Since 2010 most Group of Twenty (G20) jurisdictions have introduced new recovery and resolution regimes to deal with bank failures. The common objective of these regimes is, first, to facilitate the orderly failure of financial institutions and, second, to redirect the bulk of losses to the private sector, thereby eliminating the need for public bailouts. Stringent creditor monitoring of bank risk is presumed to constrain excessive leverage because otherwise shareholders and managers will increase leverage to maximize returns on equity (ROE). Thus, the threat of a creditor bail-in should eliminate the TBTF subsidy and should also contain the governance costs that accompany excessive leverage curtailing managerial rents. Despite significant progress to meet resolution objectives, concerns remain on whether the present arrangements will work effectively in a systemic crisis. Such skepticism centres on whether bailing in the creditors of a cross-border institution, including the conversion of pre-funded liabilities such a TLAC and MREL, would prove sufficient to prevent the bailout of a global systemically important financial institution (G-SIFI). There are also concerns about the possibly undesirable consequences of bank bail-ins when the failure is systemic rather than idiosyncratic. Finally, it is not known to what extent resolution regimes are sufficient to mitigate moral hazard, especially in the absence of an ex post penalty regime for bank managers. This paper discusses these issues in context and tries to articulate the normative values attached to resolution regimes highlighting the prevalent lack of clarity and the overlapping and sometimes conflicting nature of resolution objectives under present frameworks. Then the paper focuses on the implications of draconian creditor bail-in regimes and advocates a more relaxed approach to the provision of liquidity in resolution to avoid fire sales.
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