An approach for initiating interventions for bank recovery

Abstract

PurposeThis paper proposes an objective metric to trigger bank recovery. Banks’ living wills involve both recovery and resolution. Since it may not always be clear when recovery plans or actions should be triggered, there is a role for an objective metric to trigger recovery.Design/methodology/approachWe outline how such a metric could be constructed meeting criteria of adequate loss absorption; distinguishing between weak and sound banks; little susceptibility to manipulation; timeliness; scalable from the individual bank to the system.FindingsWe show how this would have worked in the UK, during 2007-2011.Originality/valueThis approach has the added advantage that it could be extended to encompass a whole ladder of sanctions of increasing severity as capital erodes.