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On the Measurement of Large Financial Firm Resolvability
We say that a large financial institution is "resolvable" if policymakers would allow it to go through unassisted bankruptcy in the event of failure. The choice between bankruptcy or bailout trades off the higher loss imposed on the economy in a potentially disruptive resolution against the incentive for excessive risk-taking created by an assisted resolution or a bailout. The resolution plans ("living wills") of large financial institutions contain information needed to evaluate this trade-off. In this paper, we propose a tool to complement the living will review process: an impact ...
Bank resolution concepts, trade-offs, and changes in practices
Banks and financial intermediaries perform important roles for the smooth functioning of the economy such as channeling resources from savers to productive projects and providing payment services. Because bank failure can result in significant costs for the economy, an efficient resolution mechanism is needed to mitigate such costs. This article provides a simple framework for analyzing the feasibility and cost of different resolution methods. The analysis shows that while private resolution methods, such as sale to a healthy bank, are preferred options in terms of minimizing costs, they may ...
Why Large Bank Failures Are So Messy and What to Do about It?
If the Lehman Brothers failure proved anything, it was that large, complex bank failures are messy; they destroy value and can destabilize financial markets. We certainly don?t mean to trivialize matters by calling large bank failures ?messy,? as it their messiness, particularly the destabilizing aspect, that creates the ?too-big-to-fail? problem. In our contribution to the Economic Policy Review volume, we venture an explanation about why large bank failures are so messy and discuss a policy that can make them less so.