Developing Distress Resolution Procedures for Financial Institutions

Document Type


Publication Date



A common response of governments to signs of stress in the domestic banking system is to issue a blanket guarantee for banks’ liabilities. The recent crisis has lead to a reevaluation of the channels of contagion that may create systemic risk in the financial system. In particular, contagion through price changes on securities and liquidity in markets for securities have been emphasized by economists while the more traditional contagion through payment and settlement systems have become less of a threat as a result of innovations in these systems. The emphasis on price and liquidity contagion has implications for the financial regulatory framework as a whole as well as for procedures for dealing with financial institutions in distress. Systemic liquidity problems can arise when financial institution are induced to hoard available liquidity out of fear that funding in the market may not be available when needed and as a result of uncertainty about the soundness of each financial institutions trying to borrow funds in the market. Prompt and predictable procedures for resolution of distress would mitigate this problem.


This article was originally published in SUERF: The European Money and Finance Forum in 2012.

Peer Reviewed



Société Universitaire Européenne de Recherches Financières