Abstract
Ex ante legislation is needed but inherently insufficient, and thus ex post regulation is part of any possible holistic solution. There are bankruptcy laws in many countries and not all are the poster child of optimal regulation. But even if they were, a framework is needed to address the specifics of the financial industry. From multijurisdictional monitoring to forcing banks to develop their own resolution and recovery scenarios are all building blocks of a comprehensive framework and so are stress tests. But questions are asked about how this all should work together in an efficient way under conditions that typically qualify as ‘distress’. And if ultimately it becomes clear the sovereign needs to step in to rescue a bank or financial conglomerate (bail-in or bailout), an avalanche of questions emerge as to which sovereign(s) need(s) to step in, which of the parties involved (shareholders, unsecured lenders and/or deposit holders) take a haircut and in what order. Very problematic still is the EU situation despite the bank recovery and resolution directive and single resolution mechanism put in place in recent years.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
FSB, (2014), Key Attributes of Effective Resolution Regimes for Financial Institutions, Basel Switzerland, p. 1.
- 2.
Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Council Regulation (EC) No 1346/2000 on insolvency proceedings , COM(2012) 744 final, 2012/0360 (COD). This became law in 2015 (with immediate effect): Regulation (EU) 2015/848 of the European Parliament and of the Council of May 20, 2015, on insolvency proceedings O.J. L 141, 5.6.2015, pp. 19–72.
- 3.
Impact Assessment (of the EU Impact Unit (SWD (2012) 416, SWD (2012) 417 (summary)) for a Commission proposal for a Regulation of the European Parliament and of the Council amending Council Regulation (EC) No 1346/2000 on insolvency proceedings (COM (2012) 744), May 2013 and EP Commission on Legal Affairs: REPORT on the proposal for a regulation of the European Parliament and of the Council amending Council Regulation (EC) No 1346/2000 on insolvency proceedings (COM(2012)0744 – C7-0413/2012 – 2012/0360(COD)), December 2013.
- 4.
FSB (2015), Principles for Cross-Border Effectiveness of Resolution Actions, November 3. And there was more. The FSB at that point in time in November 2015 further released a new standard on the adequacy of Total Loss-absorbing Capacity (TLAC) for global systemically important banks (G-SIBs): FSB (2015), Total Loss-Absorbing Capacity (TLAC) Principles and Term Sheet, November 9 based on BCBS, (2015), TLAC Quantitative Impact Study Report, November. See also FSB (2015), Guidance on Cooperation and Information Sharing with Host Authorities of Jurisdictions where a G-SIFI has a Systemic Presence that is Not Represented on its CMG (Crisis Management Groups), November 3. Further consultations were administered in the following fields: (1) FSB, (2015), Consultative document on Temporary Funding Needed to Support the Orderly Resolution of a G-SIB, November 3; (2) FSB, (2015), Consultative document on Arrangements to Support Operational Continuity in Resolution, November 3 (final report August 18, 2016); (3), FSB, (2015), Consultative document on Developing Effective Resolution Strategies and Plans for Systemically Important Insurers, November 3 (final report June 6, 2016). See for a total coverage on the matter: FSB, (2015), Removing Remaining Obstacles to Resolvability Report to the G20 on progress in resolution, November 9.
- 5.
Very recommended reading regarding previous crises, their treatment and how they were dealt with and what we can learn from them: A.J. Casey and E.A. Posner, (2015), A Framework for Bailout Regulation, Coase-Sandor Institute for Law and Economics Working Paper Nr. 724, February 11. They conclude ‘[t]he paradox is that the government wants both to commit not to make bailouts and to be able to make bailouts if they are necessary. The reason for committing not to make bailouts is that if bailouts are not available, then people will be more prudent with their finances, and thus financial crises may never occur. But the reason for making bailouts available is that even if people are prudent with their finances—or, if they are not but are able to exploit loopholes in order to circumvent regulation—then bailouts are necessary to prevent macroeconomic collapse’ (p. 63). The discretion of government in what to bailout and what not in itself needs to be contained, if not only at the margins.
- 6.
C.D. Ondersma, (2013), Shadow Banking and Financial Distress: The Treatment of “Money-Claims” in Bankruptcy, Columbia Business Law Review, Issue 1, p. 79.
- 7.
P. Morgan Ricks, (2011), Regulating Money Creation After the Crisis, Harvard Business Law Review, Issue 1, pp. 75–143. See also N. Goralnik, (2012), Bankruptcy-Proof Finance and the Supply of Liquidity, The Yale Law Journal, Vol. 122, pp. 460–506, in particular pp. 96, 122 & 129.
- 8.
Ondersma, (2013), Ibid. p. 141 and Ricks, (2011), Ibid. p. 132.
- 9.
J.E. Fisch, (2015), The Broken Buck Stops Here: Embracing Sponsor Support In Money Market Fund Reform, North Carolina Law Review, Vol. 93, pp. 935 ff. See also for an economic validation of the capital reform proposal: C.M. Lewis, (2014), The Economic Implications of Money market Fund Capital Buffers, Vanderbilt Owen Graduate School of Management Research Paper Nr. 2388676. His analysis shows that, after compensating capital buffer investors for absorbing credit risk, the returns available to money market fund shareholders are comparable to default free securities.
- 10.
M. Di Maggio and M.T. Kacperczyk, (2015), Columbia Business School Research Paper, Nr. 14-25. See also L.D.W. Schmidt et al., (2014), Runs on Money Market Funds, CEPR Discussion Paper Nr. DP9906. See for a relatively similar pattern in the European MMF market: S. Collins and E. Gallagher, (2014), Assessing Credit Risk In Money market Funds during the Eurozone Crisis, Working Paper.
- 11.
J.-H. Binder, (2015), The Position of Creditors under the BRRD, Working Paper, mimeo; G. Psaroudakis, (2018), Proportionality in the BRRD: Planning, Resolvability, Early Intervention , Beiträge zum Transnationalen Wirtschaftsrecht, Heft 159, August; J.H. Binder, (2019), Proportionality at the Resolution Stage: Calibration of Resolution Measures and the Public Interest Test, European Business Organization Law Review pp. 1–22. See for a full and recent list of literature on the matter: EBI, (2019), EBI financial resolution Task Force, List of published academic publications, June 4, via ebi-europe.org
- 12.
EU Commission, (2014), EU Bank Recovery and Resolution Directive (BRRD): Frequently Asked Questions, April 15.
- 13.
Directive 2014/59/EU of the European Parliament and of the Council of May 15, 2014, establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council. The European Banking Authority has since 2014 issued a wide list of technical standards and guidelines for implementation of the directive in national legislations and recommendations for national supervisors.
- 14.
EU Commission, (2014), A Single Rulebook for the Resolution of failing banks will apply in the EU as of January 1, 2015, Press release, December 31. See for technical advice regarding the contributions to the Single Resolution Fund: EBA, (2015), Technical advice on the delegated acts on the initial period of the single resolution fund under Article 69 of the SRM Regulation, EBA/Op/2015/11, London, June 10.
- 15.
EU Commission, (2014), EU Bank Recovery and Resolution Directive (BRRD): Frequently Asked Questions, April 15.
- 16.
Content to a certain degree based on: EU Commission, (2014), EU Bank Recovery and Resolution Directive (BRRD): Frequently Asked Questions, April 15.
- 17.
See for further insights: (1) BoE, (2014), Implementing the bank Recovery and Resolution Directive, Consultation Paper, CP13/14, (2) PWC, (2014), EU Bank Recovery and Resolution Directive ‘Triumph or tragedy?’, pwc.com, and (3) B. Joosen, (2014), Bail In Mechanisms in the Bank Recovery and Resolution Directive, University of Amsterdam Working Paper.
- 18.
EU Commission, (2014), EU Bank Recovery and Resolution Directive (BRRD): Frequently Asked Questions, April 15.
- 19.
EBA, (2015), Guidelines on Failing or Likely to Fail, EBA/GL/2015/07, May 26, pp. 3–4.
- 20.
See EU, (2014), Single Resolution Fund: Council Agrees on Bank Contributions, Press Release December 9.
- 21.
J.-H. Binder, (2015), Cross-Border Coordination of bank Resolution in the EU: All Problems Solved, Working Paper, mimeo, p. 17.
- 22.
See for a panic-response-based regulatory model design: D. Sabches, Banking Panics and Protracted Recessions, Federal Reserve bank of Philadelphia, Working Paper Nr. 15-39. October 8.
- 23.
W.-G. Ringe, (2015), Arbitrage and Competition in Global Financial Regulation – The Case for a Special Resolution Regime, Legal Research Paper Series, Nr. 49/2015, September.
- 24.
See for a full analysis: W. Bossu and D. Chew, (2015), “But we are different!”: 12 Common Weaknesses in Banking Laws, and What to Do about Them, IMF Working Paper Nr. WP/15/200.
- 25.
U.S. Das, (2015), Optimal bank Recovery, IMF Working Paper, Nr. WP/15/217, September. For Islamic banks see E. A. Awadzi et al., (2015), Resolution Frameworks for Islamic Banks, IMF Working Paper, Nr. WP/15/247.
- 26.
C. Hadjiemmanuil, (2015), Bank Resolution Finance in the Banking Union, LSE Law, Society and Economy Working Paper Nr. 6/2015, London School of Economics and Political Science, law Department, London. Also included in Jens-Hinrich Binder and Dalvinder Singh (eds.), (2015), Bank Resolution: The European Perspective, Oxford University Press, Oxford.
- 27.
See C. Hadjiemmanuil, (2015), Bank Resolution Finance in the Banking Union, LSE Law, Society and Economy Working Paper Nr. 6/2015, pp. 23–25.
- 28.
C. Hadjiemmanuil, (2015), Bank Resolution Finance in the Banking Union, LSE Law, Society and Economy Working Paper Nr. 6/2015, pp. 19 ff.
- 29.
C. Hadjiemmanuil, (2015), Bank Resolution Finance in the Banking Union, LSE Law, Society and Economy Working Paper Nr. 6/2015, p. 35.
- 30.
That is not completely true as some attempts have been made; see V. V. Acharya and S. Steffen, (2014), Falling Short of Expectations? Stress Testing the Eurozone Banking System, CEPS Policy Brief Nr. 315, January 15. They also laughed off the ECB’s capital shortfall tests as ‘possibly because systemic risk and feedback effects from the financial sector in the real sector, which are captured in the market data, were completely ignored in regulatory assessment’. Also in C. Hadjiemmanuil, (2015), Ibid. p. 36. See for other concerns regarding the ECB capital shortfall tests: V. V. Acharya and S. Steffen, (2014), Making Sense of the Comprehensive Assessment, VoxEU.org, October 29. C. Hadjiemmanuil concludes based on their numbers that ‘[c]ompared to the highest estimates, the DRI (direct recapitalization instrument, ed.) in its present size pales into insignificance’ (p. 36).
- 31.
C. Hadjiemmanuil, (2015), Bank Resolution Finance in the Banking Union, LSE Law, Society and Economy Working Paper Nr. 6/2015, p. 35.
- 32.
L. Nijs, (2015), Neoliberalism 2.0: Regulating and Financing Globalizing Markets. A Pigovian Approach for 21st Century Markets, Palgrave Macmillan, London, Chapter 6. C. Hadjiemmanuil, (2015), Ibid. pp. 36–38 did his own, more thorough, analysis and didn’t get particularly convinced either. He considered all resources available taking into account the fact that they could suffice for a bailout under ‘normal circumstances’ or for a single SIFI in Europe under duress assuming this will take place in relative isolation.
- 33.
C. Hadjiemmanuil, (2015), Bank Resolution Finance in the Banking Union, LSE Law, Society and Economy Working Paper Nr. 6/2015, pp. 38–39. J-H. Binder asks the question: Will the centralization of supervisory powers, over time, also lead to the streamlining of business models, corporate and group structures of banks across the Eurozone?, See J.-H. Binder, (2015), Banking Union and the Governance of Credit Institutions- A Legal Perspective, SAFE Working Paper nr. 96/2015, Frankfurt am Main.
- 34.
J.N. Gordon and W-G Ringe, (2015), Bank Resolution in Europe: the Unfinished Agenda of Structural Reform, Center for Law and Economic Studies, Columbia School of Law Working Paper Nr. 507, ECGI Working Paper Nr. 282/2015, January 11, published in European Banking Union, (eds.) D. Busch and G. Ferrarini, Oxford University Press, Oxford (2015).
- 35.
J.N. Gordon and W-G Ringe, (2015), Ibid. p. 2.
- 36.
And the measures included in the proposal for a Regulation of the European Parliament and of the Council on structural measures improving the resilience of EU credit institutions, COM(2014) 43 final/ 2014/0020 (COD), January 29.
- 37.
See also M. Ignatowski and J. Korte, (2014), Wishful Thinking or Effective Threat? Tightening Bank Resolution Regimes and Bank Risk-Raking, Journal for Financial Stability, Vol. 15, pp. 264–281.
- 38.
See Extensively: J.N. Gordon and W-G Ringe, (2015), Ibid. pp. 11–17.
- 39.
So the regulator forces ex ante such a structure on systemically important banking groups. See in favor of such a model as well: J. H. Binder, (2015), Resolution Planning and Structural Bank Reform within the Banking Union, J. Castaneda et al., (eds.), European Banking Union: Prospects and Challenges, Routledge, London; also G. Franke et al., (2015), Effective Resolution of Banks: Problems and Solutions, SAFE White Paper Series, Nr. 19, Goethe University, Frankfurt am Main.
- 40.
J.N. Gordon and W-G Ringe, (2015), Ibid. pp. 2–3.
- 41.
J.N. Gordon and W-G Ringe, (2015), Ibid. p. 3.
- 42.
E. Faia and B. Weder di Mauro, (2015), Cross-Border Resolution for Banks, SAFE Working Paper Nr. 88, Goethe University, Frankfurt am Main, March.
- 43.
See also J.-H. Binder, (2015), Resolution Planning and Structural Bank Reform within the Banking Union, in European Banking Union, Prospects and challenges, (J. Castaneda, et al. (eds.)), Routledge, London; also as SAFE Working Paper Nr. 81, Goethe University, Frankfurt am Main. He indicates ‘However, in both international standard setting and at the European Union level, issues related to resolution planning (within the context of bank resolution reform) and structural banking reforms to date have been discussed rather separately. This lack of consistency is questionable, given the obvious need to reconcile both approaches in order to facilitate effective implementation and enforcement especially with regard to large, complex banking groups’.
- 44.
S.L. Schwarcz et al., (2014), Comments on the September 29, 2014, FSB Consultative Document, ‘Cross-Border Recognition of Resolution Action’, Centre for International Governance Innovation Paper CIGI Paper Nr. 51, p. 2.
- 45.
S.L. Schwarcz et al., (2014), Ibid. p. 2.
- 46.
FSB, (2014), Ibid. p. 13.
- 47.
S.L. Schwarcz et al., (2014), Ibid. p. 3.
- 48.
See also John C. Coffee, Jr., (2014), Extraterritorial Financial Regulation: Why E.T. Can’t Come Home, Cornell Law Review, Vol. 99, Issue 6, pp. 1259–1302.
- 49.
S.L. Schwarcz et al., (2014), Ibid. p. 3, with example.
- 50.
S.L. Schwarcz et al., (2014), Ibid. p. 3.
- 51.
There are exceptions, for example, the derivative exception under US Law; see for that in detail: S. L. Schwarcz and O. Sharon, (2014), The Bankruptcy-Law Safe Harbor for Derivatives: A Path-Dependence Analysis, Washington and Lee Law Review, Vol. 71, pp. 1715–1755.
- 52.
S.L. Schwarcz et al., (2014), Ibid. p. 5.
- 53.
FSB, (2014), Ibid. p. 4.
- 54.
S.L. Schwarcz et al., (2014), Ibid. p. 6.
- 55.
S.L. Schwarcz et al., (2014), Ibid. p. 6. He indicates that the rationale for this omission would appear to be that the issuer’s law always governs equity securities.
- 56.
Ph. Paech, (2015), The Value of Insolvency Safe harbors, LSE Law, Society and Economy Working Papers 9/2015, April.
- 57.
Z. Fungacova et al., (2015), High Liquidity Creation and Bank Failures, IMF Working Paper Nr. WP/15/103.
- 58.
Shadow banking liquidity is built traditionally on two hypotheses: (1) the weak fundamentals hypothesis which is built on the idea that bank failure is embedded in its poor financial and economic fundamentals, and (2) which is built around the inability of the bank to meet liquidity commitments. The ‘High Liquidity Creation Hypothesis’ suggested by Fungacova et al. complements these two strands of literature and research: According to this hypothesis a bank’s vulnerability increases when the core output measured by liquidity creation reaches high levels compared to other banks’ activities in the system (p. 3). Their model is built on A. Berger, and C. Bouwman, (2009), Bank Liquidity Creation, Review of Financial Studies Vol. 22, pp. 3779–3837; See for an overview of literature and model review: pp. 3–8.
- 59.
Z. Fungacova et al., (2015), Ibid. p. 16. See also F. Allen, and D. Gale, (2004), Financial Intermediaries and Markets, Econometrica Vol. 72, pp. 1023–1061; A. Berger, and C. Bouwman, (2011), Bank Liquidity Creation, Monetary Policy, and Financial Crises, Working Paper, Wharton Financial Institutions Center: C. Borio, (2014), The Financial Cycle and Macroeconomics: What Have We Learnt? Journal of Banking & Finance Vol. 45, pp. 182–198; C. Brown, and S. Dinç, (2005), The Politics of Bank Failures: Evidence from Emerging Markets, Quarterly Journal of Economics Vol. 120, Issue 4, pp. 1413–1442; R. DeYoung, and G. Torna, (2013), Non-traditional Banking Activities and Bank Failures during the Financial Crisis, Journal of Financial Intermediation Vol. 22, Issue 3, pp. 397–421; D. Diamond, and R. Rajan, (2005), Liquidity Shortages and Banking Crises, Journal of Finance Vol. 20, Issue 2, pp. 615–646; F. Vazquez, and P. Federico, (2012), Bank Funding Structures and Risk: Evidence from the Global Financial Crisis, IMF Working Paper Nr. WP/12/29.
- 60.
See also M. Dewatripont and X. Freixas, (2011), Bank Resolution: A Framework for the Assessment of Regulatory Intervention, Oxford Review of Economic Policy, Vol. 27, Nr. 3, pp. 411–436.
- 61.
See in detail the chapter on CCPs as well as: (1) ISDA, (2013), CCP Loss Allocation at the End of the Waterfall, August, (2) R. Cont, (2015), The End of the Waterfall: Default Resources of Central Clearing Parties. Imperial College London WP, (3) B. Cœuré, (2014), Keynote Speech by Benoît Cœuré, Member of the Executive Board of the ECB , At Exchange of Ideas #2 “Central clearing – guarantee of stability or new moral hazard ?” organized by Eurex Clearing, London, November 24, 2014, (4) EACH, (2014), An Effective Recovery and Resolution Regime for CCPs, December, (5), JP Morgan Chase, (2014), What is the Resolution Plan for CCPs, Perspectives, September.
- 62.
FSB, (2011), Key Attributes of Effective Resolution Regimes for Financial Institutions, October.
- 63.
FSB , (2014), Key Attributes of Effective Resolution Regimes for Financial Institutions, October. In June 2018, the document was complemented with two supporting documents dealing with (1) Principles on bail-in execution (the operational side of a bail-in ), and (2) the funding strategy of a resolution plan. The first document deals with issues such as: disclosures on the instruments and liabilities within the scope of bail-in ; valuations to inform and support the application of bail-in ; processes to suspend or cancel the listing of securities, to notify creditors, and to deliver new securities or tradeable certificates following entry into resolution; securities law and securities exchange requirements during the bail-in ; processes for transferring governance and control rights to a new board and management for the firm emerging from resolution; and communications to creditors and the market at large. The second document provides information on issues such as: firms’ capabilities to support monitoring, reporting and estimating funding needs in resolution and executing the funding strategy; the development of resolution funding plans by authorities; the reliance on firm assets and private funding as preferred sources of funding in resolution; access to temporary public sector backstop funding mechanisms and ordinary central bank facilities; and information sharing and coordination between authorities. See FSB, (2018), Principles on bail-In Execution, June 21 and FSB , (2018), Funding Strategy Elements of an Implementable Resolution Plan, June 21, both via fsb.org. The latter should be read in conjunction with and complements their earlier document funding requirements during resolution projects for G-SIBs . See FSB, (2016), Guiding Principles on the Temporary Funding needed to Support the Orderly Resolution of a Global Systemically Important Bank (“G-SIB ”), August 18.
- 64.
FSB , (2016), Key Attributes Assessment Methodology for the Banking Sector Methodology for Assessing the Implementation of the Key Attributes of Effective Resolution Regimes for Financial Institutions in the Banking Sector, October 19. D. Domanski, (2018), Towards Effective Global Resolution Regimes: the Road Ahead, Brussels, June 12, 2018, Remarks.
- 65.
The establishment in 2015 of the Single Resolution Board (SRB), a new agency of the European Union, counts as one of the most significant European banking reforms of recent years. The SRB was set up to quickly resolve banks that are failing or likely to fail, as part of a wider effort to break the vicious cycle between banks and sovereigns that nearly destroyed the euro area in 2011–12. The SRB was created following a decision by Europe’s leaders in December 2012 to create a Single Resolution Mechanism (SRM), whose legislative basis was enacted in July 2014. It started operations on January 1, 2016, including the possibility of forcing losses on their claimants if need be (“bail-in ”); see N. Véron, (2018), Bad News and Good News for the Single Resolution Board, blog Post January 15 (via bruegel.org). Regarding the ‘single’ dimension, that is, the interaction between the EU and national level in the process, see D. Busch et al., (2019), How Single is the Single Resolution Mechanism ? European Banking Institute Working Paper Series 2019, Nr. 30, January; A. Segura and S. Vicente, (2019), Bank Resolution and Public Backstop in an Asymmetric Banking Union, Bank of Italy Working Paper Nr. 1212, March 18 (also as ESRB Working Paper Nr. 83, 2018, August 16).
- 66.
Regulation (EU) No 806/2014 of the European Parliament and of the Council of July 15, 2014, establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No 1093/2010, OJ L 225, 30.7.2014, pp. 1–90. This piece of regulation goes hand-in-hand with the BRRD Directive discussed before: Directive 2014/59/EU of the European Parliament and of the Council of May 15, 2014, establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council Text with EEA relevance, OJ L 173, 12.6.2014, pp. 190–348.
- 67.
That besides the fact that the governance structure of the SRM is extremely complex, jeopardizing the effectiveness of the decision-making process. Reaching an agreement on how the structure should look like was a first step toward that complexity. Other issues relate to the complexity of European law and how this mechanism was supposed to fit within the wider regulatory framework. The second element that relates to complexity is the division of tasks between European and national authorities. There are not only exclusive but also parallel responsibilities. It is not always clear how that cooperation should be coordinated. Further there is the division of tasks between the SRB plenary session and the executive session. Tasks are well divided but decision-making is not. The financing of the Fund is an ordeal in itself. That is mainly caused by (1) the calculation of the ex ante contributions, (2) the decision-making behind extraordinary ex post contributions, and (3) it is the participating member states that raise these funds with the institutions covered by the SRM and need to transfer them to the fund. A clear legal foundation for that transferring mandate is still not in place and should ideally be based on Union law. See in detail: D. Busch, (2017), Governance of the Single Resolution Mechanism, Working Paper, mimeo. Based on the earlier quasi-identical chapter in: D. Busch and G. Ferrarini (eds), (2015), European Banking Union, Oxford University Press, Oxford.
- 68.
J. Dermine, (2017), The Single Resolution Mechanism in the European Union: Good Intentions and Unintended Evil, Monetary Economic Issues Today, Festschrift in Honour of Ernst Baltensperger (ed.), Swiss National Bank, Orell Füssli Verlag, Zurich, pp. 359–372. He comes to that conclusion after considering three objectives that resolution legislation should live up to: ‘(a) swift decisions, to minimize the impact on the economy, (b) privatization of losses, to stop the linkage between public bailout , budget deficit, and sovereign risk, (c) elimination of moral hazard , with bail-in debt held by private creditors who bear losses.’ Also I. Asimakopoulos, (2018), The Veneto Banks Resolution: It Shall Be Called ‘Liquidation’, European Company Law, Vol. 15, Nr. 5, pp. 156–162.
- 69.
ECA, (2017), Single Resolution Board: Work on a Challenging Banking Union Task Started, but Still a Long Way to Go, Special Report, Nr. 23/2017 (via eca.europe.eu). This audit assessed the quality of the SRB’s overall rules and guidance, resolution planning for individual banks, and whether the SRB is staffed adequately. The ECA found shortcomings in all of these areas.
- 70.
Losses on loans do not disappear but are passed on to shareholders. The objective is then not to avoid losses to avoid (a further) loss of confidence in case that happens. It is therefore crucial that designated ‘bail in’ instruments are known upfront as well as how the bank’s own bail-in will be distributed across customers of the bank. See regarding the systemic implications of bail-in : A.-C. Hüser et al., (2017), The Systemic Implications of Bail-In: A Multi-Layered Network Approach, ECB Working Paper Nr. 2010, February including an interesting and extensive literature list (pp. 39–41). They find that there is no direct contagion to creditor banks and also spillover effects are small due to low levels of securities cross-holdings in the interbank network. They also estimate the impact on the different liability holders of a bail-in : shareholders and subordinated creditors are always affected by the bail-in , senior unsecured creditors in 75% of the cases thereby using a multi-layered network model. A bail-in however reshapes significantly interbank linkages within specific seniority layers as ‘[t]he bank under resolution becomes more central within the equity network layer after the bail-in and less central in the subordinated debt layer’ (p. 3). This shows, according to Hüser et al., that resolution authorities will need to carefully consider the level of loss-absorbing capacity —to avoid that certain creditors such as depositors or perhaps even senior unsecured creditors are hit—as well as the composition of loss-absorbing capacity. Also L. Leanza et al., (2019), Bail-In vs Bail-Out: Bank Resolution and Liability Structure, Working Paper, February, mimeo. The latter conclude that a credible bail-in resolution regime endogenously reduces leverage and mitigates default risk. A strict enforcement of the Common Equity Tier 1 (CET1) capital requirement , as introduced by the Basel III regulation, entails a dramatic reduction of the optimal bank leverage .
- 71.
Solutions to those issues according to Dermine are as follows: (1) exclude short-term debt with a maturity of more than seven days, as it would reduce bank runs ; (2) impose rules on seniority for short-term debt. Debt with a maturity of less than one year would rank as senior, with other debt being junior or impose the collateralization of short-term debt. Also this would reduce the risk of a bank run; (3) apply a ‘corralito’ (the bank is closed and funds cannot be withdrawn); (4) the creation of a private industry fund that would guarantee either short-term deposits or all deposits and (5) ex post penalties. Also E.J. Janger et al., (2015), Implementing Symmetric Treatment or Financial Contracts in Bankruptcy and Bank Resolution, CORP. FIN. &COM. L. 10, Nr. 1, pp. 155–182.
- 72.
Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Regulation (EU) No 806/2014 as regards loss-absorbing and recapitalization capacity for credit institutions and investment firms- COM/2016/0851 final – 2016/0361 (COD)- November 23, 2016. The final text was approved April 16, 2019.
- 73.
The MREL aspects are managed in the EU by the Single Resolution Board (SRB). The SRB started operations on January 1, 2015, and is since January 1, 2016, fully responsible for resolution projects and policy in the EU. The MREL is embedded (in a relatively loose way) in the previously discussed Bank Recovery and Resolution Directive (BRRD) which requires G-SIBs to meet a minimum requirement for own funds and eligible liabilities (MREL ) so as to be able to absorb losses and restore their capital position, allowing banks to continuously perform their critical economic functions during and after a crisis. MREL represents one of the key tools in enhancing banks’ resolvability. It was in 2017 that the SRB developed its first MREL policies. That process has continued in 2018 and 2019 where it developed policies for more complex scenarios and to facilitate cross-border resolution planning. Interesting is its report on valuation issues in the context of resolution planning (report February 19, 2019), all via srb.europe.eu. See for an evaluation: F. Restoy, (2018), Bail-In in the New Bank Resolution Framework: Is there an Issue with the Middle Class, speech given at the IADI-ERC International Conference: “Resolution and deposit guarantee schemes in Europe: incomplete processes and uncertain outcomes”, Naples, Italy , March 23. Restoy highlights that the MREL requirements as set by the SRB are pretty demanding (i.e. close to twice the amount of regulatory capital or to be very precise ‘twice the sum of Pillar 1 and Pillar 2 requirements plus the combined buffer requirements plus a market confidence charge’). That triggers a variety of challenges in particular for smaller and mid-tier banks. Also AFME, (2018), Resolution Aspects of the EU Risk Reduction Measures Package, October, via afme.eu, who warn of excessive requirements and urge for simplicity and awareness of the global context in which banks operate. Also B. Berger et al., (2016), Total Assets Versus Risk Weighted Assets: Does it Matter for MREL , Bruegel Policy Contribution Nr. 2016/12, via bruegel.org. Also C. Gortsos, (2019), The Role of Deposit Guarantee Schemes (DGSS) in Resolution Financing European Banking Institute Working Paper Series 2019 – Nr. 37, March 28.
- 74.
Questions are asked whether a policy of strict bail-in in all cases (bailout only in case of precautionary recapitalization ; but this applies only to solvent institutions and cannot cover past losses) of undercapitalization is wise. Even if a financial system has sufficient volumes of junior debt to bail-in , the question is at what cost that will occur. See in detail: C. Hadjiemmanuil, (2017), Limits on State-Funded Bailouts in the EU bank Resolution Regime, EBI Working Paper Nr. 2.
- 75.
T.H. Troeger, (2018), Why MREL Won’t Help Much, European Banking Institute Working Paper Nr. 13, May. Troeger argues ‘[t]he main problem, echoing the general concerns scholars voiced against the European ü regime, is that the specifications for minimum requirements for own funds and eligible liabilities (MREL) are also highly detailed and discretionary and thus fail to fully alleviate the predicament of investors in bail-in debt…Quite importantly, given the character of typical MREL instruments as non-runnable long-term debt, even if investors are able to correctly gauge the relevant risk of PSI (“Private Sector Involvement”) in a bank’s failure at the time of purchase, subsequent adjustments of MREL prescriptions by competent or resolution authorities potentially change the risk profile of the pertinent instruments. Therefore, original pricing decisions, and the market discipline that follows from them may prove inadequate and so may.’ The TLAC implementation (through the SRM amendments) he considers ‘with an exorbitant emphasis on proportionality and technical fine-tuning.’ He concludes ‘it is barely conceivable that the pricing of MREL instruments reflects an accurate risk assessment of investors because of the many discretionary choices a multitude of agencies are supposed to make and revisit in the administration of the new regime.’ He seems little positive about the bail-in mechanism: T.H. Troeger, (2017), Too Complex to Work: A Critical Assessment of the Bail-In Tool Under the European Bank Recovery and Resolution Regime, Journal of Financial Regulation, Vol. 4, Issue 4, March, pp. 35–72; C. Hadjiemmanuil, (2017), Limits to State-Funded Bailouts in the EU Bank Resolution Regime, European Banking Institute Working Paper Nr. 2.
- 76.
FSB , (2015), Principles on Loss-absorbing and Recapitalisation Capacity of G-SIBs in Resolution, Total Loss-absorbing Capacity (TLAC) Term Sheet, November 9; FSB , (2017), Guiding Principles on the Internal Total Loss-absorbing Capacity of G-SIBs (‘Internal TLAC’), July 6; BCBS, (2016), TLAC Holding, Standard, October.
- 77.
See for further details: EC , (2016), Frequently Asked Questions: Capital requirements (CRR /CRD IV) and resolution framework (BRRD/SRM ) amendments – Fact Sheet, MEMO/16/3840, November 23. The proposal aims to incorporate international standards on loss-absorbing and recapitalization . In line with the 2015 FSB recommendations on TLAC (total loss-absorbing capacity), the proposal aims to reduce the impact of banking failures on public funds. It applies to all global systemically important institutions (G-SIIs ) worldwide as of January 2019. It applies to all G-SIIs , hence to 13 banks within the EU (out of 30). Since TLAC is not binding, it has to be transposed into national or European legislation. As of January 1, 2019, G-SIIs will have to comply with a minimum TLAC requirement of 16% of RWA and 6% of the Basel III leverage ratio denominator (TLAC Leverage Ratio Exposure (LRE) Minimum). See also T.H. Fuertas, (2016), European Banking Resolution: Making it Work! Interim Report of the CEPS Task Force on Implementing Financial Sector Resolution, January.
- 78.
A. Carstens, (2018), Post-Crisis Bank Resolution: What Are the Main Challenges Now? Concluding Remarks, The 8th FSI-IADI conference on “Bank resolution, crisis management and deposit insurance” February 2, Basel. Also C. Gortsos, (2018), The Role of Deposit Guarantee Schemes (DGSS) in Resolution Financing, European Banking Institute Working Paper Series 2019 Nr. 37, March, about the interaction between the deposit insurance schemes directive and the BRRD.
- 79.
FSB , (2019), Thematic Peer Review on Bank Resolution Planning, April 29; FSB, (2018), Thematic Peer Review on Bank Resolution Planning: Summary Terms of Reference, June 4; FSB, (2016), Second Thematic Review on Resolution Regimes, March (all via fsb.org).
- 80.
See for some impressions: M. Feiller, (2017), On the Credibility of Bail-ins. Has the Single Resolution Mechanism become more credible for European Banks after the Banco Popular Bail-in?, StudyLab, December 14; R. Houben, (2017), The Single Resolution Mechanism, Intersentia Ltd., Cambridge; S.M.C. Nuijten et al., (2017), The Bank Recovery and Resolution Directive and the Single Resolution Mechanism: Preadviezen/Reports 2014, Eleven International Publishing, The Hague; M. Henze, (2015), Einheitliche Abwicklung für Europas Banken: Die zentrale Bankenabwicklung in der Eurozone auf dem Prüfstand, Springer Gabler, Wiesbaden; SRB, (2015), The Single Resolution Mechanism. Introduction to Resolution Planning, Brussels; Finance Ministry Germany, (2018), The Single Supervisory Mechanism: Lessons Learned after the First Three Years, Federal Ministry of Finance’s Monthly Report, January, pp. 1–5. Also D. Busch and A. Teubner, (2019), Fit and Proper Assessments within the Single Supervisory Mechanism, EBI Working Paper Nr. 34, March.
- 81.
Also J.-H. Binder, (2018), The Relevance of the Resolution Tools Within the SRM, EBI Working Paper, Nr. 29, November; J.-H. Binder, (2019), Resolution Regimes in the Financial Sector: In Need of Cross-Sectoral Regulation? European Banking Institute Working Paper Series Nr. 33, March; J.-H. Binder, (2019), Bank Bail-In and Disputed Claims: Can It Cope? The Case for and against a Vis Attractiva Resolutionis, European Banking Institute Working Paper Series 2019 – Nr. 32, January 30.
- 82.
See in detail: D. Busch, (2017), Governance of the European Banking Union’s Single Resolution Mechanism European Banking Institute Working Paper Series Nr. 9; D. Busch and M.B.J. van Rijn, (2018), Towards Single Resolution and Single Supervision of Systemically Important Financial Institutions in the European Union?, European Business Organization Law Review, Vol. 19, Nr. 2, pp. 301–363. The bottom line in Buschs’ story is: ‘the increasingly blurred distinction between markets, financial institutions, services and products is not matched in the European Union by an integrated regulatory and supervisory approach. Instead, regulation was and remains largely organized along sectoral lines, with an emphasis on the banking sector.’ A coherent supervisory model would ‘(1) help to eliminate (national) supervisory and regulatory gaps, (2) reduce regulatory arbitrage activities, and (3) contribute to the stability of the financial system and a level playing field.’ Also J.-H. Binder, (2019), Resolution Regimes in the Financial Sector: In Need of Cross-Sectoral Regulation?, EBI Working Paper Nr. 33, March.
- 83.
Managerial overconfidence (in investment performance) is linking insurer shadow banking involvement to government bail-outs (purchasing of distressed assets). S. Chen et al., (2019), CEO Overconfidence and Shadow-Banking Life Insurer Performance Under Government Purchases of Distressed Assets, Risks, Vol. 7, Issue 1, pp. 28 ff. https://doi.org/10.3390/risks7010028, including an interesting literature list for those interested in the shadow insurance (or captive reinsurance) industry.
- 84.
See in detail on all matters: O. Croituro et al., (2018), Resolution Funding: Who Pays When Financial Institutions Fail?, IMF Technical Notes and Manuals Nr. 18/01, Washington DC.
- 85.
The expectation of a possible bailout has an impact on bank credit growth. Xu engaged in the exercise to identify the patterns that exist in that credit growth. Xu measured each bank holding company’s exposure to the systemic bailout factor, which is the sensitivity of each bank’s out-of-the-money put option price to the variations of sector-wide put option basket-index spreads. Xu further shows that low market expectations of the banking sector systemic bailouts played a significant role in the weak bank credit recovery after the subprime crisis. Bank holding companies with higher pre-crisis exposure to the systemic bailout factor experienced larger post-crisis deviations from the pre-crisis bank credit growth trend. Such a pattern is persistent even for banks that are less affected by the post-crisis financial regulations and less exposed to borrowers from the deteriorating sectors. Commercial bank subsidiaries within the same bank holding company present the same credit growth patterns even though they have different exposure to financial regulations and deteriorating sectors. Xu also concludes that the securitization market, which connects the two types of banks (shadow and traditional banks), determines how market expectations of systemic bailouts to shadow banks affect the credit origination capacity of the whole banking system. See in detail: Y. Xi, (2018), Shadow Banking and Systemic Bailout Exposure, Working Paper, February 28, mimeo.
- 86.
T. Asonuma et al., (2019), Costs of Sovereign Defaults: Restructuring Strategies, Bank Distress and the Capital Inflow-Credit Channel, IMF Working Paper Nr. WP/19/69, March, pp. 2–5, 50. Also F. Hett and A. Schmidt, (2017), Bank Rescues and Bailout Expectations: The Erosion of Market Discipline During the Financial Crisis. Journal of Financial Economics, Elsevier, Vol. 126, Issue 3, pp. 635–651.
- 87.
T. Asonuma et al., (2019), Ibid. p. 4 and their earlier work T. Asonuma, and C. Trebesch, (2016), Sovereign Debt Restructurings: Preemptive or Post-default, Journal of the European Economic Association, Vol. 14, Issue 1, pp. 175–214.
- 88.
The transmission channels and associated output and banking sector costs depend on whether the ‘restructuring takes place preemptively (without missing payments to creditors), or after a default has occurred (and payments are unilaterally missed)’, T. Asonuma et al., (2019), Ibid. p. 35.
- 89.
T. Asonuma et al., (2019), Ibid. pp. 5–7.
- 90.
Also C. Arellano, et al., (2019), Sovereign Default Risk and Firm Heterogeneity, Federal Reserve Bank of Minneapolis Research Department Staff Report Nr. 547, revised, March; T. Asonuma, (2016), Serial Sovereign Defaults and Debt Restructurings, IMF Working Paper Nr. WP/16/66; T. Asonuma, and H. Joo, (2017), Sovereign Debt Restructurings: Delays in Renegotiations and Risk Averse Creditors, Working Paper, mimeo, February 7; I. Balteanu, and A. Erce, (2018), Linking Bank Crises and Sovereign Defaults: Evidence from Emerging Markets, IMF Economic Review, Vol. 66, Issue 4, pp. 617–664; A. Chari, et al., (2018), The Costs of (sub)Sovereign Default Risk: Evidence from Puerto Rico, Federal Reserve Bank of Richmond WP Nr. 18-03; A. Cesa-Bianchi, et al., (2017), International Credit Supply Shocks, Journal of International Economics, Vol. 112(C), pp. 219–237; G. Cheng et al., (2018), The Macroeconomic Effects of Official Debt Restructuring: Evidence from the Paris Club, Oxford Economic Papers, pp. 1–20; A. Erce, and E. Mallucci, (2018), Selective Sovereign Defaults, International Finance Discussion Paper Nr. 1239, Board of Governors of the Federal Reserve System and European Stability Mechanism, November; N. Gennaioli, et al., (2018), Banks, Government Bonds, and Default: What do the Data Say? Journal of Monetary Economics, Vol. 98, pp. 98–113; G. Gordon, and P. Guerron-Quintana, (2018), Dynamics of Investment, Debt and Default, Review of Economic Dynamics, Vol. 28, pp. 71–85 and C. Sosa-Padilla, (2018), Sovereign Defaults and Banking Crises, Journal of Monetary Economics, Vol. 99, pp. 88–105.
- 91.
H.R. Tabarraei et al., (2019), Sovereigns and Financial Intermediaries Spillovers, IMF Working Paper Nr. WP/19/43, February.
- 92.
Cutura argues that the introduction of the Banking Recovery and Resolution Directive (BRRD) improved market discipline in the European bank market for unsecured debt. His empirical results are consistent with the hypothesis that debt holders actively monitor banks and that the BRRD diminished bailout expectations. J. Cutura, (2018), Debt Holders Monitoring and Impact Guarantees: Did the BRRD Improve Market Discipline, SAFE Working Paper Nr. 232, October 20.
- 93.
Also P. Poyntner and T. Reiniger, (2018), Bail-In and Legacy Assets: Harmonized Rules for Targeted Partial Compensation to Strengthen the Bail-In Regime, ONB Working Paper Nr. 224, October; A. Segura and J. Suarez, (2019), Optimally Solving Banks’ Legacy Problems, ESRB Working Paper Nr. 96, June 17.
- 94.
Some fear it will restrict the right and adequate mix of techniques and arrangements used; for instance T. Geithner, (2014), Stress Test: Reflections on Financial Crises, Crown Publishing Group, NY.
- 95.
See for further details: M. Lucchetta et al., (2018), Systemic Risk, Bank Moral Hazard and Bailouts , CESifo Working Paper, Nr. 6878, Center for Economic Studies and Ifo Institute (CESifo), Munich, January.
- 96.
G. Dell’Ariccia et al., (2018), Trade-offs in Bank Resolution, IMF Staff Discussion Note SDN/18/02, February, Washington DC. See the details of the model used in appendix 1 (pp. 33–35). The model is based on D. Sandri, (2015), Dealing with Systemic Sovereign Debt Crises: Fiscal Consolidation, Bail-ins or Official Transfers? IMF Working Paper Nr. WP/15/223, International Monetary Fund, Washington, DC and T. Cordella, et al. (2016), Government Guarantees, Transparency, and Bank Risk-Taking, October 19, mimeo.
- 97.
G. Dell’Ariccia et al., (2018), Ibid. pp. 6–11, 26–28.
- 98.
E. Avgouleas, and C. Goodhart, (2015), A Critical Evaluation of Bail-in as a Bank Recapitalization Mechanism. In The New International Financial System: Analyzing the Cumulative Impact of Regulatory Reform, eds. by D. D. Evanoff, A. Haldane, and G. Kaufman, World Scientific Studies in International Economics, Vol. 48, pp. 267–305.
- 99.
The FSB periodically conducts a review of the resolution regimes. The most recent was the initiated third review FSB , (2018), Thematic Peer Review on Bank Resolution Planning, June, London. The content of the peer review is detailed in the Summary Terms of Reference also released on June 4, 2018, via fsb.org. See the progress report ‘Keeping the Pressure Up’, FSB 2018 Resolution Report, for an intermediate analysis, November 15. Intermediate reporting also occurs through the annual reports to the G20 (latest report 4th edition, November 28, 2018). The second review conducted dates back to 2016. See fsb.org for all back-up documents.
- 100.
See also N. Sarin, and L. H. Summers, (2016), Understanding Bank Risk through Market Measures, Brookings Papers on Economic Activity, Fall, pp. 57–127. See G. Dell’Ariccia et al., (2018), Trade-offs in Bank Resolution, IMF Staff Discussion Note SDN/18/02, February, Washington DC pp. 14–17 for a discussion of the broad spectrum of existing research regarding moral hazard in all its dimensions. Those dimensions include: (1) the lower cost of funding (and CDS spreads) for banks that enjoy the outlook of a future bailout (see for a review of the literature on bank costs with and without moral hazard: R. Kroszner, (2016), A Review of Bank Funding Cost Differentials, Journal of Financial Services Research, Vol. 29, pp. 151–174); (2) whether lower funding costs due to bailouts lead to more risk taking: it’s not all clear but it has become clear that large banks take on ‘larger positions on riskier loan segments, greater reliance on riskier funding, lower buffers against potential loan losses, and greater loan losses after a shock’ (see recently: L. Laeven, et al., (2016), Bank Size, Capital, and Systemic Risk: Some International Evidence, Journal of Banking and Finance, Vol. 69, pp. S25–S34). The short answer is thus: yes, large banks increase risk taking while small ones decrease it, but the data are not robust across a variety of scenarios. US literature shows anyway a mixed bag: TARP benefiting banks shifted to riskier segments within the same asset class, leading to increased volatility and default risk, while others suggest that banks with low charter values and high leverage increased risk taking and those with high charter values and low leverage decreased it (see also N.A. Schenk, and J. H. Thornton, (2016), Charter Values, Bailouts, and Moral Hazard in Banking, Journal of Financial Regulation, Vol. 49, pp. 172–202; A.N. Berger, et al., (2016), Do Bank Bailouts Reduce or Increase Systemic Risk? The Effects of TARP on Financial System Stability, Federal Reserve Bank of Kansas City Research Working Paper RWP 16-08, September); (3) results are impacted by the fact that banks that are likely to receive bailouts also suffer from enhanced scrutiny, a factor which was controlled separately.
- 101.
See G. Dell’Ariccia et al., (2018), Trade-offs in Bank Resolution, IMF Staff Discussion Note SDN/18/02, February, Washington DC, pp. 17–23 for some case study analysis. Some observations include: (1) imposing losses on unsecured creditors may have implications not only for the bailed-in bank but also for other banks; (2) there may be other costs associated with bailing in unsecured creditors, particularly depositors, under an ad hoc regime; (3) US cases that mostly relate to FDIC (Federal Deposit Insurance Corporation) resolutions, find mixed results on the equity prices and CDS spreads of other banks; (4) bailing in some banks may have had spillovers for creditors and equity holders in other banks that were not yet subject to bail-ins ; (5) The choice for a bail-in or not might trigger market discipline on other institutions and signaling to investors that supervisors might be less willing or inclined to advanced actions given evolving market conditions (also A. Schafer, et al., (2016), Bail-in Expectations for European Banks; Actions Speak Louder Than Words, ESRB Working Paper Series Nr. 7); It is relevant who holds equity and who holds unsecured debt in the bail-in institution or other players in the field. Experienced and professional might make a difference in terms of behavior at the moment of bail-in and therefore the size and nature of potential spillovers (also A.-C. Huser, (2017), The Systemic Implications of Bail-in: A Multi-layered Network Approach, ECB Working Paper Series Nr. 2010, February).
- 102.
P. Bolton and M. Oehmke, (2018), Bank Resolution and the Structure of Global Banks, NBER Working Paper Nr. 24737, June.
- 103.
Also W.-G. Ringe and J. Patel, (2019), The Dark Side of Bank Resolution: Counterparty Risk through Bail-in, EBI Working Paper Nr. 31, March; D. R. Muñoz and J. Solana, (2019), Bank Resolution and Creditor Distribution: The Tension Shaping Global Banking – Part I: ‘Individual Bank v. Group’ and ‘Ex Ante v. Ex Post’ Dimensions Part II: The Cross-Border Dimension, mimeo.
- 104.
See a quantitative assessment of the new EU bank regulatory framework: P. Benczur et al., (2017), Evaluating the Effectiveness of the New EU Bank Regulatory Framework: A Farewell to Bail-Out, Journal of Financial Stability, Vol. 33, pp. 207–223.
- 105.
Also M. Dobler, et al., (2016), The Lender of Last Resort Function after the Global Financial Crisis, IMF Working Paper Nr. WP/16/10, Washington, DC. In terms of emergency liquidity or liquidity requirements post-resolution but before market confidence is restored see M. Demertzi et al., (2018), How to Provide Liquidity to banks after Resolution in Europe’s Banking Union, In-Depth Analysis, November 22, via Bruegel.org
- 106.
See G. Dell’Ariccia et al., (2018), Trade-offs in Bank Resolution, IMF Staff Discussion Note SDN/18/02, February, Washington DC, pp. 24–26. That residual risk can take many forms: (1) emergency liquidity facilities that remain due because of insolvency ; (2) collateral provided that gets consumed due to bigger than expected losses ; (3) state guarantees might be needed to ensure market access of failing banks; (4) loss-absorbing capacity might turn out to be insufficient to cover actual losses; (5) the state needs to take temporary bridge ownership or needs to provide ‘bridge’ financing during the resolution phase. A sufficiently wide mandate and flexible mode of operations for supervisory authorities are needed to minimize the need for public funding. There is however no consensus what the nature and size of the flexibility exactly mean. Being too flexible might ‘perpetuate too-big-to-fail premiums, increase contingent fiscal risks, and undermine the credibility of the regime’ (see also box 1, p. 28 regarding the fiscal implications of bailouts ). Being too strict implies sacrificing future financial stability.
- 107.
See G. Dell’Ariccia et al., (2018), Trade-offs in Bank Resolution, IMF Staff Discussion Note SDN/18/02, February, Washington DC, pp. 25–26.
- 108.
E. Martino, (2019), Bail-inable Securities and Financial Contracting: Can Contracts Discipline Bankers? European Journal of Risk Regulation, Vol. 10, Issue 1, pp. 164–179, May 24. doi:https://doi.org/10.1017/err.2019.5. T. Huertas, (2019), Will Bust Banks Be Born Again by Bail-In?, Butterworths Journal of International Banking and Financial Law.
- 109.
EC , (2019), Adoption of the Banking Package: Revised Rules on Capital Requirements (CRR II/CRD V) and resolution (BRRD/SRM), April 16, via europa.eu.
- 110.
See for some market implications of bail-ins: T. Beck et al., (2018), Sharing the Pain? Credit Supply and Real Effects of Bank Bail-ins, EBA Staff Paper Series Report Nr. 1, June, via eba.europe.org. While banks more exposed to the bail-in significantly reduced credit supply at the intensive margin, affected firms compensated the tightening of overall credit with other sources of funding. Also A. Berger, et al. (2017), Do Borrowers Benefit from Bank Bailouts ? The Effects of TARP on Loan Contract Terms, Working Paper, mimeo. A. Bergerand R. Roman, (2017) Did Saving Wall Street Really Save Main Street? The real effects of TARP on local economic conditions. Journal of Financial and Quantitative Analysis, Vol. 52, Issue 5, pp. 1827–1867. B. Bernard et al., (2017), Bail-ins and bail-outs: Incentives, Connectivity, and Systemic Stability. NBER Working Paper Nr. 23747.
- 111.
The FSB publishes an annual G-SIB list, most recently on November 16, 2018, via fsb.org
- 112.
FSB , (2015), Principles on Loss-absorbing and Recapitalisation of G-SIBs in Resolution and Total Loss-absorbing Capacity (TLAC) Term Sheet, November. J.-E. Colliard, and D. Gromb, (2017), Financial Restructuring and Resolution of Banks. Working Paper, mimeo. A.-C. Hüser et al., (2018), The Systemic Implications of Bail-in: A Multi-Layered Network Approach, Journal of Financial Stability, Vol. 38, October, pp. 81–97.
- 113.
FSB, (2018), Principles of Bail-in Execution, June 21, London.
- 114.
FSB, (2018), Ibid. pp. 2–4.
- 115.
See in detail: FSB, (2018), Ibid. pp. 7–9.
- 116.
See in detail: FSB, (2019), Ibid. pp. 10–14.
- 117.
The EBA published a handbook on valuation for purposes of resolution, February 22, 2019, via eba. Europe.eu. It aims at fostering the convergence and consistency of valuation practices as well as the interaction with independent valuers across the EU.
- 118.
See in detail: FSB, (2018), Ibid. pp. 14–16.
- 119.
See in detail: FSB, (2018), Ibid. pp. 16–21.
- 120.
See in detail: FSB, (2018), Ibid. pp. 21–23.
- 121.
See in detail: FSB, (2018), Ibid. pp. 23–26.
Author information
Authors and Affiliations
Rights and permissions
Copyright information
© 2020 The Author(s)
About this chapter
Cite this chapter
Nijs, L. (2020). What If Things Still Go Wrong: The Quest for Optimal Resolution Regimes and Policies. In: The Handbook of Global Shadow Banking, Volume I. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-34743-7_9
Download citation
DOI: https://doi.org/10.1007/978-3-030-34743-7_9
Published:
Publisher Name: Palgrave Macmillan, Cham
Print ISBN: 978-3-030-34742-0
Online ISBN: 978-3-030-34743-7
eBook Packages: Economics and FinanceEconomics and Finance (R0)