Six Structures in Search of Stability
LSE Financial Markets Group Special Paper 236
19 Pages Posted: 19 Sep 2015
Date Written: July 1, 2015
This paper analyses the proposition that adjusting structure can strengthen safety and therefore promote stability. It examines six proposals: Liikanen, Volcker, the US rule requiring foreign banking organisations (FBOs) to establish an intermediate holding company (IHC), depositor preference, bail-in plus total loss-absorbing capital (TLAC) and Vickers. Each endeavours to restructure banks along one or more of the following lines: activity, geography and/or creditor hierarchy. Only the creditor hierarchy approach holds the promise of enhancing financial stability, and the complete reordering (bail-in plus TLAC) is distinctly superior to the partial reordering implied by depositor preference. Indeed, bail-in plus TLAC opens the door to making banks resolvable. That in turn makes segregation by activity or by geography superfluous.
Keywords: banks, banking, depositor preference, bail-in, ring-fencing
JEL Classification: G01, G21, G24, G28
Suggested Citation: Suggested Citation