The current uses of resolution-based regulation to try to protect the stability of the financial system fall into three general categories, which can be described as “reactive,” “proactive” and “counteractive.” Reactive resolution-based regulation, the most common approach, applies once a systemically important firm becomes financially troubled. Proactive resolution-based regulation consists of preplanned enhancements that are designed, at a time when a systemically important firm’s default is merely a theoretical possibility, to take effect if the firm starts to become troubled (by then strengthening the firm’s ability to pay its debt or facilitating its resolvability). Counteractive resolution-based regulation is intended to reduce the need for resolution by preventing firms from becoming financially troubled in the first place.
Extending Bankruptcy-resolution Techniques to Protect Financial Stability
CIGI Paper No. 184