The Challenge of Resolving Cross-Border Financial Institutions

Abstract

Despite more than 30 years of efforts to harmonize international financial regulatory and prudential policies, the topic of how to resolve a large, complex international bank was missing from the agenda of the Basel Committee on Banking Supervision. The financial crisis of 2008-2009 and the realization that many large, complex international financial institutions had become too-big-to-fail moved the topic of resolution from virtual obscurity to the top of the international regulatory agenda. The magnitude of the recent crisis has focused attention on resolution policy for the simple reason that too-big-to-fail is too costly to continue. Andrew Haldane estimated that guarantees and subsidies extended by the U.S., the U.K. and the Euro area to support the financial system amounted to 25% of world GDP in November 2009. Not only are these costs large relative to global output, but also the costs to some individual countries exceeded their capacity to provide credible support. For example, Ireland's bailout of its banks transformed a banking crisis into a sovereign debt crisis. Before the crisis, however, authorities appear to have ignored the warning signs of weaknesses in resolution procedures.