Banks cannot be made failsafe. But they can be made safe to fail, so that the failure of a bank need not disrupt the economy at large nor pose cost to the taxpayer. In other words, banks can be made resolvable, and “too big to fail” can come to an end.
To do so, the authorities, banks and financial market infrastructures (FMIs) need to prepare in advance for what amounts to a pre-pack reorganisation of the bank that the resolution authority can implement over a weekend, if the bank reaches the point of non-viability in private markets/fails to meet threshold conditions. This pre-pack consists of two principal elements: (i) a recapitalisation of the bank through the bail- in of investor instruments and (ii) the provision of liquidity to the bank in resolution. Creating such a pre-pack solution should form the core of the resolution plans that authorities are developing for globally systemically important financial institutions (G- SIFIs).
We start by setting out the conditions that must be met for a bank to be resolvable. The paper then outlines that this ‘safe-to-fail’ test can be met under a variety of banking structures under a so-called Single Point of Entry approach where the home country resolution authority acts as what amounts to a manager of a global resolution syndicate (Annex A deals with the Multiple Point of Entry approach).1 How banks are organised matters less than what banks, authorities and financial market infrastructures do to prepare for the possibility that resolution may be required. That agenda for action concludes the paper.
