The Single Resolution Mechanism in the European Union: Good Intentions and Unintended Evil

Following the global financial crisis of 2008, a new architecture for global financial markets has emerged. It aims to sever the link between bank losses, state aid and sovereign risk, and put an end to the doctrine of “too-big-to fail” and moral hazard thanks to the privatization of losses. As of January 2016, the European Union operates the single resolution mechanism (SRM) for banks in the euro-zone countries. In our opinion, in its current form the SRM creates a unintended evil: a significant increase in the likelihood of bank runs. Since this is the prime cause of financial crises around the world, there is an urgent need to address this shortcoming. Five alternative solutions are discussed.