The volatility of exchange rates and securities prices has increased in recent weeks, triggering a rapid unwinding of carry trade positions that in its turn has affected exchange rates. These factors of fragility are counterbalanced by the credibility of monetary policies, which has subdued inflation expectations.
Third, there should be a clear expectation that the shareholders and creditors of the failing firm will bear losses to the fullest extent consistent with preserving financial stability. Shareholders of the firm ultimately are responsible for the organization’s management (or, more likely, mismanagement) and are supposed to be in a first-loss position upon failure of the firm.