How should prudential regulators deal with global banks that are too big to fail? Many see bank resolution as the key element in dealing with this challenge. The main idea is that global systemically important banks (G-SIBs) are required to issue a sufficient amount of “total loss absorbing capital” (TLAC) in the form of subordinated long-term debt or equity. These securities are issued for the purpose of absorbing losses and recapitalizing the institution in resolution, with minimal disruption to the bank’s operations and without public support.
But what should these resolution frameworks look like and, most importantly, will they work? Much hinges on this question, given that there are currently around thirty G-SIBs, with total exposures equal to more than 75% of global GDP in 2014.