Bank resolution and creditor distribution: the tension shaping global banking – part I: “External and Intra-Group Funding” and “Ex Ante planning v. Ex Post Execution” dimensions

Banking has drastically changed since the 2007-2009 financial crisis and its aftermath. Of all the reforms that impinge upon the ability of global banks to run their business, none is more consequential than the new frameworks on bank resolution, which try to end “too-big-to-fail.” Yet bank resolution’s “macro” goals, such as systemic stability, limitation of contagion, and avoidance of moral hazard, run in the face of insolvency law and the more “micro” principles underpinning it. Among the latter, none is more pervasive than the need for fairness between creditors, and between (and within) creditor classes, enshrined in the ranking and priorities’ systems under insolvency law. At first glance, these demands could set bank resolution and insolvency laws on a collision course with each other. On closer examination, however, the picture is much more complex, for the tension between bank resolution and insolvency law is giving rise to a series of equilibria that are giving shape to the modern face of global banking. This and a succeeding article provide an analytical framework to aid in grasping the full picture, which is a difficult, and often overwhelming, enterprise. The proposed analytical framework breaks down the complexity of international banking into three different layers: the “individual bank v. group” dimension, the duality of crisis management (ex post) and crisis-prevention (ex ante) tools, and the cross-border dimension. We explore each of these three layers incrementally, drawing from precedent analysis as we progress. Part II of this article provides a general analysis of the tensions between bank resolution and insolvency law and introduces the analytical framework. It then moves on to explore the first two layers within that framework: the group dimension, and the duality of crisis-prevention and crisis-management tools. A separate article will address the cross-border dimension