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An approach for initiating interventions for bank recovery

Author

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  • Charles A.E. Goodhart
  • Miguel A. Segoviano

Abstract

Purpose - This paper proposes an objective metric to trigger 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. Design/methodology/approach - We outline how such a metric could be constructed meeting criteria of adequate loss absorption; distinguishing between weak and sound banks; little susceptibility to manipulation; timeliness; scalable from the individual bank to the system. Findings - We show how this would have worked in the UK, during 2007-2011. Originality/value - This approach has the added advantage that it could be extended to encompass a whole ladder of sanctions of increasing severity as capital erodes.

Suggested Citation

  • Charles A.E. Goodhart & Miguel A. Segoviano, 2017. "An approach for initiating interventions for bank recovery," Journal of Financial Regulation and Compliance, Emerald Group Publishing Limited, vol. 25(4), pages 360-380, November.
    • Handle: RePEc:eme:jfrcpp:jfrc-01-2017-0005
    DOI: 10.1108/JFRC-01-2017-0005
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    More about this item

    Keywords

    Bank resolution; Bank recovery; Loan default; Loss absorption; Metrics for triggers; Probability of distress; G21; G28; G33;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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