Following the collapse of Silicon Valley Bank and Signature Bank, the troubled path of First Republic, and the forced purchase of Credit Suisse by UBS, a troubling pattern emerged that echoed echoes of the 2008 financial crisis. Investors watched another slide in bank equities and bonds, even as the market tested new tools for preventing and resolving banking crises. Here are the instruments that have shaped crisis response in recent years.
After the 2008 turmoil, a suite of tools was created to reduce the severity of banking crises. One key instrument is the Single Resolution Fund (SRF), financed by the contributions of many banks and some investment firms across 19 member countries. The body overseeing bank resilience rests on three pillars: the single supervisory mechanism, the single resolution mechanism, and a centralized deposit guarantee framework. The forecast is that the SRF will accumulate an amount equal to at least 1% of the deposits from credit institutions; estimates placed this near 80 billion by the end of 2023. This tool is part of the Single Resolution Mechanism (SRM), established in 2015 to ensure an orderly wind-down of failing banks with minimal burden to taxpayers, guided by a central decision body and supported by the European Stability Mechanism (ESM). The European Financial Stability Facility (EFSF) was created in 2010 and reformed into the ESM in 2012 to support euro-area financial stabilization. The ESM primarily extends credit to member states to clean up financial systems, a model seen in cases like Spain. In non-systemic cases, national authorities lead the resolution process; in Spain, the fund is managed by FROB. If the SRB determines a bank’s failure would not harm public interests, it is wound down; otherwise, resolutions seek to transfer assets to solvent entities or sell them to another buyer. One example is Sareb, a “bad bank” created to house distressed assets. In June 2017, the SRB issued its first resolution decision in the case of a well-known bank later associated with Santander.
The European Central Bank (ECB) is the central institution wielding these tools, including liquidity measures such as LTROs – Long-Term Refinancing Operations – and emergency lending at low rates in the interbank market. LTROs are designed to support lending to businesses and households by banks within the euro area, provided lending targets are met and the loans carry longer maturities, typically three to four years. The ECB launched three rounds of LTROs: LTRO I in 2014, LTRO II in 2016, and LTRO III in 2019. The parameters for the most recent round were adjusted in 2020 in response to the COVID-19 pandemic.
Another pillar is MREL – Minimum Required Eligible Liabilities – an obligation applying to European banks to create a solvency buffer that covers potential losses and supports recapitalization without public money. MREL is set for each bank group based on risk and other characteristics and has been in force since January 2016. Relatedly, TLAC (Total Loss-Absorbing Capacity) was established for the global systemically important banks list, ensuring higher loss-bearing capacity in crises. In practice, these frameworks push banks to retain sufficient buffers and to manage liabilities in a way that reduces taxpayer exposure in a crisis.
A core purpose of these mechanisms is to align incentives among shareholders and creditors to absorb losses and avoid public bailouts. Debt instruments are ordered to absorb losses first, with capital instruments such as reserves, AT1 and T2, then equity, and finally ordinary creditors. Subordinated and hybrid debt, including convertible bonds sometimes nicknamed “coconuts,” carry higher risk and higher potential returns. In a resolution, ordinary deposits for businesses and individuals up to the insured limit are protected, but larger uninsured deposits and other unsecured claims can face losses. In extreme cases, some losses may be allocated to shareholders and creditors before public funds are used. The goal is to restore solvency while containing the spillover of losses through orderly resolution rather than taxpayer-supported bailouts.
Recent tensions centered on Credit Suisse’s AT1 bonds, whose treatment became a focal point in the UBS acquisition package. The Swiss regulator announced that Credit Suisse’s AT1 securities, valued around €16 billion, would be written down to zero. Such instruments, sometimes called convertible contingent bonds, are designed to preserve bank capital and help managers maintain solvency in stress scenarios. They sit ahead of other debt in the loss chain, but behind equity in recovery, and carry higher risk for investors who hold them. In the Credit Suisse case, shareholders reaped some gains in stock markets with UBS, while AT1 holders faced significant losses. The episode drew renewed attention from the ECB, the SRB, and the European Banking Authority, who clarified that in the eurozone, bondholders do not outrun shareholders when losses are allocated. These dynamics highlight why robust resolution frameworks exist and why they matter for financial stability across Europe and beyond.