In Europe, the scope of the issue appeared limited at first, until the unfolding of Deutsche Bank’s situation changed the picture. The Credit Suisse sale, hurried through over a single weekend, likely helped temper views of Switzerland’s presence as unsustainable, reducing the immediate pressure on authorities to deploy their final, fallback plan. The situation remains intricate across Europe, and a straightforward, one-size-fits-all solution has yet to emerge. What instruments and negotiating power does Europe still possess in this hypothetical scenario?
Margarita Delgado, vice-president of the Bank of Spain, recently spoke in connection with the PwC report The Banking Union, a Challenge Across Overlapping Crises. She stated that a European solution could arrive this year through a Single Resolution Fund (SRF) with an initial target of eighty billion euros, complemented by additional support from MEDE (the European Stabilisation Mechanism). [Cite: PwC report and Bank of Spain remarks]
Exposed as piecemeal at the outset, the Bank of Spain notes that the SRF is funded by contributions from all banks and certain investment firms across the 19 member countries of the Banking Union. Its target equals about 1% of insured deposits, a milestone gradually built since the union’s inception in 2016, with contributions continuing until the year-end or until the fund is called upon. [Cite: Banking Union framework]
Jonás Fernández, a member of the European Parliament representing the PSOE and part of the Economic and Monetary Affairs Committee, explained that MEDE could provide a backstop up to twice the amount contributed by SRF. If the fund is fully utilized, MEDE’s input could reach 160 billion euros, potentially boosting the European “bazooka” to 240 billion euros if a resolution becomes necessary. [Cite: Parliament member statements]
At the Bank of Spain, officials emphasize that these tools are reserved for liquidity support during resolution processes and are not substitutes for the European Central Bank’s broader liquidity toolbox. The ECB’s LTRO scheme, a rapid lending facility at low rates, is designed to ensure liquidity in the interbank market and to prevent a systemic collapse. [Cite: ECB tools overview]
One challenge with the proposed 240-billion-euro bazooka is the lack of homogeneous implementation across Europe. The SRF’s activation requires shareholders and bondholders to cover at least 8% of the institution’s debts in a resolution scenario. The order of losses is currently under discussion as Europe seeks harmonization, a process not yet completed in Italy, where officials have advocated broadening the ESM’s remit. [Cite: European harmonization efforts]
Another critical point is that the resolution plan relies on the survival of medium-sized and systemically important entities; smaller banks may be kept under local authority control. In Spain, the engine for asset liquidation would lie with FROB. The remedy framework is designed for situations with no obvious exit, where authorities evaluate social and economic consequences before proceeding with a resolution plan. In practice, crises have often been resolved through strategic sales, such as Banco Popular’s sale to Santander or Credit Suisse’s sale to UBS. Supervisors are weighing three additional options: transferring assets or liabilities to a bridge institution to save time, moving assets or liabilities to an asset management company to maximize sale value, or internal recapitalization that uses debt instruments to absorb losses before converting debt to equity and pursuing restructuring measures. [Cite: European resolution practices]