Key facts
- Proposals to weaken bank resolution plans are gaining support.
Proposals to scale back or abolish bank resolution plans are gaining traction, with critics citing recent failures as evidence of their ineffectiveness. However, proponents argue these plans remain crucial for managing bank failures and preventing contagion.
Weakening bank resolution plans could increase systemic risk by making it harder for authorities to manage the failure of large, complex financial institutions, potentially leading to contagion and economic instability.
Proposals to weaken bank resolution plans are gaining traction, with critics arguing that recent bank failures demonstrate their ineffectiveness. Jonathan Gould, identified as Trump’s comptroller of the currency, is seen as a key figure behind a recent proposal to halve requirements for banks. In the European Union, the Commission is advocating for less frequent data reporting for resolution plans, citing competitiveness concerns.
Critics contend that resolution plans are complex and resource-intensive, and point to the 2023 failures of US regional banks and Credit Suisse as evidence that these plans are not strictly followed. However, proponents argue that while plans may not be followed to the letter, they remain valuable. The sale of Credit Suisse to UBS, for instance, was facilitated by the write-down of AT1 bondholders, and Swiss authorities provided guarantees. In the case of SVB, its prior resolution plan reportedly aided authorities in tracking its international operations.
Resolution plans are seen as crucial for providing authorities with information to prevent contagion and manage bank failures. Over the past decade, these plans have advanced by limiting unpredictability and ensuring regulators have access to necessary data. The chaotic aftermath of Lehman Brothers' 2008 bankruptcy, which lacked a clear playbook, led to the creation of emergency liquidity facilities and capital injections. While ad-hoc solutions may suffice for smaller failures, larger, complex organizations require existing structures for swift action.
The 2023 failures, despite leading to exceptional interventions and litigation, demonstrated progress since 2008. Resolution plans allow authorities to quickly understand large banking groups' activities. Tools such as clean holding companies, stays on derivatives, and bail-in bonds provide legal certainty and a cushion against losses, offering guardrails that were absent in 2008. While the US model might place too much burden on banks for planning, and a shift towards Europe's scenario-planning approach could be preferable, reforms should aim to preserve and expand these structures.
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