Resolution Triggers for Systemically Important Financial Institutions
59 Pages Posted: 22 Aug 2018 Last revised: 13 Sep 2018
Date Written: August 13, 2018
The greatest regulatory challenge emerging from last decade’s financial crisis was the problem of “too-big-to-fail” financial institutions — those firms whose failure could trigger widespread runs in the financial system. When such firms faltered in 2008, regulators faced the dilemma of either acquiescing to financial panic and the attendant economic wreckage, or putting taxpayer money at risk to bail out the firm and its creditors. Regulators have made significant post-crisis progress in designing mechanisms to avoid this dilemma once a firm is placed into resolution. There is, however, a significant lingering gap in their efforts: the lack of appropriate principles to guide the decision to trigger the resolution process in the first place. Trigger-happiness and trigger-shyness both carry significant costs. Acting too soon is needlessly disruptive; acting too late may allow losses to fester to the point that all the work regulators have done to eliminate the dilemma are for naught, and they must once again either bail out a large firm or risk contagion and panic. Getting the trigger-timing right is therefore an essential part of a robust response to the too-big-to-fail problem. This Article identifies gaps and obstacles to an optimal triggering framework in the current regulatory landscape and proposes discrete policy reforms to address them.
Keywords: Banking Law, Financial Regulation, Bank Resolution, Total Loss Absorbing Capacity, TLAC
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