Resolution PlanningEdit
Resolution planning is a framework within financial regulation that seeks to ensure that large, complex banks can be wound down in an orderly fashion if they fail, without triggering a broader run on the financial system or forcing taxpayers to shoulder the bill. The core idea is to require banks and regulators to prepare credible exit strategies in advance, detailing how critical operations would continue, how creditors would be treated, and how gaps in funding would be bridged during a crisis. The goal is not to eradicate risk in finance, but to align risk with a resolvable pathway that preserves financial stability and allocates losses to those best able to bear them.
The concept gained prominence in the wake of the 2008 financial crisis, when governments around the world faced the choice between bailouts, nationalizations, or uncontained market distress. In the United States, reform efforts culminated in statutory provisions that compel large banks to file resolution plans, often called living wills, and to demonstrate that they can be wound down under insolvency regimes or through authorities like the Federal Deposit Insurance Corporation and the Federal Reserve without precipitating a broader crisis. A central feature is the development of credible mechanisms to unwind assets, reorganize legal entities, and ensure the continuity of essential services such as payments, clearing, and access to liquidity for customers and counterparties. The framework is closely associated with the regulatory toolbox around the Dodd-Frank Act and the related use of Orderly Liquidation Authority powers when necessary.
How resolution planning works
Identification of critical operations and services: Banks map which activities are essential to the functioning of the financial system, such as payment rails, liquidity facilities, and the ability to settle trades. The aim is to prevent disruption of these services even if the firm collapses. See for example discussions around Systemically Important Financial Institution status and related oversight.
Wind-down and resolution strategies: Plans outline the sequence of steps to unwind positions, dispose of assets, and transfer or bridge key operations to a stand‑alone entity or to third parties. Some banks advocate a single point of entry approach to containment, while others prepare multiple pathways depending on the structure of the firm and cross‑border operations. These strategies are intended to be credible without requiring ongoing government credit support.
Capital, liquidity, and creditor treatment: The plans specify how losses are absorbed, who gets paid first, and how liquidity is maintained in a stressful scenario. They are designed to ensure that resolution costs fall on private creditors and the institution’s equity base, rather than taxpayers, while still preserving the integrity of critical services.
Cross-border cooperation: For large, multinational institutions, resolution planning involves coordination with foreign regulators to pursue orderly, mirror-like outcomes across jurisdictions. This is where international standards and institutions such as the Financial Stability Board come into play, helping harmonize expectations and minimize spillovers.
Oversight and legal framework: Regulators review and require updates to living wills and resolution plans, with enforcement mechanisms if plans are deemed unachievable. The framework relies on a mix of bankruptcy procedures, supervisory actions, and, when necessary, resolution tools to ensure a credible exit path.
Controversies and debates
Supporters argue that robust resolution planning strengthens market discipline and reduces the likelihood of taxpayer-funded bailouts. By forcing banks to demonstrate a credible wind-down, the approach incentivizes stronger capital and liquidity buffers, simpler and more controllable group structures, and clearer lines of accountability. From this vantage point, the framework represents a practical compromise: banks accept predictable risks, while taxpayers avoid being on the hook for solving every failure.
Critics, however, raise several concerns. First, the cost of complying with extensive planning and structural changes can be high, especially for large, diversified institutions. Second, even the best-laid plans can fail under unprecedented stress, and regulators may end up making ad hoc choices in a crisis, blurring the line between market discipline and government intervention. Third, some argue that an emphasis on formal plans may incentivize risk shifting toward activities seen as more easily ring-fenced rather than toward reducing risk overall. Finally, there are debates about the sufficiency of creditor protection in practice and whether resolution mechanisms can truly avoid hidden subsidies if political considerations intrude on the process.
From a market-oriented perspective, the aim is to balance responsible risk-taking with credible exit options. Proponents contend that resolution planning should not become a license for managerial complacency or a blanket justification for heavier regulation; rather, it should refine the allocation of losses to those who provided capital and to counterparties who priced risk into contracts. They also emphasize the importance of transparency, predictable rules, and procedural safeguards to prevent opportunistic use of resolution tools. Critics of the framework sometimes argue that even well‑designed plans can be tested asymmetrically by a crisis, and that political pressure or regulatory misalignment could undermine their credibility.
Practical implications for banks and markets
Operational discipline: Banks are pushed to streamline operations, reduce complexity, and ensure that critical services can be isolated or transferred quickly. This can lead to more straightforward corporate structures and improved governance around risk-bearing activities.
Capital and liquidity discipline: Heightened focus on the solvency and resilience of core businesses tends to strengthen balance sheets, which benefits creditors and counterparties who rely on predictable performance under stress.
Market expectations and confidence: A credible resolution framework can reassure investors and counterparties that a failure will not trigger a systemic panic, potentially reducing funding costs and restoring a degree of confidence in the stability of the system.
Regulatory balance: The right mix between stringent requirements and operational flexibility remains a live area of discussion. Regulators seek to avoid stifling innovation and competition while ensuring that big institutions cannot impose external costs on the broader economy.
International dimension
Resolution planning is not unique to one country. Cross-border banks navigate a patchwork of national regimes, and this has driven calls for greater international cooperation and common principles for wind-down frameworks. The work of bodies such as the Financial Stability Board and the adoption of international standards for resolution planning aim to reduce fragmentation and create more predictable outcomes when firms fail.
See also