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Adequate loss-absorbing capacity in the resolution process
Abstract
The recent financial crisis had a turbulent onset when professional institutional investors decided to withdraw their funding from banks, sparked by fear of credit losses and unmanageable capital requirements in, most notably, the investment
portfolios of these banks.
In recent years regulators developed a comprehensive set of reform measures aiming to improve the banking sector’s ability to absorb shocks arising from financial and economic stress, improve risk management and governance, strengthen banks’ transparency and disclosures.
At the same time, steps were taken to better prepare for the event of a gone concern situation: recovery plans and resolution plans were drafted by banks and regulators respectively. For G-SIBs, on top of these plans, additional loss absorbing capacity is needed to ensure that, in case of a default, these financial institutions can be resolved in an orderly manner without taxpayer support.
The purpose of this article is to present recent regulatory initiatives in the field of loss-absorbing capital buffers and their impact on banks’ capital structure and cost of financing.
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Vol. 60 No. 3 (2015)
Published: 2015-09-30
10.26354
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.