Bank Resolution Mechanisms Revisited : Towards a New Era of Restructuring

Government interventions as a solution to systemic banking crisis received wide criticism. The new regulatory frameworks advocate banks’ bail-ins and resolutions that do not require governments’ involvement. We use the financial stability model of Goodhart et al.’s (2005, 2006a) to analyze the effects of banks’ policy interventions on banks’ performance in the rescue phase of the crisis. We then explore whether those intervention channels work effectively in bank recovery and reduction of systemic risk in the long run. We use a unique bank-level dataset from 22 advanced economies covering 1992-2017 period. We find that bank rescue does not imply bank recovery. Government recapitalizations can rescue banks but are not effective in the long run. We find that “bad-bank” resolution is positively correlated with bank’s recovery and can reduce the systemic risk. Other policy measurers deliver less optimal results. We contribute to the debate on the optimal bank resolution architecture