A Game Theory Approach to Optimizing the Banking and Financial Resolution Framework

Before the 2007-2008 financial crisis, credit institutions were assured (though not officially or formally) that if they were large enough they would be rescued with tax-payers’ money, an action also known as bail-out, denoting what became known as the “too big to fail” paradigm. The introduction of the Bank Recovery and Resolution Directive (2014/59/EU) proposes a legal framework that aims at eliminating the possibility of bailing-out institutions. This paper has the objective of assessing through a game theory approach to what extent the BRR Directive has the potential to achieve its purpose and if there are identifiable possible improvements to this framework that could be considered for practical purposes or for a possible future review of the legal framework. The term institution, for the purpose of this paper, refers to credit institutions but can also be read as referring to other types of financial institutions such as investment firms or insurance companies