Introduction

Better resolution forms a key component of the cure against future crises – along with better regulation, better supervision and better macroeconomic policy (Huertas, 2010a). This chapter outlines a possible path toward better resolution for large, systemically important financial firms.

Achieving better resolution of such firms is essential. ‘Too big to fail’ is too costly to continue, and ways must be found to assure that failing banks can be resolved at no cost to the taxpayer and limited cost to society at large. ‘Too big to fail’ distorts competition, creates moral hazard and threatens the public finances. The foundations for moving away from ‘too big to fail’ are being laid: they are the introduction of special resolution regimes for banks and the requirement that banks prepare ‘living wills’ (recovery and resolution plans). On top of these foundations now needs to be built a means of resolving large, complex cross-border banks without equity support from taxpayers. Bail-in offers the promise of such a solution, and this chapter analyses how that promise might be fulfilled.