The European Central Bank (ECB) has announced a significant update to its crisis-management playbook, aiming to fix a long-standing weakness in how the European Union handles failing banks. In a statement released on Tuesday, the ECB confirmed that it has revised its guidelines to allow lending to banks that are in the process of being wound down under the EU’s resolution mechanism.
Under the revised framework, banks undergoing resolution will be able to access central bank liquidity provided they meet specific requirements, such as maintaining sufficient capital levels. This marks a notable shift from previous rules, which effectively cut off struggling institutions from ECB support at the most critical moment.
Closing a Critical Gap in EU Banking Rules
The move addresses a structural flaw that became painfully clear during the 2017 collapse of Spain’s Banco Popular. At the time, EU regulations prevented the ECB—despite being the euro zone’s central bank—from providing emergency liquidity while the Single Resolution Board (SRB) was arranging the bank’s rescue. The lack of support highlighted inconsistencies between monetary policy operations and the EU’s bank resolution framework.
By revising its approach, the ECB is now better aligned with resolution authorities, reducing the risk that liquidity shortages alone could accelerate a bank’s failure.
Lessons From Rare Resolution Cases
Since the EU introduced its bank resolution framework more than a decade ago, it has been used only twice. The first was Banco Popular in 2017, and the second involved several European subsidiaries of Russia’s Sberbank after sanctions were imposed on Russia in 2022. Both cases underscored how limited real-world testing has left gaps in the system.
The ECB’s decision reflects lessons learned from these experiences and aims to make future resolutions smoother and more credible.
A Step Toward Greater Financial Stability
By clarifying that it can support banks during resolution under strict conditions, the ECB is strengthening the EU’s financial safety net. The change is widely seen as a practical and overdue adjustment that balances financial stability with safeguards against excessive risk-taking.
In effect, the move signals that (ECB updates its guidelines to permit lending to failing banks during resolution)—a development that could play a crucial role in managing future banking crises more effectively across the euro area.
