I think it is the best plan for implementing Title II given the complexity and scope of large, global financial institutions and I also think it is well-suited to the U.S. bank holding company framework. By assigning losses to shareholders and unsecured creditors of the holding company and transferring sound operating subsidiaries to a new solvent entity, such a “top-down” resolution strategy will facilitate continuity for the critical services performed by the firm’s subsidiaries. This will reduce the costs associated with the failure of the parent company and reduce the degree of disruption to financial markets and financial stability. While the Title II single point of entry strategy holds tremendous promise, I think it is important not to declare victory prematurely. First, there are still significant issues about how the resolution of a large systemically complex firm would work in practice. Second, even assuming that our efforts to overcome these challenges are ultimately fully successful, resolution is still likely to represent a “second best” outcome compared to preventing a systemically important financial institution from failing in the first place. After first describing some of the current implementation challenges associated with Title II resolution, I will return to this second issue. Implementing the resolution regime on a cross-border basis remains one of the most significant challenges. U.S. authorities are working with authorities abroad on the issues that require international collaboration, but the financial industry also has a role to play in overcoming these challenges.
In addition, the central banks have, for example, taken steps to contribute liquidity to the financial system. The Riksbank will be presenting a new Inflation Report next week. As usual it will contain a main scenario and a spectrum of upside and downside risks. Considering the circumstances I have outlined earlier, the main scenario is inherently uncertain. The risk spectrum will therefore be particularly important to monitor in future as new information is obtained and events unfold. Which direction will cyclical activity take? How will the exchange rate develop? What are the underlying factors here? And how will inflation expectations move? These are critical questions for the Riksbank’s future action this autumn and winter. Unfortunately there are no clear answers. BIS Review 82/2001  5