BANK RESOLUTION STRATEGIES

The Bank Resolution Strategies of the UK and US Governments

The Bank Resolution Strategies of the UK and US Governments

Introduction

There are various strategies that are used by governments in terms of bank resolution. Bank resolution funds should stay out of the federal budget, with the sole purpose of defraying the costs of resolution. The management of these funds should be entrusted to the authorities responsible for implementing measures to address the financial institutions that act as an independent executive (Demirgüç-Kunt, 1998, 81) (Demirgüç-Kunt, 1998,, 81).

External Shocks

The benefits of government intervention depend on the shocks liquidity that the bank faces. In several cases, banking crises are caused by sudden changes in terms of exchange and international interest rates. The crises are brewing over the period that the country faces a positive shock in terms of exchange and rates or international interest in its internal conditions. This environment generates expectations excessively favourable for the economy, inducing strong capital inflows and a quick expansion of domestic credit. The economic boom resulting from it is funded easily by borrowing from abroad, as the country has a strong access to international capital markets. The increase in the price of these assets is such that bubbles sometimes arise which to turn feed the demand for credit as these assets serve as collateral for new loans. In this situation, the financial system is vulnerable to possible adverse movements in terms of exchange and international interest rates (Honohan, 2003, 539) (Demirgüç-Kunt, 1998,, 81).

Stabilization Programs

The implementation of very believable stabilization programs is another factor that can rise to banking crises. Although these programs result in an initial improvement, in agents' expectations and increased economic activity, do not reduce enough domestic interest rates, thus maintaining a differential with the risk-adjusted external devaluation encouraged relatively high inputs capital and foreign ...