Bank resolution: how to protect the banking system without public bail-outs
Bank resolution aims to efficiently and swiftly resolve failing banks, while protecting customers, public resources and financial stability. Over its ten years of existence, the Single Resolution Mechanism has effectively managed major crises, including the Banco Popular episode.
12/12/2025
Banks can fail – and when they do, the consequences for the economy can be dire, with taxpayers sometimes shouldering a heavy cost. This is exactly what happened after the 2008 global financial crisis. Since then, the European Union has created mechanisms to manage banking crises, prevent contagion to other banks and reduce the need for costly public bail-outs
to a minimum. This year marks the tenth anniversary of the creation of the Single Resolution Mechanism (SRM), the perfect occasion to look at what it does and to reflect on how well it has delivered on its promise.
The banking sector is vital to the economy, since it is the main financial system intermediary in both Spain and Europe. Bank failures can cause instant and lasting damage to the economic system, eroding confidence and reducing activity and employment. This has historically justified the use of public money to bail out banks, as the cost of not intervening far exceeds that of the aid granted. However, bail-outs place the financial burden on taxpayers, directly reducing affected countries’ fiscal capacity and indirectly undermining their economic soundness.
Banking resolution was created as a way of managing distressed banks’ situation swiftly, efficiently and without resorting to public funds. Resolution applies when a bank is failing or likely to fail, there are no private or supervisory measures that could prevent the bank’s collapse and it is in the public interest. Its specific goals are set out in Figure 1.
Figure 1
OBJECTIVES OF THE BANK RESOLUTION MECHANISM (click the buttons for details)
SOURCE: Banco de España
To achieve them, the Single Resolution Mechanism (SRM) was set up in 2015. It comprises the Single Resolution Board (SRB) and the national resolution authorities (NRAs). Alongside the Single Supervisory Mechanism (SSM), it stands as one of the two pillars of the banking union already in place, a topic we’ve previously explored in this blog.
The European resolution mechanism’s purpose is to protect financial stability, ensure critical activities continue and minimise the use of public funds
This year marks the tenth anniversary of the SRM. Over the past decade it has proved to be an effective tool for managing banking crises in a consistent and orderly fashion, protecting taxpayers, passing losses to shareholders and sometimes to creditors and strengthening financial stability and confidence in the European banking system. Depositors do not suffer losses on the first €100,000 of their deposits, which is covered by the Deposit Guarantee Scheme.
DID YOU KNOW...?
The Banco de España acts as the national preventive resolution authority for credit institutions, periodically drawing up a resolution plan for each less significant institutions under our direct supervision. We also collaborate with the SRB on the plans for significant institutions (supervised by the ECB within the framework of the SSM).
The resolution plans set out the measures to be adopted in the event of an institution’s resolution and identify any obstacles to their implementation.
Also, the Banco de España designs and establishes a multi-year programme of tests to be carried out by banks to ensure the planned measures are effective.
The authorities have four tools to manage bank resolutions, which are summarised in Figure 2: sale of business (total or partial), a bridge institution, asset separation and bail-in.
Figure 2
BANK RESOLUTION TOOLS (clck the buttons for details)
SOURCE: Banco de España
What steps have been taken to avoid the use of public funds? A key measure is requiring institutions to maintain a minimum volume of loss absorbing instruments and, if necessary, to recapitalise. This minimum requirement for own funds and eligible liabilities is known as MREL. The Single Resolution Fund – funded through bank contributions – is also available to finance bank resolutions. All Spanish banks currently meet the above requirements and the Single Resolution Fund has reached its target level, with net assets of approximately €80 billion.
Has the resolution framework for European banks been strengthened?
Under the SRM framework, major crises have been successfully managed, including the collapse of Banco Popular in 2017 and the highly complex case involving the Sberbank group, with a presence in various EU countries, in 2022.
DID YOU KNOW ...?
A notable case of bank resolution in Europe was that of Banco Popular Español, in June 2017.
- Banco Popular was facing a grave liquidity crisis that led the ECB, having established that it could no longer meet its payment obligations, to declare it to be failing.
- As a result, the SRB decided to sell the bank’s business, to ensure that the critical functions carried out by Banco Popular continued to be performed at all times, protect deposits and avoid a bailout with taxpayers’ money.
- Banco Popular was eventually sold to Banco Santander.
However, the established framework had its limitations when managing crises involving smaller banks. These banks are typically highly dependent on deposits and tend to face difficulties in issuing debt instruments to absorb losses and recapitalise the institution, as analysed here. Crisis management in the case of these banks was complex, since imposing losses on depositors can lead to financial contagion and put financial stability at risk. The difficulty of accessing resolution funds accentuated the problems, leading some authorities to decide to liquidate the bank or use taxpayers’ money.
As a result, the Eurogroup resolved in 2022 to strengthen the bank crisis management framework, focusing particularly on the problems of medium-sized and smaller banks. The proposal to reform the EU bank crisis management and deposit insurance (CMDI) framework was presented in 2023 and, following more than two years of negotiations, an agreement was reached in 2025 between the European Council and the European Parliament.
This reform will moderately increase the number of banks whose crises should be managed by means of bank resolution and, at the same time, will strengthen financing mechanisms through three robust lines of defence:
- Loss absorption and the provision of capital by shareholders and creditors remains the first line of defence, minimising moral hazard and protecting confidence in the financial system.
- Use of deposit guarantee schemes to finance bank resolution is facilitated, under strict and harmonised rules.
- Use of the Single Resolution Fund is facilitated in crises involving smaller and medium-sized banks when the volume of losses absorbed by shareholders and creditors and deposit guarantee funds reaches a certain threshold.
Three lines of defence for financing crises: loss absorption by shareholders and creditors, use of deposit guarantee schemes and use of the Single Resolution Fund
On the tenth anniversary of the Single Resolution Mechanism, this reform marks a significant advance in protecting depositors, safeguarding financial stability and reducing the risk for taxpayers. Actively involved in this process, the Banco de España will continue to work to bring these changes to the public’s attention and to make the banking system safer and more resilient.
DISCLAIMER: The views expressed in this blog post are those of the author(s) and do not necessarily coincide with those of the Banco de España or the Eurosystem.