"Has BIS Found the Solution to Too Big to Fail?"

From Real Time Economics:

It’s a refrain you will hear from politicians, regulators, even bankers. Nearly five years after the collapse of Lehman Brothers, there is still no answer to the problem of banks that are Too-Big-To-Fail.

True, the Basel III accords will force global banks to hold more, and better, capital in the future, as well as bigger liquidity buffers to guard against market seizures. True, the biggest of these will be subject to extra capital charges to protect against the risks they represent to the system. And true, more of the world’s gigantic derivatives market will go through central counterparties, allowing dangerous imbalances to be tracked and, where necessary, unwound.

But ask lawmakers how they would get you taxpayers off the hook if a TBTF bank collapsed in their country, and the most you’re likely to get is still a glassy stare and a quick change of subject.

So, when the Basel-based Bank for International Settlements suggests it has found a way to resolve a large, complex bank over a single weekend without doing any interested parties an injustice, forestalling a market panic and keeping value destruction in the bank to a minimum, it’s worth listening.

Authors Paul Melaschenko and Noel Reynolds–both members of the secretariat of the Basel Committee for Banking Supervision–present what they call a “creditor-funded” resolution model. Under it, the authorities take control of a failing bank over a weekend and write down its liabilities immediately to a degree where they consider the new holding company to be well enough capitalized to cope with all expected losses. As equity is the difference between assets and liabilities, it automatically increases, the more the liabilities are written down....MORE