Resolution of Small and Medium-Sized Deposit-Taking Institutions: Back to Basics?

Following the 2008 Great Financial Crisis, financial policy makers have refocused their attention on bank resolution, prompting the creation of new resolution tools and regime reforms. As a result, the focus has mainly been on large, systemically important banks. Less attention has been paid to a broader range of financial institutions, namely small and medium deposit-taking institutions. That tendency limits the applicability of these tools, which are imperfectly adapted to the unique issues faced by these smaller institutions. This article will assess both the successful applications and the limitations of resolution tools to small and medium deposit-taking institution failures, focusing on three tools in particular: the bail-in, the bridge bank, and purchase and assumption. In doing so, the benefits and challenges of each of these tools will be examined through the lens of recent resolution examples in the United States, Canada, and the European Union. This article also argues for the availability of public funds to achieve a successful resolution, taking the view that moral hazard concerns are overstated and that rigid bans of public funds are counterproductive to the goals of resolution. Lastly, this article seeks to develop a broad understanding of the systemic importance that accounts for the essential role of small and medium deposit-taking institutions in their communities.