The Single Supervisory Mechanism (SSM) and its founding act, the balance sheet assessment and asset quality review of all directly supervised euro area banks that will take place in 2014, can therefore be seen as complementing and supporting the new resolution framework. Effective resolution is not only about strong rules creating sound incentives, but also about quick judgment and decision-making.
Given the inherent instability of financial markets, there is no time for a negotiation between bank creditors and shareholders leading to an equity write off and a conversion of debt into equity, as would be usual outside the financial sector – and in the case of a large systemic bank, such a process would have the potential to impose significant negative externalities on the economy.