When the financial crisis struck the global financial market in 2007, the banking system lost its stability worldwide. Many financial institutes failed due to the crisis. The European Union commission came up with a mechanism of Banking Recovery and Resolution Directive. This was not only limited to the European banks. The cross-border banks that were doing business in Europe also had to abide by the rules of the European Union. This was done to lift up the financial condition and get back the stability of the financial institutions (Dubel, 2013). The major objectives of the BRRD were to shift the burden of cost from taxpayers to the shareholders or creditors of the respective financial institutions. The financial crisis in any cross-border bank also can extend the shock to the member nations where they are doing business, so European Union tried to compensate this by saving the taxpayers from bearing the cost of financial crisis. The financial crisis in 2007 identified that there is a need for a mechanism to protect the credit institutions and uphold the integrity of these institutions (Acharya, 2013). Firstly, the private investors that are, the shareholders and not the taxpayers bear the risk of failure. And secondly, the BRRD ensures that the financial institutions are not affected much by the financial crisis, and can normally run by lowering the impact of any crisis.
MECHANISM OF WORKING OF BRRD
Banking Recovery and Resolution directive have come up to deal with the global financial crisis. The mechanism has been designed so as to shift the burden of crisis from taxpayers and prepare the banks to handle a financial crisis (Leaven, 2014). The authorities will intervene to help the banks from failures. If in case failure is there, then the losses are faced by the shareholders and creditors. There are National resolution funds that have been set up as an aid to be given to the member nations in case of bank failures (Krimminger, & Nieto, 2015). The member nations and the cross-border nations are pleased to cooperate with the European Union Commission. This way the financial institutions will be able to face any crisis that strike them.