OF THE many things that keep financial regulators awake at night, perhaps the most alarming prospect is the collapse of a sprawling international bank with local operations. “The one thing they don’t want to be blamed for is if a big foreign bank blows up in their market,” says a senior executive at just such a bank.The anxiety is natural. Huge progress has been made since the financial crisis in making banks safer in general, and in giving authorities the tools they need to deal with the collapse of even very large domestic banks. But if a big cross-border one were to teeter, bank supervisors would in essence face the same choice they did five years ago: bail it out using taxpayers’ money or allow a messy collapse that could freeze the financial system and the economy while spilling contagion and losses across borders.In search of more palatable options, bank regulators around the world have considered two alternative strategies to deal with the problem of banks that span borders. The first is to craft global rules that would allow the resolution of big international banks from the top down, treating them in death as the global entities they were in life. The…
