Resolution of Financial Institutions (Communication)

A statutory provision which makes the resolution of insolvent financial institutions credible can discipline market participants and reduce the existing moral hazard problem. For that purpose, however, criteria for the definition of “systemic relevance” must be urgently agreed upon. Resolution and recovery plans, official orders to amend the corporate structure and the establishment of a banking resolution fund are necessary for the credibility of the resolution scenario. Compulsory sales are justifiable in terms of an ultima ratio. The establishment of resolution colleges is consistent; without a harmonisation of the national bank insolvency rules, however, they will remain a paper tiger.