They will also be helpful in reducing excessive leverage and building liquidity buffers. The new capital requirement framework also reduces complexity and interconnectedness by blocking opportunities for regulatory arbitrage which previously was possible via complex securitisation structures. Recovery and resolution regimes aim to create a framework which did not exist at EU level prior to the crisis.
If successfully implemented, the new tools such as the recovery and resolution plans can greatly reduce the social costs of bank failures and thus reduce the implicit public guarantee. This means that recovery and resolution tools can reduce the distortive risk-taking incentives created by public bail out expectations.