Second, the new framework will allow resolution costs to be more evenly spread across the euro area banking sector, and less concentrated in the affected countries, thus enhancing the potential for cross-border risk-sharing. Specifically, the Single Resolution Mechanism (SRM) will introduce a single resolution fund that is funded by and available to all euro area banks. Will this help break the bank-sovereign nexus today?
In my view, the impact will certainly be positive. The fact that the costs of any bank rescue will fall less on sovereigns should lift expectations of government debt sustainability, thus improving asset quality for banks exposed to their governments. And the fact that bail-ins will precede bail-outs means banks’ funding costs should be better decoupled from the fiscal condition of their sovereigns.