For the solvent banks, the challenge is to maintain their lending capacity. This is particularly important given that other credit markets are not functioning normally, so that it is difficult, or impossible, for businesses to acquire funding directly from bond markets. But without more capital, the banks are not willing to accept new loans on their balance sheets. The main challenge facing the authorities today therefore is to ensure that solvent banks increase their financial strength and thereby their lending capacity. At the same time, it is important to have an exit strategy so that capital injections today do not translate into an increase in state ownership when the crisis is over. Second, cross-border banking has been increasing. Twenty years ago, all the main Nordic banks were national banks. Today, for example, four of the five largest banks in Norway are foreign-owned (three branches and one subsidiary). A national authority cannot be expected to bolster the financial strength of branches of foreign banks: indeed, it could be complicated  BIS Review 12/2009  1  to do this even for foreign-owned subsidiaries. While we were able to choose national solutions to the banking crisis 20 years ago, any effective solution to today’s situation will require an internationally harmonised approach. As today’s financial crisis progressively gets resolved, it will be necessary to start the process of preventing future crises. This will require substantial reform of the regulatory framework. Banks will have to strengthen their capital and their liquidity buffers.

Resolution plans may envisage measures such as the sale of the business or the creation, through the segregation of certain assets and liabilities, of so-called bridge banks, which perform, after resolution, the bank’s critical functions with a significantly smaller balance sheet. Some of these resolution measures other than a bail-in might be potentially appropriate in the case of commercial banks pursuing a traditional business model. The bank resulting from a resolution process where these strategies are implemented will generally have lower capital requirements than the original institution and, therefore, a lower MREL might be required of it. I thus believe there is substantial leeway for adjusting MREL requirements on the basis of more accurate assessments of capital needs during the resolution process and, in particular, of the strategies foreseen in each bank’s resolution plans. 4 Transition  In light of the foregoing, even if the minimum volume of the loss-absorbing instruments that banks should have is revised downwards, the new MREL demands may undeniably only be assumed by a large number of banks if they have a sufficiently lengthy transition period to comply with the requirements. This transition period will, moreover, be necessary so that the market should not have to absorb a large number of issues over a limited period of time. Indeed, the European Commission’s recent proposal includes the possibility of setting for each bank a time margin for compliance with the MREL requirement, although this margin would be decided on a case-by-case basis by the resolution authority, i.e.