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The New Bank Resolution Regimes and “Too-Big-to-Fail”

The New Bank Resolution Regimes and “Too-Big-to-Fail”. Jennie Bai, Christian Cabanilla, and Menno Middeldorp, Federal Reserve Bank of New York, October 2012

  • “During the recent financial crisis, the absence of an orderly resolution regime forced governments of several countries to provide extraordinary support to a number of systemically important financial institutions (SIFIs) that were considered “too-big-to-fail.” Since then, new laws such as the Dodd-Frank Act have established a framework to resolve SIFIs without the need for government “bail-outs.” These types of laws have important implications for senior bondholders of SIFIs, as the use of the new regimes would likely expose creditors to losses. Given this change, this post investigates whether markets are adjusting their perceptions of the risk associated with global SIFIs. We find that in response to shifting regulatory regimes, investors are beginning to price in a higher risk of default on senior bonds issued by the institutions.”
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