Resolution policy and systemic risk: Five entreaties

Perhaps the bigget lesson of the Great Financial Crisis was that it is a very big mistake to focus regulatory policy almost exclusively on reducing the probability of financial intermediaries failing. Looking back, this long-standing mindset is truly bizarre given the habitual refrain of prudential supervisors (and their political overseers) that they do not aim for zero failures. That being so, it is absolutely vital also to focus on containing the impact of intermediaries’ distress and failure. While the United States went into the crisis with an effective resolution regime for small and medium-sized deposit-takers, few other G7 countries did. And even the US did not have a resolution regime that could cope with the failure of large and complex banking groups or of those non-banks whose bankruptcy would exacerbate systemic spillovers. Perhaps the most profound shift in high policy following the disaster of 2008/09, therefore, is the effort to give resolution policy equal standing with prophylactic regulation and supervision. If that was the goal, however, it has not yet been achieved. While the United States has done a lot more than most of its peers to implement internationally agreed policy on resolution, it has not done nearly as much as it could have. And while the EU has a strong statutory framework – possibly better than the US’s – its implementation has to date been flawed. Against that background, I will briefly make five points, which amount to a series of entreaties to current policy makers. They concern: the need to be careful when claiming that Too Big To Fail has been “solved”; how resolution policy can lift a burden from the Lender of Last Resort; how prudential supervisors need to be more prescriptive about the structure of banking groups; how resolution policy can hard wire cross-border cooperation; and how it could help contain a full blown systemic crisis in which many intermediaries were falling over more or less simultaneously.