The Theory of Bank Resolution: Does the Bail-in Work?

52 Pages Posted: 23 Aug 2023 Last revised: 12 Sep 2023

See all articles by Urs Lendermann

Urs Lendermann

Deutsche Bundesbank - Deutsche Bundesbank University of Applied Sciences

Date Written: August 22, 2023

Abstract

The Credit Suisse default triggered considerable discourse surrounding the absence of any bank resolution procedure. Instead, public guarantees and unconventional emergency liquidity assistance were granted. This situation prompts me to explore the bail-in tool and the total loss-absorbing capacity (TLAC) which were introduced by the G20 Financial Stability Board to eliminate the need for public bailouts of global systemically important banks in case of failure. Acknowledging the pragmatic standpoint, it is essential to recognize that banks hold divergent perspectives concerning their resolution planning while policymakers continue to grapple with the persistent ‘too big to fail’ dilemma without a clearly discernible pathway for resolution. In light of these premises, I propose to consider contractual approaches to enhance the TLAC framework, incorporating a market-based trigger design as a signal for eroding market confidence. These improvements aim to create conditions that enable central banks to provide emergency liquidity assistance, thereby averting systemic disruptions during a financial crisis.

Keywords: AT1, TLAC, G-SIB, financial stability, lender of last resort, political economy

JEL Classification: E44, F34, G12, G21, G28, K20, K23

Suggested Citation

Lendermann, Urs, The Theory of Bank Resolution: Does the Bail-in Work? (August 22, 2023). European Banking Institute Working Paper Series 2023 - no. 150, Available at SSRN: https://ssrn.com/abstract=4548364 or http://dx.doi.org/10.2139/ssrn.4548364

Urs Lendermann (Contact Author)

Deutsche Bundesbank - Deutsche Bundesbank University of Applied Sciences ( email )

Schloss
Hachenburg, 57627
Germany

HOME PAGE: http://www.hochschule-bundesbank.de/hochschule-en

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