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Resolving Troubled Financial Institutions

Our advice to supervisory authorities and deposit insurers on resolution strategies draws on actual hands-on experience with intervention and gaining control of weak institutions, completing mergers, deposit transfers, asset sales, liquidations and bankruptcies.  Maintaining confidence and stability is paramount, and is best achieved through early, decisive action.  Well planned and executed closure options, which include mergers and purchase and assumption transactions, can minimize disruption to depositors, thus maintaining confidence while at the same time stopping the accumulation of ongoing losses in banks.

This philosophy has been tested in practice in many countries around the world.  It is documented in a paper Mike Andrews co-authored with an International Monetary Fund colleague, Mats Josefsson, "What Happens After Supervisory Intervention?  Considering Bank Closure Options", and in the contribution  Mike Andrews made to the Basel Committee Task Force which produced Supervisory Guidance on Dealing with Weak Banks.

Despite the clear preference for market-based solutions to problem banks, in the case of systemic crisis governments will frequently opt to use public funds to preserve some portion of an insolvent banking system.  An ill-conceived restructuring program can lay the foundation for future banking problems.  Practical advice on dealing with important but often overlooked technical issues in bank restructuring is provided in "Issuing Government Bonds to Finance Bank Recapitalization and Restructuring:  Design Factors that Affect Banks' Financial Performance"

 

2013 A. Michael Andrews and Associates Limited

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