In essence what is needed is to settle the question of ‘who pays’ unambiguously and in advance. We need to pre-position a specific type of creditor who can absorb loss if the bank fails. Clearly, getting a creditor to accept this in advance has a cost; there will be a premium for carrying such an explicit risk. That cost is, however, simply the counterpart of the hidden subsidy being given to banks by the implicit taxpayer guarantee that applies if they cannot be resolved in an orderly way. We now have international agreement on the minimum amount and nature of this type of loss absorbing instrument – which goes under the unlovely name of ‘TLAC’ – that the largest, globally systemic banks should issue.11 And in the EU, under the Banking Recovery and Resolution Directive (BRRD), resolution authorities will need to set in advance, for each firm, the overall amount and nature of the resources that can absorb loss both when the firm is a going concern and when it can no longer operate – this goes under the equally unlovely name of MREL. (v) International co-operation The final plank is international cooperation. The hardest challenge in ending too big to fail is dealing with the failure of systemically important banks that operate in a number of jurisdictions. The crisis proved beyond doubt that we did not have the international machinery to handle this.
And a large number could fail simultaneously if they take on correlated risks, as was the case in the US Savings and Loans crisis in the 1980s. Something else might be lost: banking relies on information. Large, multinational banks can use their existing customer knowledge to offer a customer services across the globe and across different business lines. This allows information to flow freely across borders and products and supports international trade and investment. I think it is possible to have a world in which large banks can fail in an orderly way – without the contagion and damage to the economy that in the past has forced the taxpayer to come in and absorb losses. But there is no single, silver bullet to achieve that; rather it requires the application of a comprehensive set of policy and powers. It requires a major change in the regulatory landscape and the transition will be difficult. Progress on resolution The good news is that there has been very substantial progress towards this new world. In the UK certainly we are now in a much stronger position in terms of dealing with bank failures  5  See Morgan and Stiroh (2005). 6  The FDIC had injected a total of $ as subordinated debt and equity into Continental Illinois (around $ in 2009 money). This compares to at least $ (contingent) capital injections into RBS (using 2009 exchange rates). 7  See Independent Commission on Banking (2011).