Some analysts at the Bank for International Settlements have found a new way to unwind too-big-to-fail banks painlessly, which I guess is newsworthy; here is a good summary, and here is the actual paper. The basic idea is to resolve a bank over the weekend by writing down its debt by some regulator-chosen amount X, giving it X more capital, which is held by a new temporary holding company. Then the bank reopens for business on Monday with more equity and less debt. The holding company eventually sells its equity in the bank to the market, and distributes the proceeds “to [the old bank's] creditors and shareholders strictly according to the hierarchy of their claim.” Here are some blue boxes:
The main attraction of this, besides speed, is that it provides a market mechanism for determining how much senior creditors lose: regulators decide how much of the bank’s senior liabilities are converted into holdco liabilities, but those holdco liabilities retain their seniority over subordinated liabilities and equity, and ultimately the amount of writedowns suffered by the senior (and junior for that matter) debtholders depends on how much the bank’s equity is ultimately worth when the holdco sells it.