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13 - The road to better resolution: from bail-out to bail-in

from Part III - The future of the euro area

Published online by Cambridge University Press:  07 October 2011

Miroslav Beblavý
Affiliation:
Univerzita Komenského v Bratislave, Slovakia
David Cobham
Affiliation:
Heriot-Watt University, Edinburgh
L'udovít Ódor
Affiliation:
National Bank of Slovakia
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Summary

Introduction

Better resolution forms a key component of the cure against future crises – along with better regulation, better supervision and better macroeconomic policy (Huertas, 2010a). This chapter outlines a possible path toward better resolution for large, systemically important financial firms.

Achieving better resolution of such firms is essential. ‘Too big to fail’ is too costly to continue, and ways must be found to assure that failing banks can be resolved at no cost to the taxpayer and limited cost to society at large. ‘Too big to fail’ distorts competition, creates moral hazard and threatens the public finances. The foundations for moving away from ‘too big to fail’ are being laid: they are the introduction of special resolution regimes for banks and the requirement that banks prepare ‘living wills’ (recovery and resolution plans). On top of these foundations now needs to be built a means of resolving large, complex cross-border banks without equity support from taxpayers. Bail-in offers the promise of such a solution, and this chapter analyses how that promise might be fulfilled.

Type
Chapter
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Publisher: Cambridge University Press
Print publication year: 2011

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References

2010 www.bis.org/publ/bcbs174.pdf
Bernanke, B.S. 2010 2010 www.federalreserve.gov/newsevents/testimony/bernanke20100210a.htm
Claessens, S.Herring, R.Schoenmaker, D. 2010 A Safer World Financial System: Improving the Resolution of Systemic InstitutionsGenevaGoogle Scholar
Huertas, Thomas F. 2010 Crisis: Cause, Containment and CureLondonPalgrave MacmillanCrossRefGoogle Scholar
Huertas, Thomas F. 2010
Huertas, Thomas F. 2010 www.fsa.gov.uk/pages/Library/Communication/Speeches/2010/0118_th.shtml
Merton, Robert C.Perold, André 1993 Theory of risk capital in financial firmsJournal of Applied Corporate Finance 6 16CrossRefGoogle Scholar
Paulson, Henry M. 2010 On the Brink: Inside the Race to Stop the Collapse of the Global Financial SystemNew YorkBusiness PlusGoogle Scholar
Squam Lake 2010 French, K.Baily, M.Campbell, J.Cochrane, J.Diamond, D.Duffie, D.Kashyap, A.Mishkin, F.Rajan, R.Scharfstein, D.Shiller, R.Shin, H.Slaughter, M.Stein, J.Stulz, R.The Squam Lake Report: Fixing the Financial SystemPrinceton University PressGoogle Scholar

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