federal banks in Brazil, restructured in 2000) or because they presumably need to remain in operation to fulfill a given social goal and are thus preserved through restructuring.<sup>27</sup>

- _Purchase and assumption._ Under this method, healthy institutions or private investors purchase some or all the assets of the failing bank and assume some or all of its liabilities. The process is conducted by the authorities and typically implies the withdrawal of the bank license, with a potential removal of original shareholders and managers. According to the survey by IADI (2005), this method has been the most frequently used in the last ten years, although most of the users of the P&A method were developed countries.<sup>28</sup> The implementation of P&A may result in transactions that can be structured in many different ways, depending on the objectives and requirements of the deposit insurer, the government, and/or the acquirer.  For instance, if it is a GB-BB, the extent of deposits covered may result in haircuts to larger depositors to maximize the availability of (limited) funds at the deposit insurance, enhance market discipline, and increase the expected return of assets available to back up the deposits transferred, arguably increasing the likelihood of success of the resolution. The latter was the case of a resolution undertaken in Paraguay in 2004 (see Section IV.2).

- _Mergers and acquisitions._ This method refers to those mergers or acquisitions of failing banks by other private banks that are induced by banking authorities (that is, the “pure” private M&A are not considered as a BR method, since it does not involve persuasion by the authorities). In the event of bank failure authorities contact healthy bank(s) in the system to motivate a merger largely by using “moral suasion” or offering regulatory or fiscal incentives.<sup>29</sup> This should not be considered as a highly recommended method for bank resolution, unless it is justified by exceptional circumstances, since it could generate a bigger problem that what it tries to resolve (creating problems for what could be otherwise solvent banks), generating moral hazard and discouraging private investments.

- _“Bridge bank”._ Under this largely untested method, the authorities close the troubled bank and, at the same time, create a new bank (the “bridge bank”) with some or all of its original assets and liabilities, allowing the failing bank to continue its operations until its shares are sold to the market by the designated liquidator. Until this happens, the failed bank is temporarily administered by the government or a group of banks and receives external support from the deposit guarantee fund and/or the government. The “bridge bank” could be found to be suitable when the authorities believe there is value to be realized or costs to be minimized by applying a resolution method different from liquidation but do not have a ready solution other than a payout at the time of failure.  The IADI survey (2005) found that this method has been rarely used in the last decade, while it had the longest average resolution period.<sup>30</sup> Thus, it is important to avoid the temptation of using the method to avoid

> 27 This paper abstracts from the discussion of whether state-owned banks should exist or not, to achieve social objectives. However, there is ample literature on the subject. See a summary in Yaron et. al. (2006).

> 28 The survey comprised 34 countries (including OECD countries) and was distributed in June, 2004.

> 29 Sometimes this is use for very large failing banks, complicating the merger process (e.g. Banco de Comercio in the Dominican Republic, then the third largest bank, merged with another bank that later failed -Baninter).

> 30 There is at least one case in LAC (in Argentina) that used a “bridge bank” method. However, arguably, there are other cases in LAC that mimic the method of a “bridge bank” in the sense that there is an interim management that “bridges” between the failing bank and the sale to another bank after a few years, but a new license is not created in the meantime.  These “quasi bridge banks” are those resulting for instance when the Government (directly or through an AMC) purchases the entire portfolio of (bad and other) assets from a failing bank to bring it back to

16