Why discretionary bank rescues are not a substitute for systemic order

The 2020 intervention stopped contagion, but its ad hoc approach and breach of loss hierarchy underline the need for a predictable, rule-based system for failing financial firms

The successful resolution of the Yes Bank crisis in 2020 has been hailed as a stellar example of astute crisis management by the Reserve Bank of India (RBI), with a rapid mobilisation of public and private capital led by the central bank. Indeed, the swift containment of contagion was an operational success, preventing what could have been a systemic shock. 

However, to celebrate this episode as a model for future financial stability is to embrace a dangerous institutional mirage. The Yes Bank resolution was a victory of ad hoc expediency over systemic design. It violated all