Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of New York
Economic Policy Review
What makes large bank failures so messy and what should be done about it?
James J. McAndrews
Donald P. Morgan
Joao A. C. Santos
Tanju Yorulmazer
Abstract

This study argues that the defining feature of large and complex banks that makes their failures messy is their reliance on runnable financial liabilities. These liabilities confer liquidity or money-like services that may be impaired or destroyed in bankruptcy. To make large bank failures more orderly, the authors recommend that systemically important bank holding companies be required to issue “bail-in-able” long-term debt that converts to equity in resolution. This reassures holders of uninsured liabilities that their claims will be honored in resolution, making them less likely to run. In a novel finding, the authors show that bail-in-able debt and equity are not perfect substitutes in terms of stemming bank runs. Finally, they argue that the long-term debt requirement should increase in line with the amount of uninsured financial liabilities the bank has issued. This approach has the advantage of tying the requirement to the sources of messy failures, and it tends to internalize the externalities associated with the issuance of uninsured financial liabilities.


Download Full text
Cite this item
James J. McAndrews & Donald P. Morgan & Joao A. C. Santos & Tanju Yorulmazer, "What makes large bank failures so messy and what should be done about it?" , Federal Reserve Bank of New York, Economic Policy Review, issue Dec, pages 229-244, 2014.
More from this series
JEL Classification:
Subject headings:
Keywords: large banks; complex banks; bank runs; messy failures; bail-inable debt; runnable financial liabilities; uninsured financial liabilities
For corrections, contact Amy Farber ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal