In this regard, a common resolution regime will have to ensure that banks without a viable business model can exit the market in an orderly fashion. Such a regime is crucial not only for financial stability, but for sustainable growth as well. A functioning resolution regime strengthens incentives for effective credit monitoring and moderates banks’ risk appetites.
In so doing, it enhances the allocation of capital and reduces the risk of a bubble emerging. Better still would be if banks didn’t reach the point of having to be wound down in the first place. In this regard, higher capital requirements are a big part of the solution – the single supervisory mechanism is another.