Resolution: Ready to Go?

12 Pages Posted: 8 Nov 2018

See all articles by Thomas Huertas

Thomas Huertas

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

Date Written: October 4, 2018

Abstract

Ending too-big-to-fail is one of the cornerstones of post-crisis regulatory reform. Ten years after the great financial crisis, where do we stand? If a major bank were to reach the point of non-viability, are the authorities ready to resolve it? The answer depends largely on whether authorities are able and willing to cooperate with one another. At the behest of regulators and supervisors, banks are making themselves resolvable. Investors are on notice that they will be at risk if a bank fails, and rating agencies now expect bail-in to be the norm, not bail out. So whether too-big-to-fail ends is now largely up to the authorities. They have the responsibility to form, communicate and execute the resolution plan, not the bank. Here, further progress is needed. Although authorities have mapped out two alternatives (the single point of entry [SPE] and multiple point of entry [MPE]), these alternatives depend upon cooperation among the authorities, both within jurisdictions and across jurisdictions. This is a frail foundation for resolution. Resolution regimes do not necessarily promote cooperation. Within jurisdictions, the central bank generally lacks a formal seat at the table in determining the initiation and execution of the resolution plan, even though its decision with respect to emergency liquidity assistance (ELA) largely determines when resolution will be triggered, and its decision with respect to liquidity provision to the recapitalised bank-in-resolution largely determines whether resolution will succeed or fail. With respect to cooperation across jurisdictions, authorities face a dilemma. They are aware that cooperation will yield the best global solution, but they recognise that cooperation may not yield the best result for their own jurisdiction or be consistent with their own mandates. Indeed, resolution regimes generally instruct authorities to frame their decisions with respect to financial stability within their own jurisdiction rather than global financial stability. Hence, each authority must assume that other authorities will put their own interest first.

That in turn has prompted two responses. First, authorities are talking with one another, in so-called crisis management groups, about how they could cooperate to resolve each globally significant bank (G-SIB). But their deliberations largely concern the processes they should employ rather than the decisions they should reach. Moreover, the conclusions of these groups are not binding on the participating authorities. Second, authorities are taking steps to reduce the need for cooperation. These steps are diminishing the effectiveness and efficiency of global banks without necessarily enhancing their resolvability. Instead, authorities should take steps to foster cooperation as well as co-opt the market into promoting such cooperation, both within and across jurisdictions.

Keywords: banks, resolution, TLAC, crisis management groups, bail-in, resolution authority, central bank

JEL Classification: G01, G18, G21, G28

Suggested Citation

Huertas, Thomas, Resolution: Ready to Go? (October 4, 2018). Available at SSRN: https://ssrn.com/abstract=3260400 or http://dx.doi.org/10.2139/ssrn.3260400

Thomas Huertas (Contact Author)

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

Campus Westend - Gr├╝neburgplatz 1
Frankfurt, 60323
Germany

Center for Financial Studies ( email )

Gr├╝neburgplatz 1
Goethe University
Frankfurt am Main, 60323
Germany

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