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A template for recapitalising too-big-to-fail banks

Author

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  • Paul Melaschenko
  • Noel Reynolds

Abstract

A proposed creditor-funded recapitalisation mechanism for too-big-to-fail banks that reach the point of failure ensures that shareholders and uninsured private sector creditors of such banks, rather than taxpayers, bear the cost of resolution. The template is simple, fully respects the existing creditor hierarchy and can be applied to any failing entity within a banking group. The mechanism partially writes off creditors to recapitalise the bank over a weekend, providing them with immediate certainty on their maximum loss. The bank is subsequently sold in a manner that enables the market to determine the ultimate losses to creditors. As such, the mechanism can eliminate moral hazard throughout a banking group in a cost-efficient way that also limits the risk to financial stability. The creditor-funded mechanism is contrasted with other recapitalisation approaches, including bail-in and "single point of entry" strategies.

Suggested Citation

  • Paul Melaschenko & Noel Reynolds, 2013. "A template for recapitalising too-big-to-fail banks," BIS Quarterly Review, Bank for International Settlements, June.
    • Handle: RePEc:bis:bisqtr:1306e
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    Citations

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    Cited by:

    1. Dirk Niepelt, 2020. "Reserves for All? Central Bank Digital Currency, Deposits, and Their (Non)-Equivalence," International Journal of Central Banking, International Journal of Central Banking, vol. 16(3), pages 211-238, June.
    2. Mullineux, Andy, 2014. "Banking for the public good," International Review of Financial Analysis, Elsevier, vol. 36(C), pages 87-94.

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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