Introduction

Responding to the global financial crisis, many country authorities are considering or have made changes in regimes for resolving problem banks. In most cases, this has involved carving bank resolution out of general bankruptcy regimes, and moving toward early intervention and resolution regimes specifically designed for banks. Such special regimes typically give more powers to central banks and other financial authorities, and reduce the involvement of the judicial system. This chapter provides a brief review of the reforms in bank resolution regimes around the globe, building on updated information from recent global surveys, including the World Bank's (2013) latest “Bank Regulation and Supervision Survey.”

The Case for Special Resolution Regimes

There is a strong case for financial institutions to be subject to a special resolution regime (SRR). Banks and other financial institutions play a special role, performing financial services fundamental to the functioning of the economy, and contributing to the transmission of monetary policy. The failure of financial institutions can cause disruption and major negative externalities, such as a liquidity crunch, a fire sale of assets, and spillovers via the interbank market. For example, during Japan's so-called lost decade in the 1990s, the effectiveness of monetary policy was hampered by insufficient restructuring of the banking system (IMF 2009). Introduction of a sound legal framework for the resolution of financial institutions is likely to increase the speed and decisiveness of efforts to restructure national banking systems, which may come to increase the effectiveness of monetary policy, and the speed of recovery of the economy.

The absence or inadequate scope of resolution tools to deal with failing financial institutions was highlighted globally during the financial crisis that started in 2007 and intensified in the second half of 2008. Authorities were often confronted with two unappealing options: corporate bankruptcy—as chosen, for instance, by the US authorities on September 15, 2008 in the case of Lehman Brothers, a global financial-services firm—or an injection of public funds—as chosen by the US authorities in the case of the American International Group two days later (see e.g. Sorkin 2008; Andrews 2008).