That conclusion is underscored by a look at existing attempts to build early-warning systems for various types of crisis. Either these systems miss out on crises that actually occur or they sound the alarm for crises that do not occur. Nevertheless, given the costs and the difficulties of managing the successive crises over the past decade, we must continue to devote considerable efforts to avoiding future crises and try hard to understand the kinds of vulnerability that lie behind them. The crises during the 1990s have revealed serious flaws not only in macroeconomic management but also, just as important, in the structure and regulation of the financial system in both debtor and creditor countries. The work now being carried out in various international fora is thorough and can be summarised under three headings: •  Crisis prevention, including the development of good practice standards and transparency codes, and incentives for both borrowers and lenders to act prudently. •  Crisis containment, including the establishment of official contingent lines and possible forms of private sector finance which may reduce the severity of any crisis. •  Crisis resolution, where the emphasis is on possible ways of creating a more orderly environment for restructuring external debt, on principles to guide the restructuring of banking systems in the wake of a crisis, and on handling corporate insolvency.
So the bank has to have enough debt that can be bailed in to restore its capital so it can continue to operate as an authorised firm while it is being resolved. Smaller banks can be more easily separated into the parts that provide critical economic services and that can be sold and those that do not and can go into insolvency. Only the critical parts would be recapitalised in resolution. They need less bail-in debt. The very smallest institutions do not need to be kept in operation. Their abrupt cessation of activity should not generate contagion or damage the economy. Insolvency rather than resolution is the proportionate strategy here. They do not need bail in debt. Gradualism The second key principle is gradualism. The Bank is proposing to allow the full four-year transition period for banks to meet their MREL requirements. This will allow the market for MREL-eligible debt to develop and allow banks to smooth out their debt issuance, minimising issuance and interest costs. Clarity The third is clarity. Banks and their creditors need to have clarity – clarity in relation to the requirements of the new regime and clarity as to their liability if things go wrong. So we need to avoid uncertainty and get on and implement the EU requirements that came into force at the beginning of this year. Bank creditors need to know where they stand if things go wrong.