A good, albeit somewhat extreme, example of the scope of the new resolution powers took place very recently when a very small cooperative bank reached the point of non-viability. That bank proved unable to find by itself a suitable solution. As a consequence, the Banco de España put the institution into resolution and appointed the resolution fund (FROB) as an administrator. The FROB then took full control of the institution and sold it – through an express auction – to another cooperative bank. The whole process was conducted in roughly 24 hours and entailed no cost for depositors, creditors or even holders of capital instruments. All resolution actions have been taken with sufficient care, particularly with respect to the fulfillment of the no-creditor-worse-off principle. Indeed, so far we have faced very limited litigation, and no decision has been successfully challenged to date in the courts of justice. I believe that the recent Spanish experience may offer some insight into issues aired in the ongoing debates in the European Union and the rest of the world. First, as I said, the Spanish bank restructuring process was conducted without a clear European resolution framework. Yet, as in all cases in which Member States offer support to weak institutions, resolution and restructuring plans had to be submitted to the Directorate General for Competition of the European Commission to clear compliance with EU State Aid  BIS central bankers’ speeches  3  Rules.
The idea was that, as there was no ex-ante commitment to possible public bail-outs, the risk of moral hazard in relation to risk management policies and investors’ decisions could be sufficiently contained. The recent crisis has however illustrated very clearly the limitations of this “constructive ambiguity” approach. Thus, during the crisis, and in particular after the collapse of Lehman Brothers, the authorities have openly recognised that bank failures – even if they are not particularly large or complex – can seriously impair financial stability, making bail-out a natural policy response. As a consequence, there were widespread bail-outs of creditors of banks under stress. These rescues have obviously confirmed the existence of an implicit guarantee for banks’ liabilities which constitutes a serious challenge for fiscal balances and a substantial distortion of the system of incentives for bank managers and fund providers. There is now broad agreement that in order to restore the socially desirable incentives and minimise the use of public resources, it is not enough to work on preventing bank failures by adopting appropriate regulatory and supervisory policies, but rather it is also necessary to be able to deal with non-viable banks in an orderly fashion and obviate the perverse dilemma between two important public policy objectives: preserving financial stability and protecting taxpayers’ money. To that end, the constructive ambiguity approach must be replaced by clear resolution rules which can be credibly specified ex-ante and swiftly implemented ex-post.