Bank resolution mechanisms revisited: Towards a new era of restructuring

Abstract

Government interventions as a solution to systemic banking crises continue to receive wide criticism. The new regulatory frameworks advocate banks’ bail-ins and resolutions that do not require governments’ involvement. However, as the recent events with Credit Suisse and Silicon Valley Bank show, the government still plays an active role in rescuing and resolving the bank's problems. We use the financial stability model of Goodhart et al.’s (2005, 2006a) to analyze the effects of various bank policy interventions on banks’ performance during the crisis rescue phase. We then explore whether those interventions work effectively in facilitating bank recovery and whether they reduce systemic risk in the long run. We use a unique granular bank-level dataset from 22 advanced economies covering the 1992–2017 period. We find that bank recapitalization without debt resolution measures does not resolve bank distress. The empirical results document that “bad-bank” resolution is positively correlated with a bank’s recovery as well as lower systemic risk. Those findings contribute to the ongoing debate on the optimal bank resolution architecture during systemic events.