Following the hostile takeover of Credit Suisse by its longtime rival UBS earlier this year, the European Banking Authority (EBA) announced that it planned a thorough review of crisis mitigation plans of banks throughout the continent. 

In an announcement made on Thursday, August 3rd, EBA officials remarked that it would be necessary to investigate whether central banks within the European Union (EU) are checking if banks within their jurisdiction are able to find liquidity following a crash.

EBA’s announcement comes in the wake of the rapid withdrawals made by depositors following the banking crises plaguing Switzerland, as well as the United States.

Are Central Banks Playing the Game Right?

The EBA announcement also included a report showing how financial regulators within the EU applied resolution measures which were set in motion to prevent the use of taxpayers’ money to bail out failing banks. 

In this context, resolution refers to the act of closing a financial institution and turning over its transactions to a solvent lender. It may also mean the restructuring of a failed institution to help it look for viable markets and other ways by which it can maintain liquidity.

However, the EBA also pointed out the limited number of measures proposed to maintain the liquidity of banks. Indeed, the bulk of remedial solutions are focused on gaining the assistance of central banks and similar government financial agencies.

This is due to the fact that recovering banks, particularly those fresh out of resolution, have trouble getting private assistance to ensure their continued liquidity. Likewise, even asking for central bank assistance to ensure liquidity poses a challenge for institutions that lack the necessary collateral.

For those unable to tap either public or private entities for assistance, they may resort to the sale or redistribution of assets. debt issuance, as well as guaranteed credit lines in order to stay in business.