IMF Publishes Staff Discussion Note on Trade-offs in Bank Resolution
IMF published staff discussion note on trade-offs in bank resolution. The note examines the economic forces that determine the relative costs and benefits of bail-ins and bail-outs. The note revisits the trade-off entailed in the decision of a policymaker on the relative role of bail-ins of private stakeholders and public bail-outs.
The first section of the note presents the theoretical model that provides a framework to assess the circumstances in which losses may need to be borne by the public sector, rather than private investors. The answer crucially hinges on the trade-off between the moral hazard costs associated with bail-outs and the potential spillovers arising from bail-ins. The second section discusses the empirical evidence that is consistent with the existence of moral hazard effects associated with bail-outs and of spillovers associated with bail-ins. The third section briefly discusses the recent reforms to enhance resolution frameworks, along with the progress in shifting the burden of a crisis to private investors, strengthening resolution frameworks, and improving the bail-in/out trade-offs by enhancing resolvability and increasing loss absorbency.
The note supports the ongoing reform agenda to provide resolution authorities with effective bail-in powers and stresses that frameworks should aim to minimize moral hazard associated with bailouts. Nonetheless, it also emphasizes the need to allow for sufficient, albeit constrained, flexibility to be able to use public resources in the context of systemic banking crises—when spillovers are significant and deemed likely to severely jeopardize financial stability. Furthermore, the analysis calls for continued efforts to enhance loss-absorbing capacity, ensure that holders of bail-in-able debt are those best situated to absorb losses, and improve arrangements for cross-border resolution. This is essential to further boost the effectiveness of bail-in powers and contain the risk of spillovers.
Related Link: Discussion Note
Keywords: International, Banking, Bank Resolution, Trade-offs, Bail-in, Bail-out, Resolution Framework, IMF
Previous Article
ECB Publishes the Fourth Eurosystem Oversight Report 2016Related Articles
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.
BIS Bulletin Examines Cognitive Limits of Large Language Models
The use cases of generative AI in the banking sector are evolving fast, with many institutions adopting the technology to enhance customer service and operational efficiency.
ECB is Conducting First Cyber Risk Stress Test for Banks
As part of the increasing regulatory focus on operational resilience, cyber risk stress testing is also becoming a crucial aspect of ensuring bank resilience in the face of cyber threats.
EBA Continues Momentum Toward Strengthening Prudential Rules for Banks
A few years down the road from the last global financial crisis, regulators are still issuing rules and monitoring banks to ensure that they comply with the regulations.
EU and UK Agencies Issue Updates on Final Basel III Rules
The European Commission (EC) recently issued an update informing that the European Council and the Parliament have endorsed the Banking Package implementing the final elements of Basel III standards