8.8.2 Addressing moral hazard

Whether the resolution framework sufficiently addresses moral hazard is a controversial topic.1 It is often mentioned that the moral hazard risk is mitigated by ensuring that each bank can fail. After the introduction of the resolution framework, winding up a bank through normal insolvency proceedings is considered the default option.2 As long as Member States can use their insolvency proceedings to award State aid to banks without triggering the bail-in requirements under the resolution framework, the moral hazard risk will, however, still be present.

In addition, the resolution framework seems to focus on limiting the risk of ‘moral hazard’ not the level of the bank, but at the level of the shareholders and creditors of a bank, since they are the ones that can now be forced to contribute to a failing bank.3 Under the State aid regime for the banking sector, shareholders and creditors of banks cannot be forced by the Commission to contribute to failing banks. The Commission can only disapprove of the State aid award by the Member State. As a result, any measures taken in relation to third parties needed either to be implemented in cooperation between the bank and its stakeholders, or to be imposed by the Member State through national legislation. This is different under the resolution framework, since the resolution authorities can interfere in contractual relationships of a bank.4 The resolution authorities can exercise the PONV conversion power and apply the resolution tools. In addition, the resolution authorities have the resolution powers, under which they can cancel or modify contractual terms, suspend payment and delivery obligations and suspend termination rights. The measures that the resolution authorities can take with respect to the failing bank itself – such as removing or replacing the management board of the bank, enforcing caps on remuneration and preventing banks from paying dividends or coupons –could already be imposed on banks as part of the State aid award process. The resolution framework has not, therefore, substantially altered the measures that could already be imposed under the State aid regime for the banking sector with respect to the failing bank itself.