International Finance Regulation: The Quest for Financial Stability

CHAPTER 9 Banking Resolution and Recovery

“I am concerned that decision-making may become overly complex and financing arrangements may not be adequate. We should not create a Single Resolution Mechanism that is single in name only.”

—ECB President Mario Draghi

History has seen governments and international institutions stepping in to avoid previous financial crises that would otherwise create systemic damages. Because the recent banking crisis was not due to macroeconomic external problems but to the financial system itself, the authorities looked at ways to prevent a repetition of a situation where they ended up being in charge of crisis resolution and being forced to use taxpayers’ money to do so.

The Bank of England¹ defines resolution as having five key objectives, which must be considered in choosing which resolution tools to use:

• Protect and enhance the stability of the financial systems of the United Kingdom;
• Protect and enhance public confidence in the stability of the banking systems of the United Kingdom;
• Protect depositors;
• Protect public funds;
• Avoid interfering with property rights in contravention with human rights

Recent regulatory reforms were inspired, more or less explicitly, by the same philosophy and pursue the same objectives.

MORAL HAZARD

Former BIS Director General Alexandre Lamfalussy stated:

The widespread belief that systemically important financial institutions will always be bailed out has two devastating consequences: it encourages reckless ...