Bank Resolution

Before the 2008 financial crisis, governments often had two poor choices when a large bank failed: let it collapse, risking chaos, or bail it out with public money. Resolution frameworks introduced since then provide a third option.

Resolution authorities have powers to take control of a failing bank and restructure it. Tools include selling all or part of the bank to another institution, transferring good assets to a temporary bridge bank, separating bad assets into an asset management vehicle, and bail-in, which imposes losses on shareholders and creditors and converts some debts into equity.

For example, when the Spanish bank Banco Popular failed in 2017, European authorities wrote down its shares and some debt, and sold it to Santander for a nominal sum of one euro, with no cost to taxpayers.

Large banks must prepare resolution plans, sometimes called living wills, showing how they could be resolved. They must also hold sufficient loss-absorbing capital and debt that can be bailed in.