Bank Resolution 10 Years From The Global Financial Crisis: A Systematic Reappraisal

School of European Political Economy, LUISS 7/2019

Edinburgh School of Law Research Paper Forthcoming

21 Pages Posted: 6 Jun 2019

See all articles by Emilios Avgouleas

Emilios Avgouleas

University of Edinburgh - School of Law

Charles Goodhart

London School of Economics & Political Science (LSE) - Financial Markets Group

Date Written: May 31, 2019

Abstract

Since 2010 most Group of Twenty (G20) jurisdictions have introduced new recovery and resolution regimes to deal with bank failures. The common objective of these regimes is, first, to facilitate the orderly failure of financial institutions and, second, to redirect the bulk of losses to the private sector, thereby eliminating the need for public bailouts. Stringent creditor monitoring of bank risk is presumed to constrain excessive leverage because otherwise shareholders and managers will increase leverage to maximize returns on equity (ROE). Thus, the threat of a creditor bail-in should eliminate the TBTF subsidy and should also contain the governance costs that accompany excessive leverage curtailing managerial rents. Despite significant progress to meet resolution objectives, concerns remain on whether the present arrangements will work effectively in a systemic crisis. Such skepticism centres on whether bailing in the creditors of a cross-border institution, including the conversion of pre-funded liabilities such a TLAC and MREL, would prove sufficient to prevent the bailout of a global systemically important financial institution (G-SIFI). There are also concerns about the possibly undesirable consequences of bank bail-ins when the failure is systemic rather than idiosyncratic. Finally, it is not known to what extent resolution regimes are sufficient to mitigate moral hazard, especially in the absence of an ex post penalty regime for bank managers. This paper discusses these issues in context and tries to articulate the normative values attached to resolution regimes highlighting the prevalent lack of clarity and the overlapping and sometimes conflicting nature of resolution objectives under present frameworks. Then the paper focuses on the implications of draconian creditor bail-in regimes and advocates a more relaxed approach to the provision of liquidity in resolution to avoid fire sales.

Keywords: systemic stability, bank resolution, systemic risk, macroprudnetila regulation, bailins, bailouts, BRRD

JEL Classification: F330, F30

Suggested Citation

Avgouleas, Emilios and Goodhart, Charles A.E., Bank Resolution 10 Years From The Global Financial Crisis: A Systematic Reappraisal (May 31, 2019). School of European Political Economy, LUISS 7/2019, Edinburgh School of Law Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=3396888 or http://dx.doi.org/10.2139/ssrn.3396888

Emilios Avgouleas (Contact Author)

University of Edinburgh - School of Law ( email )

Old College
South Bridge
Edinburgh, EH8 9YL
United Kingdom

Charles A.E. Goodhart

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom
0207 955 7555 (Phone)
0207 242 1006 (Fax)

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