Precautionary Recapitalizations: Time for a Review?

Paper prepared in advance for the European Parliament's Economic and Monetary Affairs (ECON) Committee public hearing with Ms. Elke König, chair of the Single Resolution Board

July 11, 2017

Precautionary recapitalization, a tool for public intervention in the banking sector defined in the Bank Recovery and Resolution Directive (BRRD), is consistent with the rest of BRRD and a legitimate instrument for bank crisis management. The conditions set for it by BRRD are restrictive and have so far effectively prevented its inappropriate use on insolvent banks. Minor corrections to the legislative text are desirable to fix a few cases of poor drafting. Beyond these, there is no immediate need for legislative change before the broader review of BRRD scheduled in late 2018. Outside of the scope of BRRD, the colegislators should consider a reform of the EU audit framework to improve audit quality, and the European Stability Mechanism should be empowered to participate in future precautionary recapitalizations.