Bank resolution mechanisms: how to prepare for a birthday with an imperfect plan

Some bank mechanisms can help reduce idiosyncratic, but not necessarily systemic, risk, write Aneta Hryckiewicz, Natalia Kryg and Dimitrios P. Tsomoco

An assessment of the Europeans’ Bank bailout policies since the global financial crisis and a proposal for reforms: a comparison with the US experience

Europe still has a lot to learn from the events of the Global Financial Crisis (GFC) of 2008 as it continues with reforms of its bank resolution ecosystem. Through a comparison of the bailout mechanisms used in Europe and the United States during the GFC, we show that the US bank bailout approach appears to have been much more successful than the European one. The separation of governance functions from management functions and the nature of voting rights have incentivised the US Treasury to actively intervene in the distressed banks by imposing critical changes, for example a change of CEO or affecting the board compensation. In addition, such US Treasury behaviour has also disciplined other banks to implement the necessary restructuring changes to avoid government intervention. In turn, the European bailout approach has supported government passiveness in the governance functions and its greater involvement in bank business. As a result, we have noticed a significant increase in board compensation at nationalised banks, and no significant restructuring changes. Our findings call for bailout mechanisms incentivising the resolution authority playing an active role in the governance functions at distressed banks without significant involvement in bank business. We also opt for time-constrained intervention

Bank performance and stability

This thesis presents a collection of essays into bank performance and stability. The introduction provides an overview of the topic as well as the broader context behind the subsequent chapters. The first chapter focuses on empirical investigation into factors determining performance of investments of a multinational development bank. I construct a unique database of almost 1,600 EBRD investments. It is a first study of all EBRD investments which complements the literature on the project performance of MDBs. My findings suggest that the probability of project success is higher with larger investments and projects under framework. Also, projects with state clients are less likely to be successful. I address the selection bias and this further contributes to the related literature. The second chapter is a cross-bank, cross-country and cross-time empirical study of bank performance in the context of government interventions into failing banks during financial crises. I use a novel database consisting of banks which received government intervention and their non-intervened peers in 39 countries between 1990 and 2017. The findings contribute to the latest empirical literature which is far from conclusive by identifying no clear winner among the studied interventions with gains as well as potential losses under each intervention. I argue that a ‘one-size-fits-all’ intervention approach is suboptimal. The final chapter of my thesis looks at the bank performance analysis in the context of financial stability. I apply the model of financial stability by Goodhart et al. (2004, 2005) to illustrate the impact of government interventions on banks’ behaviour using data for UK banks. The model has been widely used by central bankers and regulators to illustrate the trade-offs between bank’s performance and financial stability. This is its first application in the context of government interventions. The final chapter concludes my thesis

Bank resolution mechanisms revisited: towards a new era of restructuring

Government interventions as a solution to systemic banking crises continue to receive wide criticism. The new regulatory frameworks advocate banks’ bail-ins and resolutions that do not require governments’ involvement. However, as the recent events with Credit Suisse and Silicon Valley Bank show, the government still plays an active role in rescuing and resolving the bank's problems. We use the financial stability model of Goodhart et al.’s (2005, 2006a) to analyze the effects of various bank policy interventions on banks’ performance during the crisis rescue phase. We then explore whether those interventions work effectively in facilitating bank recovery and whether they reduce systemic risk in the long run. We use a unique granular bank-level dataset from 22 advanced economies covering the 1992–2017 period. We find that bank recapitalization without debt resolution measures does not resolve bank distress. The empirical results document that “bad-bank” resolution is positively correlated with a bank’s recovery as well as lower systemic risk. Those findings contribute to the ongoing debate on the optimal bank resolution architecture during systemic events