8.3.1 Introduction

318. In the spring of 2014, European legislators adopted the BRRD, which requires banks and certain investment firms to set up recovery and resolution plans. A bank resolution occurs “when authorities determine that a failing bank cannot go through normal insolvency proceedings without harming public interest and causing financial instability”.1 The financial crisis showed that normal bankruptcy procedures for a bank could cause unexpected contagion consequences for other financial institutions. The bankruptcy of Lehman Brothers in the USA caused “investors to reappraise risk and return. They flew to strong banks and ran from the weak, causing the latter to fail, markets to collapse and the real economy to contract. Financial instability was indeed the instant result of letting a big bank fail”.2 The BRRD was introduced in the European Union to “provide authorities with a credible set of tools to intervene sufficiently early and quickly in an unsound or failing institution so as to ensure the continuity of the institution’s critical financial and economic functions, while minimizing the impact of an institution’s failure on the economy and financial system”.3 The BRRD was thus meant to ensure that the critical functions of a bank, for instance the deposit-taking and lending to non-financial sector enterprises,4 would be able to endure, whereas other non-critical functions could fail. “The objectives of resolution should, therefore, be to ensure the continuity of critical functions, to avoid adverse effects on financial stability, to protect public funds by minimizing reliance on extraordinary public financial support to failing institutions and to protect covered depositors, investors, client funds and client assets”.5

319. The BRRD addresses most of the concerns and objectives identified in the Liikanen report,6 in that it aims to decrease the need for public sector involvement and increases the protection for financial stability by providing additional safeguards for the vital functions of a bank.