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The issue of how to maintain financial stability in the presence of a distressed global LCFI cannot be deferred until there is a workable global agreement that provides a general mechanism for resolution.
The authorities may not be able to arrange for another financial institution to provide timely replacement of some systemically important services of the failed LCFI. Further, detachment can run into a variety of legal problems, some of which have parallels in the problems with resolving the LCFI as a group.
But shelf-bankruptcy plans could be a big step toward better preparing for the failure of an LCFI.
Hupkes (2004) discussed several difficult problems related to restructuring or winding down large and complex financial institutions (LCFIs) operating across national borders.
Hupkes (2004) argued that not all the functions of LCFIs are systemically important to all the countries in which they operate.
In other words, there should be an additional fee or premium that is tied specifically to the systemic risk of LCFIs as their failures impose costs on the rest of the financial sector and the real economy (for example, Acharya, Pedersen, et al., 2010).
These distortions occurred not only at banks with access to FDIC insurance, but also at Fannie Mae and Freddie Mac (the two major GSEs) and the too-big-to-fail LCFIs. And such distortions remain a big issue.
There is almost universal agreement that there needs to be a solvency regime to deal with LCFIs. One might prefer the receivership approach of the Dodd-Frank Act; changes to the U.S.
As a final comment on resolving LCFIs, it is reasonable to question the Dodd-Frank Act's choice of the FDIC receivership approach.
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