Tackling too-big-to-fail

The resolvability challenge for banks

This paper sets out how banks can address the challenge of becoming resolvable by improving their performance in six areas – so-called ‘resolvability drivers.’

Overview and key findings

Addressing the issue of too-big-to-fail (TBTF) banks has been the overriding aim of financial services policy since the economic downturn. At the core of this effort is the goal of making banks “resolvable” in distress, to reduce the risk of having to bail them out. What resolvability means in practice and how it will be interpreted in detail remains though one of the more elusive pieces in the post-crisis regulatory puzzle. Yet banks need clarity and soon in order to be able to adequately plan and deliver the significant operational, structural and business model changes required.

The paper sets out our view on what “good” looks like for banks trying to achieve resolvability, identifying six ‘resolvability drivers’ that they must address to meet resolution authorities’ expectations:

  • Simplifying legal entity structures
  • Reducing operational complexity
  • Enhancing the credibility of loss-absorbing capacity
  • Improving liquidity management
  • Rationalising and justifying global booking models
  • Enhancing data quality, reporting and valuation capabilities

Although driven by regulation and unavoidably a costly and time-consuming exercise, becoming resolvable should not only be dealt with as a matter of regulatory compliance. We believe that there is potentially considerable commercial benefit that banks can extract from investing in their resolvability, particularly through improved capabilities, becoming more efficient and competitive, and through the prospect of less intrusive supervisory scrutiny.

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