
Contents
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I. Introduction I. Introduction
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II. Bail-out/Lender of Last Resort Tools II. Bail-out/Lender of Last Resort Tools
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A. Overview A. Overview
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B. Bail-outs During the Financial Crisis B. Bail-outs During the Financial Crisis
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C. The Effectiveness of Crisis Bail-outs C. The Effectiveness of Crisis Bail-outs
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D. Post-Crisis Developments D. Post-Crisis Developments
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E. Conclusion E. Conclusion
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III. The Resolution Toolbox for Troubled Financial Institutions III. The Resolution Toolbox for Troubled Financial Institutions
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A. Overview A. Overview
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1. The key resolution tools 1. The key resolution tools
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2. Requirements and safeguards 2. Requirements and safeguards
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B. Bail-in B. Bail-in
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1. Overview 1. Overview
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2. Going concern and gone concern bail-in 2. Going concern and gone concern bail-in
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3. Characteristics of bail-in 3. Characteristics of bail-in
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4. Bail-in regimes in the US and Europe 4. Bail-in regimes in the US and Europe
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5. Bail-in experience in Europe 5. Bail-in experience in Europe
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C. Effectiveness of Bail-in Measures C. Effectiveness of Bail-in Measures
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1. Overview 1. Overview
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2. The loss absorption capacity of bail-in: TLAC and MREL 2. The loss absorption capacity of bail-in: TLAC and MREL
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D. Bridge Bank D. Bridge Bank
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1. Overview 1. Overview
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2. Characteristics of a bridge bank 2. Characteristics of a bridge bank
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3. Use of the bridge bank tool 3. Use of the bridge bank tool
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E. Asset Separation Tools E. Asset Separation Tools
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F. Sale of Business/Merger Tool F. Sale of Business/Merger Tool
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G. Stays G. Stays
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1. Overview 1. Overview
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2. Temporary stay on early termination rights in financial contracts 2. Temporary stay on early termination rights in financial contracts
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IV. Insurance Resolution Tools IV. Insurance Resolution Tools
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A. Overview A. Overview
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B. Bail-in B. Bail-in
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C. Transfer Tools: Sale of Business, Bridge Institution, and Asset Separation C. Transfer Tools: Sale of Business, Bridge Institution, and Asset Separation
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D. Run-off D. Run-off
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E. The Forthcoming EU Resolution Framework for the Insurance Sector E. The Forthcoming EU Resolution Framework for the Insurance Sector
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F. Resolution Regime in Selected Countries F. Resolution Regime in Selected Countries
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V. The Valuation Process V. The Valuation Process
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A. Overview A. Overview
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B. The Difficulty of the Valuation Process B. The Difficulty of the Valuation Process
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C. Valuation for the Purpose of Insurance Resolution C. Valuation for the Purpose of Insurance Resolution
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VI. Funding Resolution VI. Funding Resolution
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VII. Orderly Liquidation VII. Orderly Liquidation
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VIII. The Cross-border Effects of Resolution Measures VIII. The Cross-border Effects of Resolution Measures
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A. Recognition and Supportive Measures A. Recognition and Supportive Measures
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B. Bail-in and Other Resolution Tools in a Cross-border Scenario B. Bail-in and Other Resolution Tools in a Cross-border Scenario
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1. Regulatory arbitrage and solutions 1. Regulatory arbitrage and solutions
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2. Statutory recognition of bail-in and equitable treatment of creditors 2. Statutory recognition of bail-in and equitable treatment of creditors
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3. Contractual recognition 3. Contractual recognition
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4. Regulatory strategies to cross-border resolution tools: SPOE versus MPOE 4. Regulatory strategies to cross-border resolution tools: SPOE versus MPOE
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IX. Conclusion IX. Conclusion
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4 Resolution and Other Crisis Management Tools
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Published:August 2023
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Abstract
This chapter examines the broad range of tools that have been developed to help resolve financially distressed financial institutions. It commences with a discussion of bail-outs, the use of public funds to resolve liquidity and solvency issues, suggesting that while use of public funds is likely to be more highly constrained in the future, there is a limited role for bail-out as one of the tools that can be deployed to resolve financial institution insolvency, if appropriate safeguards are in place. The chapter then turns to the many other tools that have become part of the toolbox of financial supervisors and market participants, exploring how different approaches can benefit different financial institutions depending on their size, capitalization, region, market, and jurisdiction. It considers the benefits and challenges of orderly liquidation, bridge financial institutions, sale of business and merger strategies, asset separation tools, bail-out, bail-in, and deposit insurance and policyholder guarantee funds as features of an effective resolution regime. Facilitating the continuation of critical operations despite a bank’s insolvency is key to the protection of depositors, who need to rely on uninterrupted access to their savings and the continued provision of payment services and other services. Similarly, these tools can ensure continued protection of insurance policy holders, avoiding gaps in coverage of life, health, and property insurance during the period an insurance company is insolvent.
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