Public support for bank resolution

Bank resolution preserves a failing bank's critical functions to support financial stability. Resolution tools incur costs, through either funding the bank's operations or supporting a purchase of the failing bank. Therefore, resolution policies specify sources to fund the resolution, typically from the bail-in of creditors' claims that the bank is required to hold or from funds to which the industry contributes, such as deposit insurance funds or dedicated resolution funds. However, public resources may sometimes be needed to enhance a bank's internal resources and those of industry-sourced funds, and jurisdictions have adopted a variety of policies to deploy and recoup such public support.

Resolution frameworks should integrate well-defined public support arrangements that enhance financial stability and contain adverse social costs. There are four key elements to consider: First, public support arrangements should be credibly funded but drawn on only as a last resort and upon determination that a failing bank presents a systemic risk. Second, jurisdictions should codify policies and procedures to recoup the public support used to finance a resolution. Third, adequate governance arrangements are key to preserve the social legitimacy of the public intervention. Fourth, while public support needs to be subject to safeguards, flexibility to provide requisite support to quell a systemic risk remains crucial.

JEL classification: G01, G28, G33

Keywords: crisis management, bank resolution, public support