Financial Crisis Management and Bank Resolution provides an analysis of the responses to the recent crisis that has beset the international financial markets taking a top down approach looking at the mechanisms to manage a financial crisis, to the practicalities of dealing with the resolution of a bank experiencing distress. This work is an interdisciplinary analysis of the law and policy surrounding crisis management and bank resolution. It comprises contributions from a team of leading experts in the field that have been carefully selected from across the globe. These experts are drawn from the law, central banks, government, financial services and academia. This edited collection will provide a new and important contribution to the subject at a crucial time in the debate around banking resolution and crisis management regimes, and help to plug the gap in our knowledge and understanding of the law of bank resolution and restructuring.

The project of creating a Banking Union is designed to overcome the fatal link between sovereigns and their banks in the Eurozone. As part of this project, political agreement for a common supervision framework and a common resolution scheme has been reached with difficulty. However, the resolution framework is weak, underfunded and exhibits some serious flaws. Further, Member States' disagreements appear to rule out a federalized deposit insurance scheme, commonly regarded as the necessary third pillar of a successful Banking Union. This paper argues for an organizational and capital structure substitute for these two shortcomings that can minimize the systemic distress costs of the failure of a large financial institution. We borrow from the approach the Federal Deposit Insurance Corporation (FDIC) has devised in the implementation of the “Orderly Liquidation Authority” under the Dodd Frank Act. The FDIC's experience teaches us three important lessons: first, systemically important institutions need to have in their liability structure sufficient unsecured (or otherwise subordinated) term debt so that in the event of bank failure, the conversion of debt into equity will be sufficient to absorb asset losses without impairing deposits and other short term credit; second, the organizational structure of the financial institution needs to permit such a debt conversion without putting core financial constituents through a bankruptcy, and third, a federal funding mechanism deployable at the discretion of the resolution authority must be available to supply liquidity to a reorganizing bank. On these conditions, a viable and realistic Banking Union would be within reach -- and the resolution of global financial institutions would be greatly facilitated, not least in a transatlantic perspective.

Depositor preference and collateralization of borrowing may reduce the cost of settling the conflicts among creditors that arises in case of resolution or bankruptcy. This net benefit, which may be capitalized into the value of the bank rather than affect creditors’ expected returns, should result in lower overall funding costs and thus a lower probability of distress despite increasing encumbrance of the bank’s balance sheet. The benefit is maximized when resolution is initiated early enough for preferred depositors to remain fully protected.

Islamic banking is growing rapidly and its potential impact on global financial stability cannot be underestimated. International standards for resolving banks have evolved after the global financial crisis, culminating in the Financial Stability Board’s (“FSB”) Key Attributes of Effective Resolution Regimes for Financial Institutions. This paper examines the applicability of the Key Attributes to the resolution of Islamic banks. It concludes that a number of issues would need to be addressed, owing to Islamic banks’ unique governance structures and balance sheets. It recommends international guidance for the design of robust Shari`ah -compliant resolution frameworks for jurisdictions with Islamic banks.