On 19 January 2024, the Bank of England (BoE) published a working paper considering in detail the main techniques for resolving large banks and containing the systemic consequences which could arise from their failure.
The paper is published as a tribute to Peter Brierley who served as a BoE official for four decades before his retirement.
It was written prior to the Global Financial Crisis and highlights several important issues around resolving large banks. The most significant of these is the need to avoid, as far as possible, insolvency, and where this cannot be done, liquidation. The paper further covers the ways in which certain activities of a large bank may be wound down while the bank functions of systemic importance are preserved, and finally the trade-off between preserving financial stability on the one hand and limiting moral hazard on the other.
The main conclusions of the paper include that the key dilemma for the authorities in dealing with the insolvency of a systemic bank will be that of balancing the need to maintain financial stability with the need to contain moral hazard. Authorities need to demonstrate they possess transparent and credible procedures, which both facilitate early intervention and, where early intervention fails, wind up the bank’s affairs in an orderly manner that minimises the systemic repercussions.