A macro approach to international bank resolution

Abstract

In the aftermath of the Great Financial Crisis, regulators have rushed to strengthen banking supervision and implement bank resolution regimes. While such resolution regimes are welcome to reintroduce market discipline and reduce the reliance on taxpayer-funded bailouts, the effects on the wider banking system have not been properly considered. This paper proposes a macro approach to resolution, which should consider (i) the contagion effects of bail-in, and (ii) the continuing need for a fiscal backstop to the financial system. For bail-in to work, it is important that bail-inable bank bonds are largely held outside the banking sector, which is currently not the case. Stricter capital requirements could push them out of the banking system. The organisation of the fiscal backstop is crucial for the stability of the global banking system. Single-point-of-entry resolution of international banks is only possible for the very largest countries or for countries working together, including in terms of sharing the burden of a potential bank bailout. The euro area has adopted the latter approach in its Banking Union. Other countries have taken a stand-alone approach, which leads to multiple-point-of-entry resolution of international banks and contributes to fragmentation of the global banking system.

Promoting the Integration of Payment Markets: A Stakeholder’s Vision

“…In contrast, the adopted European-wide approach is fully understood through the lens of stakeholder theory, as it is based on a level playing field for all market participants to contribute to. 7 See, for example, Mintzberg (1983), Chakravarthy (1986, Freeman and Gilbert (1988), Evan and Freeman (1993), Clarkson (1995), Donaldson and Preston (1995), Parkinson (1995), Freeman and McVea (2001), Worthington (2001), Freeman and Phillips (2002), Jones et al (2002), Post et al (2002), Phillips et al (2003), Schwartz and Carrol (2003), Freeman (2004), Walsh (2005), Agle et al (2008), Laplume et al (2008), Freeman et al (2010), Phillips (2010), Ayuso et al (2014), Berman and Johnson-Cramer (2017), Schoenmaker (2017). banks, consumers, companies, and clearing houses were among the first to step in, as documented in the interviews we conducted with Portuguese financial-market experts.…”

Liquidity in Resolution: Comparing Frameworks for Liquidity Provision Across Jurisdictions

“…According toSchoenmaker (2017), the optimal size for a fiscal backstop in the euro area would be closer to €230 billion.…”

“…See EU Council, "Term sheet on the European Stability Mechanism reform", 4 December 2018. 63 See Letter of the President of the Eurogroup to the President of the Euro Summit, 5 December 2019.64According toSchoenmaker (2017), the optimal size for a fiscal backstop in the euro area would be closer to €230 billion.…”