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Optimal bank recovery

The authors find it highly improbable that banks will trigger their own recovery phase until bankruptcy is staring them in the face. They say that therefore, there is a need for an objective metric which would help supervisory and regulatory authorities trigger the onset of the recovery phase for a bank earlier. In the paper the authors develop a framework that can be used to estimate such an “intervention metric”.

IMF working paper No. 15/217
30 September 2015
Source: International Monetary Fund

Charles Goodhart, London School of Economics
Miguel Segoviano, International Monetary Fund

>  Optimal bank recovery


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.