In his latest The Wide Angle, Sam Theodore says no other planned resolution avenue can really succeed without dramatically increasing the likelihood of a bank run, and that there is a wide optionality gap between preparing for resolution and actually triggering it. He believes regulators should be more explicit about the desirability of forced mergers.

This means two things, neither of which is currently in the cards. First, as part of the resolution process, making the failing bank more sellable must be an explicit and transparently communicated goal. Second, not rejecting outright the compromise of partial and temporary State support in resolution if the national political will to engage exists (which often it does).

While we have seen failing banks taken over by stronger peers outside resolution, a bank surviving resolution as an independent entity has not happened and may never happen. Yet resolution tools are aimed at restoring failing banks to financial viability as going concerns without the use of State bailouts.

When the regulatory rubber meets the political road, these scenarios can be easily overtaken and flushed out by fast-evolving and often unpredictable events. The on-the-ground reality is that the government of the failing bank’s home country may prefer a more direct and less complicated solution away from the resolution framework and process.

This solution cannot be an outright State bailout (unless a banking collapse would lead to a national emergency) but it may entail elements of partial and temporary State support. This runs counter to the zero-bailout credo but it may be a necessary compromise in the new world we inhabit.

Read the latest edition of The Wide Angle here.