Default of Systemically Important Financial Intermediaries: Short-term Stability versus Incentive Compatibility?


  • The views expressed in the analysis are those of the authors and do not necessarily reflect the views of the Deutsche Bundesbank or its staff. Andreas Dombret is member of the Executive Board of the Deutsche Bundesbank and André Ebner is an economist in the Financial Stability Department of the Deutsche Bundesbank. Corresponding author's e-mail address:


Financial integration and globalization have acted as a major stimulus in the development of large, internationally operating banks, which not only provide cross-border services but also have a local presence. While these banks are themselves drivers of economic integration, they can pose serious threats to financial stability. Their size, interconnectedness and importance as providers of specific services mean that financial institutions can be too-systemic-to-fail (TSTF). Since the entry and exit of market participants is a crucial feature of well-functioning markets, the absence of any credible possibility of failure leads to serious distortions. This analysis gives an overview of the TSTF problem and discusses the challenges to be faced in establishing credible resolution regimes.