They make banks sufficiently resilient so that they are able to continue operating, even if they incur losses. Bank resolution, in turn, limits contagion from the failure of an individual bank to the financial system. Resolution can therefore also be viewed as a macroprudential tool, operating in the gone-concern world. A credible resolution framework prevents excessive risk taking.
Resolution tools ensure that banks can exit the market in case of failure without disrupting the financial system. In this way, a credible resolution framework lowers the expectation of implicit government guarantees. This strengthens market discipline and creates incentives for banks to avoid excessive risk-taking and to become “too big to fail” (TBTF).