Winners and losers in bank resolution: recent examples and a modest reform proposal

In response to the 2023 banking crises in the US and Europe, the relevant authorities intervened to prevent contagion and distressed banks were sold at seemingly deflated prices. This column identifies three primary factors contributing to elevated profits in distressed bank mergers, particularly in Europe – the absence of a robust backstop, ineffective use of the bail-in tool in loss allocation, and lack of competition among bidders during the sale of distressed bank assets – and provides concrete policy recommendations to address these. In the longer term, the European resolution framework and deposit guarantee system need to be transformed along the lines of the FDIC.