Resolution Authority
A resolution authority is a public body responsible for managing the orderly resolution of failing financial institutions.
Meaning in Practice
In practice, the resolution authority implements tools such as bail-in mechanisms, asset transfers, or bridge institutions to maintain critical functions. It acts when a bank is no longer viable and normal insolvency proceedings could threaten financial stability. The objective is to minimize taxpayer costs and systemic disruption.
Why It Matters
An effective resolution authority reduces moral hazard and strengthens market discipline. It ensures that shareholders and creditors bear losses before public funds are used. This framework supports confidence in crisis management structures.
Market Impact
Clear resolution regimes can lower systemic risk premiums. Uncertainty about resolution outcomes may increase funding costs for weaker institutions. Markets closely monitor resolution planning for large banks.
Example
When a major bank becomes insolvent, the resolution authority restructures its liabilities through a bail-in process while preserving essential banking services.