Working paper on Resolution Strategic optionality in resolution: combination of tools

This paper discusses the selection of resolution tools in the EU resolution planning framework, going beyond the one-size-fits-all approach generally based on the single bail-in tool. As it is impossible to account for all the peculiarities of bank failures, it argues that optimal resolution strategies should preserve flexibility and involve a combination of bail-in and transfer tools.

In the first part, we highlight the variety of resolution tools in the EU framework, with a typology of strategies relying on their combinations. Notwithstanding the many options offered by the EU resolution toolkit, resolution planning remains primarily focused on bail-in alone. At the same time, transfer transactions have a proven track record in ensuring orderly management of bank failures. Frequent departures of resolution execution from resolution planning in the EU show the need for greater flexibility and optionality. Drawing on 2023 bank failures, we argue that for large, multibusiness line banks such as global systemically important banks, a combined approach where openbank bail-in is complemented by partial transfer tools could be more appropriate and credible than whole-bank sales leading to market exit.

In the second part, we present the French national resolution authority’s approach to alternative strategies and asset separation for large banks. This modular approach relies on a toolbox strategy, where the bail-in tool is complemented by both the sale of business tool and the asset separation tool. This toolbox allows resolution authorities to embed flexibility and options within a single strategy, rather than designing several strategies in parallel for the myriad of crisis situations that could be encountered in resolution. We assess the relevance of transfer transactions over the compressed timeline of the resolution weekend, compared to the longer time horizon of the restructuring phase. In a combined approach, resolution authorities can leverage on the funding source provided by bail-in to enact costly business exits and separate sources of high risks (e.g. impaired assets or assets generating reputation risks).

The third part focuses on operational considerations to ensure these combinations of tools are fully actionable. Greater flexibility should not come at the cost of the credibility of resolution strategies. Proper operationalisation of such strategies requires that both banks and resolution authorities reach and maintain an adequate level of preparedness for several tools at the same time. Finally, we consider valuation aspects to show that the combined approach may have the additional benefit of reducing resolution funding needs compared to the use of bail-in on a stand-alone basis.

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Working paper on Resolution Strategic optionality in resolution: combination of tools
  • Publié le 20/12/2023
  • EN
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Mis à jour le : 03/01/2024 17:17