Between Financial Stability and Fairness in Resolution: The Role of Special Bank Resolution Regimes in Post-Crisis Financial Regulation

In wake of the financial crisis, the building of national and international special resolution regimes that can shut down ailing banks of any size without upsetting systemic functions, has reached the top of the regulatory agenda. Analysing this debate using the two ideal types of ‘market sceptics’ and ‘market believers’, the paper argues that the support for special resolution regimes is premised on a belief that more information and planning is what is fundamentally needed to ensure stability, and that making creditors pay for resolving ailing institutions is possible without hurting financial stability. As a contrast, and drawing on a more market sceptic position, this paper argues that by focusing so strongly on planning and transparency enhancing policies, special resolution regimes do not address the most important impediment in solving the too-big-to-fail-problem, namely the lack of limits on the growth of financial institutions. The point is illustrated through an analysis of the only time a modern resolution regime has actually been effectively used to bail in creditors, namely in the Danish case, thus demonstrating the contradiction of wanting financial stability and fairness in resolution at the same time.