What If Things Still Go Wrong: The Quest for Optimal Resolution Regimes and Policies
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Ex ante legislation is needed but inherently insufficient, and thus ex post regulation is part of any possible holistic solution. There are bankruptcy laws in many countries and not all are the poster child of optimal regulation. But even if they were, a framework is needed to address the specifics of the financial industry. From multijurisdictional monitoring to forcing banks to develop their own resolution and recovery scenarios are all building blocks of a comprehensive framework and so are stress tests. But questions are asked about how this all should work together in an efficient way under conditions that typically qualify as ‘distress’. And if ultimately it becomes clear the sovereign needs to step in to rescue a bank or financial conglomerate (bail-in or bailout), an avalanche of questions emerge as to which sovereign(s) need(s) to step in, which of the parties involved (shareholders, unsecured lenders and/or deposit holders) take a haircut and in what order. Very problematic still is the EU situation despite the bank recovery and resolution directive and single resolution mechanism put in place in recent years.