Creditor-funded approach to resolve TBTF banks’ recapitalisation woes?
BIS’ recently proposed three-step mechanism enables a “too big to fail” bank to be recapitalised over a weekend, minus taxpayer involvement.
A number of financial institutions almost failed or experienced outright failure during the most recent financial crisis, resulting in the relevant governments recapitalising these “too big to fail” (TBTF) entities with taxpayer funding. Aside from the obvious direct costs on taxpayers, publicly funded bailouts can lead to increased risk-taking, reduced market discipline and create competitive distortions, further increasing the possibility of financial distress. The financial crisis and resultant collapse of some TBTF entities have resulted in increased supervision and stricter regulations,…
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, Risk and Regulation
, Financial Stability Board