Resolution regimes: rolling back the implicit subsidy from the state The most fundamental effects prospectively flow from making orderly resolution credible for the largest and most complex firms. Funding costs for any banks where bailout was STILL confidently expected would be heavily subsidised, as in the past. Where there was uncertainty, there would tend to be somewhat subsidised funding combined with a bias to shorter-term financing which could run at signs of trouble. But such “regimes”, if they merit that description, are unsustainable. Policy is clear: taxpayers should not provide solvency support to banks. Instead, losses exceeding a bank’s equity base should fall on bondholders and other uninsured creditors, in line with the creditor hierarchy that would apply in bankruptcy.1 Other things being equal, exposing the holders of bank bonds to risk will tend to increase the overall cost of finance for banks during normal times compared with the past. Earning a fixed return but exposed to downside risk, investors in, especially, longer-term debt will be a source of market discipline. That is likely to incentivise banks to be better capitalised than in the past – through some combination of less levered balance sheets and less risky business activities. For society at large, the counterpart is that, with a lower probability of failure and credible plans in place to resolve banks without recourse to public funds, government bond yields should be lower than otherwise and the public finances more resilient.
Future changes will not be simple at all, but all of us together, by exchanging experiences and necessities for change, will build a safer environment, which I hope will make future challenges somewhat easier. Granting independence to central banks represents one of the most relevant steps in the financial system reform in the countries of our region, as an important precondition for maintaining inflation under control and becoming an ESCB member. However, our endeavours for the consolidation of the institutional and real independence should be coordinated carefully by taking into consideration the specific features of our economies in transition, and not as a mere implementation of what may seem to be a successful model for the ESCB countries. In this framework, I consider today’s meeting as very important, since the Bulgarian economy and the Bulgarian National Bank have been going through substantial reforms in the context of EU accession. I believe that the challenges that we have faced and those that we will face in the future are more or less the same with those experienced by the Bulgarian authorities, including the Bulgarian National Bank. As a consequence, I think that the bilateral cooperation between our banks carries a high potential, and in the name of my institution, I avail myself of this opportunity to offer maximal guarantees with regard to the fruitful development of these relations. 1/2  Passing into a multilateral framework, I will return once more to the idea that focuses on the institutionalisation of the inter-regional cooperation between central banks.