Edited by John Raymond LaBrosse, Rodrigo Olivares-Caminal and Dalvinder Singh
Chapter 14: ‘Too-Big-To-Fail’ – Can Alternative Resolution Regimes Really Remedy Systemic Risk in Large Financial Institutions’ Insolvency?
14. ‘Too-big-to-fail’ – can alternative resolution regimes really remedy systemic risk in large financial institutions’ insolvency? 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...
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