Table of Contents

Managing Risk in the Financial System

Managing Risk in the Financial System

Edited by John Raymond LaBrosse, Rodrigo Olivares-Caminal and Dalvinder Singh

Managing Risk in the Financial System makes important and timely contributions to our knowledge and understanding of banking law, financial institution restructuring and related considerations, through the production of an innovative, international and interdisciplinary set of contributions which link together the law and policy issues surrounding systemic risk and crisis management.

Chapter 14: ‘Too-Big-To-Fail’ – Can Alternative Resolution Regimes Really Remedy Systemic Risk in Large Financial Institutions’ Insolvency?

Jens-Hinrich Binder

Subjects: economics and finance, financial economics and regulation, money and banking, law - academic, finance and banking law


Jens-Hinrich Binder* 14.1. INTRODUCTION Substantial fiscal costs have been incurred in the bailouts of financial institutions, deemed systemically important. In view of the moral hazard inevitably triggered by such operations among bank owners and bank creditors, improved resolution procedures for large, complex financial institutions (LCFIs) are clearly needed on the legislative agenda at both the national and international levels. International standard-setting bodies such as the Basel Committee,1 the then Financial Stability Forum (now the Financial Stability Board),2 the European Union3 as well as national governments have announced initiatives to improve existing systems. With the passage of the Banking Act 2009, the UK has taken the lead and implemented a complete overhaul of its previous arrangements.4 Germany, to give another example, has just followed with a reformed bank insolvency regime that came into force in January 2011.5 Evidently, the key policy objective common to all such initiatives is to avoid the need for further bailouts of systemically important institutions, be it on the grounds of their size – i.e. motivated by ‘too-big-to-fail’ (TBTF) considerations – or their respective interconnectedness with other market participants is expected to trigger a domino effect upon formal closure and liquidation. This chapter discusses the prospects and constraints on such concepts. While a detailed analysis of the vast range of technical problems associated with alternative resolution regimes is outside its scope, the chapter develops an assessment of such plans and the likelihood of their success. The question is central in the search for solutions to the TBTF...

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