Abstract
The perfect banking system would be too expensive. Therefore, the failure of banks is imminent, and we should be ready for it. Failing of individual weak banks is acceptable. However, only if the failure is correctly managed. The failed bank goes through resolution. It is a deliberately vague word with a lot of meanings. EU resolution framework assumes “open bank” resolution for strategic banks. It means that the bank would fail and resolve without any discontinuity in operations. Only shareholders and junior creditors of the bank are involved in the resolution. However, a lot of work needs to be done to achieve all preconditions for such a resolution. Most importantly, it would require improvement of the banks’ reputation.
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Notes
- 1.
FDIC (2019).
- 2.
“Lend without limit, to solvent firms, against good collateral, at high rates.”.
- 3.
Regulatory preconditions required to maintain a bank’s licence. Article 2 of Regulation EU 2016/1450.
- 4.
Some information about dynamics of EU bank subordinate bond yields can be found (Nuevo, 2019).
- 5.
“The collateral damage, including the domino effects and the potential disruption of the broader economy, would likely be significant even if the direct cost of bankruptcy or resolution were borne by investors or by the banking industry.” (Admati & Hellwig, 2014, p. 78).
References
Admati, A., & Hellwig, M. (2014). The bankers’ new clothes, Princeton University Press.
FDIC. (2019). https://www.fdic.gov. Retrieved from https://www.fdic.gov/bank/individual/failed/banklist.html.
Kay, J. (2015). Other people’s money, Profile Books. ISBN 978-1781254431.
Nuevo, I. P. (2019, September). Has the new bail-in framework increased the yield spread between subordinated and senior bonds? Working Paper Series.
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Odak, D. (2020). Bank Failure and Resolution. In: A Political Economy of Banking Supervision. Springer, Cham. https://doi.org/10.1007/978-3-030-48547-4_10
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DOI: https://doi.org/10.1007/978-3-030-48547-4_10
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