That benefits not just financial stability, however, but also the real sector and growth. This is confirmed by a recently published Bundesbank study.1 A functioning resolution mechanism has a positive influence on the banks’ decision-making process in lending.
Banks having grounds to fear that, under the terms of an existing resolution mechanism, they will exit the market in a worst-case scenario lowers risk appetite to an appropriate level and increases the incentive to monitor loans carefully. This means that capital will tend more to be allocated to its most productive use.