Key result
Ad hoc capital injections account for ~50% of historical programs, challenging adherence to resolution principles.
Why the study?
Government recapitalizations of systemic banking organizations are costly and unpopular but sometimes necessary to prevent financial contagion, leaving authorities to face difficult design decisions.
Highlights the challenges authorities face in designing and deploying ad hoc capital injections for failing banks.
May warrant revised approaches to bank resolution; challenges authorities' adherence to established principles.
Government recapitalizations of systemic banking organizations can be costly and unpopular but are sometimes necessary to protect depositors and prevent financial contagion. This paper surveys 23 Yale Program on Financial Stability case studies of ad hoc capital injection programs, defined as programs that provide capital to a single institution or a clearly defined minority of institutions. We saw a marked increase in capital injection programs in the past 50 years, more than half of which were ad hoc. Authorities designing ad hoc capital injections face difficult decisions—when to deploy them rather than let a bank fail; whether to impose losses on shareholders and unsecured creditors; how to protect taxpayers; and how to deal with the management of failed firms. Most advanced countries have updated their tools for managing bank failures since the Global Financial Crisis of 2007–09, generally in compliance with the Financial Stability Board’s 2011 Key Attributes of Effective Resolution Regimes for Financial Institutions. Our survey points to the challenges authorities have faced over the years in attempting to adhere to such principles.
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Rhee et al. (2024) studied this question. Ad hoc capital injections accounted for over half of all capital injection programs in the past 50 years, presenting ongoing challenges for authorities attempting to adhere to resolution principles.
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