.
Ten years later, the idea that governments must ride to the rescue of distressed banks to preserve financial stability has gone out of fashion. The disruptive effect of such bailouts on public finances and rising sovereign debt are usually put forward as arguments against such assistance.