Orderly Resolution of Failing Banks
Term: Orderly Resolution of Failing Banks | Book: Lipstick on a Pig (financial bailouts): book profile and conceptual summary
Definition and core idea
Orderly resolution is the set of tools and powers that allow a failed financial institution to be restructured or closed, vital services to be preserved, and losses to be allocated, as far as possible, without unlimited reliance on taxpayers.
Explanation and elaboration
The book’s discussion centres on alternatives to conventional bailouts, but the newer policy framework includes a range of options: absorption of losses by shareholders, conversion or write-down of some claims, transfer of critical services, sale of businesses, and use of recovery and resolution plans. The aim is not to accept a bank’s failure without consequences in every circumstance; it is that the threat of a bank failing should not turn into bargaining for unconditional support.
The Financial Stability Board stresses that resolution regimes must provide the legal and operational power needed to resolve systemically important institutions and reduce the risk of loss to taxpayers.
Notes and limits of interpretation
Separating claim from fact
Resolution tools must be designed to fit a country’s laws, deposit structure, international links and the state of the crisis; there is no single version for all banks and countries.
Relations to other concepts
Review questions
- What problem does this concept clarify?
- Who benefits and who is harmed?
- What evidence is needed to test this claim in a real case?
- Which part is the author’s position and which part needs independent evidence?