Public Information Notice: IMF Executive Board Discusses Cross-border Bank Resolution
July 21, 2010
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July 21, 2010
On July 1, 2010 the Executive Board of the International Monetary Fund (IMF) discussed a proposed framework for enhanced coordination of cross-border bank resolution. The framework was outlined in a staff paper prepared in response to calls from G-20 leaders, who have placed the complex issue of the resolution of international financial groups high on their agenda. Building on existing work in this area by other international bodies the paper proposes a pragmatic approach to cross-border resolution focused on enhanced coordination among national authorities.
Executive Board Assessment
Executive Directors welcomed the opportunity to reflect on the need for the international community to develop a more effective framework for the resolution of cross-border banks and financial groups. They had a very productive discussion of the relevant issues and broadly agreed with staff’s analysis and recommendations, while noting that substantial follow-up work remains.
Directors generally agreed that the tension between global financial groups and national resolution frameworks has led to difficulties in coordinating resolution actions and procedures across borders. They noted that, when banking authorities are faced with distress or failure of a financial institution within their territory, they tend to give primary consideration to the potential impact on their own stakeholders. They also observed that, in some jurisdictions, legal barriers prevent cross-border collaboration while, more generally, a lack of international legal harmonization of resolution regimes impedes effective coordination of cross-border resolution.
Directors concurred that strengthened supervision and regulatory regimes would be important in reducing the likelihood of financial firm failure. However, acknowledging that the possibility of failure cannot be completely eliminated, Directors recognized the need for robust resolution mechanisms to be employed effectively in cross-border scenarios.
Directors acknowledged that one approach would be to work towards an international treaty to establish binding rules on the division of international responsibilities in a cross-border resolution. However, this approach could involve a long and difficult process, given the need for explicit burden sharing and the potential sacrifice of sovereignty under such a treaty. This process could be less arduous among countries that already have a high degree of financial integration. Directors also recognized that the “de-globalization” of financial firms could, to some extent, alleviate the problem of the absence of an international resolution regime. However, “de-globalization” would likely entail efficiency losses and other disadvantageous consequences.
Acknowledging the difficulties inherent in both these approaches, Directors broadly agreed with the more pragmatic “middle way” approach outlined in the paper. They noted, however, that the challenge of creating and implementing this approach should not be underestimated. They generally agreed that the following elements would be important features of a policy framework:
• First, countries would amend their national laws so as to remove legal or practical barriers to cross-border cooperation. This would be a significant first step towards coordinated cross-border resolution.
• Second, countries would ensure that their national resolution regimes met core coordination standards. These would include the harmonization of resolution regimes in key areas on such issues as the non-discrimination against foreign creditors, and would ensure that countries adhere to robust standards of supervision, and have the institutional capacity to implement an international solution.
• Third, it could be useful to establish criteria for ex ante burden-sharing agreements, although some Directors recognized the potential obstacles for reaching consensus in this regard. A primary objective of any resolution regime (national or international) should be to minimize the need for public funding.
• Fourth, countries would agree to procedural mechanisms for the coordination of cross-border resolution actions. This would entail not only procedures for information sharing but also rules to determine which jurisdiction’s competent authorities would assume a lead role in resolving a particular international firm.
Directors agreed that countries sharing specific cross-border banks should enhance cooperation and work to meet these criteria. Such enhanced cooperation would represent a step forward, in particular if it involves the principal financial centers.
A few Directors felt that the Fund’s priority in the near term should be on assessing implementation by members of international standards for cooperation in cross-border resolution, including elements of domestic resolution regimes that would be conducive to cross-border resolution.
Directors noted that the framework outlined in the paper represents a step in the right direction. However, they emphasized that a number of policy and technical issues remain to be addressed. They called on staff to continue to work on these issues and, in doing so, to work closely with its counterparts at the Financial Stability Board and the standard setters, given their extensive experience and their role in this area.