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“Who Pays for Bank Insolvency?” by David G. Mayes and Aarno Liuksila, Palgrave McMillan

The book takes off from a paper by David Mayes, Liisa Halme, and Aarno Liuksila entitled “Proposed Bank Reorganization and Liquidation Scheme,” which was taken up during a conference workshop organized by the Bank of Finland tackling the issue, “Who pays for Bank Insolvency”.

 The paper has become so popular that it had come to be known as the MHL formula in addressing bank insolvency. The MHL principle was originally proposed in a companion book, Improving Bank Supervision which was published by Palgrave in 2001.

The scheme offers a credible way of handling the insolvency of large and complex banks that are currently thought to be individually “too big to fail” or of a number of banks at one time that are currently thought to be “too many to fail”. Both circumstances under the scheme do not entail the use of public money to bail out the existing shareholders and unsecured debtors. Since “Too Big To Fail” is a judgment call, some countries may set the maximum size for permitting insolvency very low.

The MHL approach is part of a bigger scheme which involves improved supervisory procedures, improved corporate governance of banks, improved disclosure by banks to enable market discipline, prompt corrective action for undercapitalized banks, increased incentives for more prudent bank behavior by bank directors, and actions by authorities to reduce the knock-on effects of the bank closure to the rest of the system such as netting arrangements and reduction of systemic risks through settlement systems.

The book also tackles cross border implications, market discipline, assessing the social cost of banking crises, assessing the cost of public intervention, and other costs of insolvency and alternative arrangements.



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