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Optimal Bank Recovery

C. Goodhart and Miguel Segoviano

No 2015/217, IMF Working Papers from International Monetary Fund

Abstract: 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. We outline how such a metric could be constructed meeting criteria of (i) adequate loss absorption; (ii) distinguishing between weak and sound banks; (iii) little susceptibility to manipulation; (iv) timeliness; (v) scalable from the individual bank to the system. We show how this would have worked in the U.K., during 2007–11. This approach has the added advantage that it could be extended to encompass a whole ladder of sanctions of increasing severity as capital erodes.

Keywords: WP; loss distribution; bank loss; distress probability; loss absorption buffer; log asset return; Bank Recovery; Bank Resolution; Metrics for Triggers; Loss Absorption; Probability of Distress; Loan Default; banks RBS; market cap; banks' equity; Systemic risk; Bank solvency; Loans; Financial sector stability; Stocks; Global (search for similar items in EconPapers)
Pages: 41
Date: 2015-09-30
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Citations: View citations in EconPapers (3)

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Handle: RePEc:imf:imfwpa:2015/217