Extending Bankruptcy-resolution Techniques to Protect Financial Stability

CIGI Paper No. 184

August 15, 2018

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. 

About the Author

Steven L. Schwarcz is a CIGI senior fellow and the Stanley A. Star Distinguished Professor of Law and Business at Duke University. Steven is an expert on systemic risk and financial regulation, corporate governance of systemically important firms, cross-border resolution measures and sovereign debt restructuring.