5.5.2.3 Financial stability as the overriding goal

Within the resolution framework, several indications can be found that (one of) its objectives is to protect public funds. Firstly, the BRRD and SRMR recitals contain several references to the objective of minimising the costs for ‘taxpayers’.1 Secondly, one of the resolution objectives is to protect ‘public funds’ by minimising reliance on EPFS (by failing banks).2 In other words, one of the reasons to put a bank in resolution is to restrict the use of public funds for bank failures. Even if this is not the reason for putting the bank in resolution, public funds are still protected through the resolution condition that there is no reasonable prospect that any alternative private sector measures, including measures by an IPS or supervisory action taken in respect of the entity, including early intervention measures or the write-down or conversion of relevant capital instruments in accordance with the PONV conversion power, would prevent its failure within a reasonable timeframe. This resolution condition should always be met before a bank can be put in resolution.3 While protecting public funds is one of the objectives of the resolution framework, another is to avoid a significant adverse effect on the financial system (according to the wording in the BRRD) or the financial stability (according to the wording in the SRMR).4

According to Tuominen, the Member States came up with the concept of financial stability in order to justify the bail-out of Greece and the subsequent creation of the ESM. The underlying rationale was that the GFC threatened not just the individual Member States, but also the future of the euro as a currency and therefore the whole EU. With this political rationale, financial stability became a legally legitimizing factor for bail-outs.5 There is however a tipping point, when bail-outs have a destabilizing impact on public finances and sovereign debt.6 During the GFC, certain Member States faced this tipping point, as a result of which it became clear that strict limits should be set for bail-outs. Both the State aid regime and the resolution framework, however, prioritise maintaining financial stability above protecting public funds in a last resort situation.7 The underlying assumption justifying the use of public funds in a last resort situation is that the financial position of the bank could quickly deteriorate and then generate financial instability.8 This means that sometimes taxpayers have to contribute to the losses of banks in order to avoid any further – potentially catastrophic – losses and to ensure financial stability.

There could therefore be situations where the use of public money instead of – or accompanying – the resolution tools can be more appropriate and effective in light of the public interest. Public funds may be needed if imposing extensive losses on private stakeholders would unleash large spillovers. In these exceptional cases, the moral hazard and fiscal costs of bail-outs would be preferable to the disruptive effects that spillovers associated with bail-ins could have on financial stability and the economy at large.9 In other words, financial instability can have a meaningful cost to taxpayers even if it is not visible in the very short term.10