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Recovery and resolution
The term refers to planning by a financial institution and the authorities for the eventuality the firm suffers life-threatening losses. The Financial Stability Board has drawn up international standards for financial firms whose failure could have a systemic impact, and these have been implemented in many Group of 20 jurisdictions.
The standards state each firm should maintain a recovery plan that spells out what the management could do to keep the firm solvent. This could include sales of businesses, capital raising and the cessation of dividend and coupon payments.
The purpose of the resolution plan is to ensure any financial firm can be wound down without a government bailout and with the firm’s critical functions maintained. Options include wiping out shareholders, bailing in unsecured and non-retail creditors, transferring viable businesses to a third-party buyer or bridge bank, and takeover by the authorities.
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