Abstract:

In the March 2023 experience, the supervisory response suffered from excess inertia,  an intervention gap driven by lack of tools and fears of runs. The result were worse losses and chaotic runs. At present, Basel III measures for recovery are too limited and not credible, because of the threat of potential runs.  Once again, bank bailout is the only remaining option. 

There is now a shift of attention to resilience, as opposed to solidity. Resilience is here defined as the capacity to respond effectively (in time and scale) when instability is not contained by prudential buffers. 

We contrast bank solidity and bank resilience, finding parallels with dam engineering and flood emergency measures.   The resilience of an overflown dam depends on technical aspects (slope of the backwall, profile, cohesiveness) but especially on a prompt response, under a clear emergency mandate to mobilize resources.  There are clear analogies to prudential policy.  

We outline simple new tools, such as charges on uninsured deposit runs and a bank recovery procedure inspired by flood containment measures.