In an environment where market participants are truly at risk, they will be much more likely to take steps to protect themselves, thus reducing the side effects of resolutions, and a failed institution’s essential activities can be continued through bridge banks and other means.
A recent Moody’s comment further voices a belief that the resolution regime, as outlined in the FDIC’s interim rules, “will not work as planned, posing a contagion risk and most likely forcing the government to provide support in order to avoid a systemic crisis.” Based on this belief, Moody’s intends to continue assuming government support for the eight largest banking organizations, thus helping to carry on the funding advantage these entities have over other market players.