Banking Crises and Special Resolution Regimes (SRRs)

What do countries do when their banks get into serious trouble?

In this paper we report in a preliminary fashion on some key issues in designing special resolution regimes (SRRs) under the oversight of the prudential banking authorities. The crisis that can be traced to August 2007, the collapse of Lehman Brothers in September 2008 and subsequent events has exposed among other things the incapacity of the authorities to deal efficiently and effectively with bank distress and insolvency other than in a context of limited and small incidence, when the ‘normal’ procedures of exit through bankruptcy and liquidation are readily available. Otherwise authorities have been reduced to ad hoc ex post too big to fail (TBTF) measures, which carry significant costs and create wider economic problems. The solution now being advanced to this policy disaster is that of special resolution regimes (SRRs) for systemically important financial institutions (SIFIs), but set in a wider regulatory reform project, incorporating prompt corrective action (PCA) combined with SRR to establish structured early intervention and resolution (SEIR). This has been a long‐established recommended approach of scholars such as George G Kaufman and others but until the current crisis found little hearing among policy‐makers or competent authorities.

  • We provide a brief treatment of terminological distinctions and then set the scene for the global financial crisis (GFC), the Prologue
  • Second, we outline the resolution issue in terms of ‘banks are different’
  • Third, we describe a small number of resolution schemes in place (US, UK, New Zealand, Denmark, Germany) and some current international institutional thinking
  • We proceed to deal with some current issues (‘living wills’, bridge banks, set‐off and netting and ‘bailing‐in’)
  • We conclude with some brief allusion to further issues and remarks addressing agendas for further research.

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