Letting Insolvent Banks Fail

It is commonly accepted that insolvent banks should be subject to bankruptcy (or, to use today’s terminology, resolution). More specifically, when a bank’s assets are worth less than its debts, it should die. In practical terms, a resolution takes the form of a restructuring performed over a weekend and under the supervision of a judge. Potential acquirers bid for the bank’s assets (and often some of its debt), allowing a new bank to open for business on Monday morning. The old bank’s equity holders and, to a lesser degree, its unsecured creditors swallow the losses when capital is wiped out and the debt is not fully covered by the proceeds of the resolution.