Commentary Type

An Effective Regime for Nonviable Banks: US Experience and Considerations for EU Reform

Anna Gelpern (PIIE) and Nicolas Véron (PIIE)


For 85 years, the US regime for nonviable banks has maintained a high degree of stability and public confidence by protecting deposits, while working to minimize the public cost of that protection. With awareness of the difference in context, EU reformers can draw valuable insights from the US experience. On balance, a review of the US regime supports arguments in favor of harmonization and centralization of bank insolvency proceedings and deposit insurance in Europe’s banking union. A unitary regime would improve on the EU status quo along multiple dimensions: deposit protection, creditor rights, controlling moral hazard, predictability and operational effectiveness, transparency and accountability, and financial stability. It would help break the bank-sovereign vicious circle in the euro area. The US experience suggests that substantial improvements are achievable in a well-designed system of institutional checks and balances that learns and adapts over time.

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