Novo Banco: Made in Brussels

At the start of this week the Portuguese authorities announced plans to resolve the failing Banco Espírito Santo. The approach taken – bailing in shareholders and junior bondholders, splitting off problem assets, and creating Novo Banco, a bridge bank, to operate as a going concern – provides a case study for the operation of the new European rulebook on bank resolution, even though it is not yet in force. The approach appears to have been successful, with losses borne where intended, no signs of contagion, and a positive impact on incentives that will help contain moral hazard in future. It will likely embolden the ECB which takes over responsibility for the supervision and resolution of Eurozone banks from November.