Safe to Fail

22 Pages Posted: 29 Nov 2017

See all articles by Thomas Huertas

Thomas Huertas

Goethe University Frankfurt - Institute of Law and Finance; Center for Financial Studies

Date Written: November 21, 2013

Abstract

Banks cannot be made fail-safe. But they can be made safe to fail, so that the failure of a bank need not disrupt the economy at large nor pose cost to the taxpayer. In other words, banks can be made resolvable, and “too big to fail” can come to an end. To do so, the authorities, banks and financial market infrastructures need to prepare in advance for what amounts to a pre-pack reorganization of the bank that the resolution authority can implement over a weekend, if the bank reaches the point of non-viability in private markets (fails to meet threshold conditions). This pre-pack consists of two principal elements: (i) a recapitalization of the bank through the bail-in of investor instruments, and (ii) the provision of liquidity to the bank-in-resolution. Creating such a pre-pack solution should form the core of the resolution plans that authorities are developing for global systemically important financial institutions (G-SIFIs).

Suggested Citation

Huertas, Thomas, Safe to Fail (November 21, 2013). Journal of Financial Perspectives, Vol. 1, No. 3, 2013. Available at SSRN: https://ssrn.com/abstract=3078037

Thomas Huertas (Contact Author)

Goethe University Frankfurt - Institute of Law and Finance ( email )

Campus Westend - Grüneburgplatz 1
Frankfurt, 60323
Germany

Center for Financial Studies ( email )

Grüneburgplatz 1
Goethe University
Frankfurt am Main, 60323
Germany

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