A Resolvable Bank

Making banks resolvable or “safe to fail” is a key component of the regulatory reform program enacted in response to the crisis. This paper designs a bank that will be resolvable, first for a bank in a single jurisdiction and then for a banking group with branches and/or subsidiaries in multiple jurisdictions. This involves three steps: granting customer obligations such as deposits preference over investor obligations; granting the resolution authority to bail-in the bank’s liabilities, starting with the investor obligations, and assuring that the bank has enough investor obligations outstanding for the bail-in to be sufficient to restore the bank’s common equity to at least the minimum required level. These steps assure the solvency of the bank-in-resolution and provide the basis for the bank-in-resolution to obtain liquidity. Together, the recapitalization and the liquidity provision should go a long way toward stabilizing the bank-in-resolution, assuring that it is able to continue to perform critical economic functions and paving the way for the resolution authorities to restructure the bank. Overall, this means resolution can occur without cost to the taxpayer and without significant disruption to the financial markets or the economy at large.