Posted

October 01, 2015 09:06:13 AM

Date

2015-09

Author

C. A. E. Goodhart and Miguel A. Segoviano

Affiliation

Money and Capital Markets Department, IMF

Title

Optimal Bank Recovery

Summary /
Abstract

Banks’ living wills involve both recovery and resolution. Since it may not always be clear when recovery plans or actions should be triggered, there is a role for an objective metric to trigger recovery. We outline how such a metric could be constructed meeting criteria of (i) adequate loss absorption; (ii) distinguishing between weak and sound banks; (iii) little susceptibility to manipulation; (iv) timeliness; (v) scalable from the individual bank to the system. We show how this would have worked in the U.K., during 2007–11. This approach has the added advantage that it could be extended to encompass a whole ladder of sanctions of increasing severity as capital erodes.

Keywords

Bank Recovery, Bank Resolution, Metrics for Triggers, Loss Absorption, Probability of Distress, Loan Default

URL

http://www.imf.org/external/pubs/ft/wp/2015/wp15217.pdf

See

More articles ...