## Executive Summary (IMF staff note CR/10120)

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### I. Introduction and main findings
- Events since August 2007 tested U.S. crisis management and financial stability arrangements and exposed important shortcomings.
- Key pre-crisis shortcomings identified:
  - absence of formal responsibility for financial stability, individually or collectively, or a systematic interagency approach to monitoring and addressing potential systemic risks;
  - legal hurdles to information collection and obstacles to information-sharing among the agencies which hampers assessment of systemic risks;
  - absence of authority to require functional regulators to change their rules to address an identified and emerging systemic risk;
  - crisis management tools that have lagged behind the complexities of the U.S. financial system.
- Agencies coordinated informally and effectively once the crisis broke, improvised solutions, and contained wider disruption, but deficiencies contributed to large economic and financial costs.
- The note draws on meetings held between October 16 and November 4, 2009, and a review of agency material.

### II. Desirable properties of crisis management frameworks
- A robust framework should include:
  - Information-sharing mechanisms during crises and for emerging risks.
  - A common systemic assessment approach to evaluate transmission across institutions, markets, and sectors.
  - Coordinated decision-making arrangements recognizing legal responsibility often rests with a single authority.
  - Coordinated external communication with markets, public, overseas investors and other constituencies.
  - Regular review and testing of arrangements and crisis management tools.

### III. Observed features of U.S. arrangements
- Informality is a striking feature of U.S. arrangements; the President’s Working Group (PWG) was the only body bringing together agencies across sectors for system-wide monitoring and crisis oversight.
- Micro-prudential supervision had bilateral contacts and some cross-agency coordination (e.g., FFIEC); no equivalent systematic interagency process for reviewing risks to financial stability existed beyond PWG.

### IV. Principal recommendations (summary)
- Establish a formal council as the systemic risk regulator (SRR) with a mandate for financial stability including Fed and Treasury and regulatory agencies:
  - meet regularly (at least quarterly);
  - perform comprehensive cross-sectoral risk assessment and periodic stress tests (cf the Supervisory Capital Assessment Program (SCAP));
  - consider mitigation measures (regulatory or market infrastructure) where significant risks are identified;
  - oversee continuous crisis-preparation, information-sharing, and testing of crisis tools.
- Provide the council with powers to demand information and require regulatory/supervisory action after consultation with the appropriate prudential regulator.
- Assign one agency as the council’s agent and lead executor to avoid dissipation of responsibility; the Fed is identified as the most natural lead executor given its roles.
- Define principles for future access to emergency liquidity assistance for banks and non-banks:
  - ensure capacity to provide liquidity support is not so circumscribed as to be ineffective;
  - review prudential liquidity requirements for institutions with potential access to liquidity support.
- Review Deposit Insurance Fund (DIF) funding arrangements:
  - consider removing the ceiling on the size of the fund or increasing its size to address procyclicality;
  - target premiums to take account of systemic risk.
- Adopt a comprehensive resolution regime for large financial firms that shares losses with shareholders and debt-holders and provides credible access to funding to allow orderly resolution.
  - use ex ante resolution plans (“living wills”) and impose higher prudential requirements or structural changes if plans are not credible.
- Ensure all potentially systemic financial groups are subject to effective consolidated supervision and prudential buffers reflecting the risks they bring.
- Review cross-border resolution arrangements and ensure compatibility with foreign authorities; implement FSF Principles for Cross-Border Coordination in Crisis Management.

*Executive Summary, IMF staff note CR/10120 — "Executive Summary" (content provided).*

---

### Pre-crisis agency processes, PWG evolution, and interagency coordination (section 8 and interagency findings)

### Pre-crisis monitoring within agencies
- FRB and FRBNY umbrella groups coordinated banking supervision, monetary affairs, international, research, operations and payment systems staff; every six months a report was submitted to the Board of Governors with conjunctural overview and deeper analysis of selected priorities.
- FRBNY produced a Financial Sector Overview report quarterly (from 2006).
- OCC internal policy groups and Examiners In Charge of the fifteen largest banks met quarterly offsite.
- FDIC had mechanisms to focus on horizontal risks and thematic concerns.
- No equivalent systematic interagency process existed beyond a tour de table at PWG meetings.

### PWG role and evolution
- PWG established in 1988; membership: Secretary of the Treasury (chair), chairs of FRB, SEC, and CFTC; other agencies included informally.
- PWG coordinated Y2K, post-September 11 business continuity, and created FBIIC for financial information infrastructure.
- From 2006 PWG meetings were regularized and participation expanded; PWG assumed crisis coordination role and produced reports in 2008 on market turmoil and OTC derivatives.
- Financial stability was not an explicit PWG mandate under the Executive Order; its role evolved in response to events.

### Interagency coordination and crisis response (2007–2008)
- After July 2006, PWG worked to enhance information-sharing, plan for failures of major firms, and review crisis tools.
- From August 2007 interagency coordination intensified with regular conference calls (several times a day at crisis peak) among Treasury, FRB, FRBNY, other Reserve Banks, SEC, OCC, FDIC as required.
- FRBNY and SEC established a new information-sharing MOU between FRB and SEC in July 2008; FRBNY-SEC interaction increased after PDCF creation.
- Exceptional powers and fiscal commitments used between September 14 and November 30, 2008:
  - Section 13(3) and systemic risk exception used on thirteen separate occasions;
  - Treasury committed US$315 billion of funds available under EESA.
- Treasury interventions under EESA comprised:
  - Capital Purchase Program—US$250 billon
  - investment in senior preferred stock of AIG─US$40 billion
  - credit protection for Term Asset-Backed Securities Loan Facility (TALF) purchases by the Fed─US$20 billion
  - guarantee on the US$306 billion Citigroup asset pool─US$5 billion
- Decisions were based on legal authorities of each agency rather than any collective legal determination of systemic risk; the Treasury Secretary often led overall direction with the Fed Chairman.

### Evaluation: gaps and testing shortfalls
- No clear responsibility for financial stability existed.
- Monitoring did not fully recognize risk build-up: missed or underestimated the true extent of U.S. housing exposures, scale of investment bank leverage, and dependency on wholesale funding.
- Information blind-spots existed from financial activity beyond regulatory reach and from statutory restrictions on information-sharing.
- Coordinating interagency actions could be slow (supervisory guidance on non-traditional and subprime mortgages took more than a year and did not apply to all originators).
- Limited testing of crisis tools: business continuity extensively tested via FBIIC; little PWG-level testing of financial-crisis arrangements (no comprehensive tests involving all PWG agencies for key scenarios).
- External communication on system-wide stability was fragmented and left to individual agencies.

---

### Crisis management policy design: emergency liquidity, deposit insurance, and resolution (paragraphs summarized)

### Emergency liquidity assistance — facts, scale, and policy implications
- Pre-crisis Fed discount window access was restricted to depository institutions; lending typically short-maturity, fully collateralized, and at a penalty rate.
- During the crisis the Fed broadened support:
  - Fed extended maturity via Term Auction Facility and, under Section 13(3), introduced facilities for lending to non-banks and lending to individual non-banks.
  - FDIC used the systemic risk exception for least cost resolution and provided guarantees (TLGP) and institution-specific support.
- Scale of exceptional liquidity support provided:
  - US$3.5 trillion in facilities provided,
  - US$1.4 trillion in liquidity drawn at the peak for each facility,
  - US$0.9 trillion of debt guarantees.
- Expansion of central bank liquidity support to non-banks may have weakened incentives for liquidity prudence (moral hazard).
- Need to articulate future policy on Section 13(3):
  - define the test for “unusual and exigent circumstances” and evidence;
  - clarify facility structure and operational design.
- Reform proposals:
  - House: require written approval of the Secretary of the Treasury for any use of Section 13(3).
  - Senate: require the Fed to report to Congress within seven days on any use of Section 13(3), including justification, identity of borrowers, and terms.
- Managing moral hazard requires higher prudential requirements on non-bank systemically important institutions.

### Deposit insurance — performance, DIF funding, and procyclicality
- Crisis-era performance:
  - From February 2007 through to end-June 2009, FDIC was named receiver for 73 failed institutions with US$411 billion in assets.
  - Confidence among retail depositors was maintained; no depositor runs comparable to those in some other countries.
  - Congress increased insured deposit coverage from US$100,000 to US$250,000 under EESA; FDIC extended unlimited insurance to demand deposits as part of TLGP.
- DIF funding evolution and figures:
  - End-2007: DIF held US$52 billion and reserve ratio stood at 1.22 percent.
  - By September 2009: DIF funding level was negative at─US$8.2 billion.
  - FDIC restoration plan extended the restoration period successively: five years (October 2008) → seven years (February 2009) → eight years (June 2009).
  - FDIC favored prepayment of US$45 billion of assessments for the next three years over immediate assessment increases.
  - May 2009: FDIC borrowing rights from Treasury increased from US$30 billion to US$100 billion permanently and to US$500 billion temporarily (until December 2010).
- Additional crisis facts:
  - As of March 2009, FDIC insured approximately US$4.8 trillion or 55 percent of total deposits.
  - The seventy nine banks failing in the two years to March 2009 had an average of brokered deposits four times the national average.
  - Of 125 failures, only six involved deposit payouts.
- DIF design issues:
  - Reserve ratio cap and premium rebate rules led to procyclicality and incentives for leverage (from 1997–2006, 95 percent of banks paid no premiums).
  - Premiums have not priced systemic risk; FDIC has taken steps to incorporate risk-based elements only for largest institutions.
  - Policy options include increasing targeted reserve ratio, removing the fund and having premiums accrue to Treasury with FDIC borrowing authority retained, and targeting premiums for systemic risk.
- Noted historical benchmarks:
  - Up until 2006 reserve ratio under FDICIA was set at 1.25 percent.
  - Average designated reserve ratio in EU ex ante funds was 0.84 percent.
  - Under FDIRA FDIC obtained discretion to target between 1.1 percent and 1.5 percent; reserve ratio of 1.25 percent was amended in FDIRA to 1.50 percent (premiums are rebated when reserve ratio exceeds 1.35 percent).
- Isolated numeric mention: 1.15 percent.

### Resolution framework, fiscal/moral hazard consequences, and living wills
- Sectoral resolution arrangements:
  - Insurance companies resolved at state level with guaranty associations.
  - SIPC handles broker-dealer liquidation with compensation up to US$500,000 from SIPC Fund.
  - FDIC resolves insured depositories; OCC has a separate regime for uninsured national banks.
  - Other financial institutions generally subject to Bankruptcy Code limits.
- Crisis experience highlighted insufficiency of existing tools for large complex groups; ad hoc public support was repeatedly used.
- Fiscal and subsidy indicators:
  - Of the US$205 billion disbursed under the Capital Purchase Program, US$71 billion repaid along with dividend payments of US$7 billion and warrant proceeds of US$3 billion (by September 2009).
  - Example implied subsidy: between 2000 and 2007 the spread between funding cost for small and large banks averaged 29bps but widened in Q4 2008 to 78bps on average. If gap costs were attributed to too-big-to-fail, this would be equivalent to a US$34bn subsidy in Q1 2009.
- Need for new resolution powers:
  - House and Senate proposals envision a resolution agency (FDIC in most cases) able to take control of systemically important groups and allocate losses to shareholders and liability-holders, with public financing recouped from the industry.
  - Credibility is essential: without powers to impose losses on debt holders, too-big-to-fail incentives remain.
- Ex ante preparation and “living wills”:
  - Firms must furnish detailed information (exposures by legal entity, client asset locations, netting contracts) and maintain wind-down readiness.
  - Regulators should require revisions, higher prudential requirements, or structural changes if plans are not credible.
- Practical constraints:
  - Rapid failure dynamics (e.g., heavy reliance on wholesale funding) make fast, orderly resolution hard; FDIC preparatory timelines for smaller banks: start work ninety days in advance and after forty five days begin marketing if conditions do not improve.
  - Bridge bank arrangements can help preserve systemically important functions.

---

### Designation, prudential requirements, and cross-border issues (paragraphs 67–84)

### Designation and prudential regimes for systemic groups
- Senate proposal: Agency for Financial Stability (AFS) would designate specified FHCs on systemic grounds; non-bank FHCs would register with FIRA and be subject to enhanced prudential requirements defined by AFS.
- House proposal: FSOC would designate systemic FHCs; the Fed would define increased prudential requirements for, and supervise, designated groups.
- Trade-off in scope of designation:
  - Narrow list: clearer signaling of systemic firms but may increase moral hazard unless resolution credibility is high.
  - Broad list with graduated criteria: more firms monitored and regulated to varying degrees; designation less stigmatizing but still allows graduated prudential measures.
- Recommendation: a broader list with graduated requirements is preferable on balance, combined with higher prudential requirements and credible resolution plans.

### Cross-border exposures and coordination needs
- End-June 2007 consolidated claims:
  - U.S. banks’ consolidated overseas claims: US$3.2 trillion.
  - Foreign banks’ consolidated claims on the U.S.: US$6.5 trillion.
- U.S. LCFIs are globally active and central to international markets; no formal cross-border crisis management agreements existed pre-crisis.
- Crisis-era coordination:
  - December 12, 2007: Fed, ECB, and SNB introduced temporary dollar swap lines concurrently with the Fed’s Term Auction Facility.
  - Swap lines expanded after Lehman failure in size and participating central banks.
  - Selection of EME central banks for swap access considered size, stability, and relationship quality with the Fed.
- Supervisory coordination:
  - FRBNY established the Senior Supervisors Group (SSG) in September 2007, bringing together major home-country supervisors to pool information on counterparty risks.
  - SSG faced limitations from management information systems at firms impeding consolidated exposure matrices.
- Lehman case:
  - LBHI entered Chapter 11 on September 15; Lehman group comprised 2,985 legal entities in some 50 countries.
  - Lehman insolvencies across jurisdictions (Switzerland, Japan, Singapore, Hong Kong, Germany, Luxembourg, Australia, the Netherlands, Bermuda) had no strong coordination framework, producing drawn-out and costly processes.
  - LBIE intra-group interdependencies at September 15 included:
    - collateral placed by LBIE with other group companies under repo and stock lending: US$210 billion (collateral received US$208 billion);
    - counterparty asserted set-off claims on similar transactions: US$283 billion and US$278 billion of collateral placed and received respectively;
    - more than 300 debtor and creditor balances between LBIE and other Lehman entities: US$10.5 billion receivable and US$11 billion payable;
    - a priority to resolve an estimated US$26 billion of client money and asset claims (including US$1 billion cash in Bankhaus, US$6.6 billion with LBI, and US$1 billion with Lehman entities in Japan and Hong Kong).
    - 800,000 failed trades for LBIE on 15 September required 200,000 manual ledger entries for LBIE alone.
- Need for ex ante international resolution planning:
  - Implement FSF Principles for Cross-Border Coordination in Crisis Management and FSB guidance;
  - conduct cross-border resolution planning to identify inconsistency or incompatibility among national legal frameworks and to determine whether increased prudential requirements, plan revisions, or structural changes are required.

### FSF Principles (implementation priorities)
- Prepare for crises by developing common tools, meeting at least annually, keeping all materially affected countries informed, sharing key information on structures and contingency plans, ensuring firms can provide required information and maintain funding/wind-down procedures, and removing practical barriers to coordinated resolution.
- In managing crises authorities should strive for coordinated solutions, share national assessments early, and coordinate public communications where practicable.
- U.S. agencies are participating in FSB work to operationalize these principles.

*Source: IMF staff report (PDF chapter/section).*

*Italicized source attribution: IMF staff report content (PDF chapter/section).*

### Executive Summary ......................................................................................................

### Executive Summary

### I. Introduction and Main Findings
- Events since August 2007 tested arrangements for crisis management and financial stability in the U.S.
- In a framework of multiple, statutorily independent agencies, arrangements were largely informal; agencies coordinated effectively once the crisis broke and improvised solutions that helped contain the crisis.
- The crisis revealed shortcomings prior to the crisis in:
  - absence of formal responsibility for financial stability, individually or collectively, or a systematic interagency approach to monitoring and addressing potential systemic risks;
  - legal hurdles to information collection and obstacles to information-sharing among the agencies which hampers assessment of systemic risks;
  - absence of authority to require functional regulators to change their rules to address an identified and emerging systemic risk; and
  - crisis management tools that have lagged behind the complexities of the U.S. financial system that the agencies have to manage.
- These shortcomings contributed to enormous costs in economic and financial disruption and scale of public intervention; they should be judged in the context of a crisis of unprecedented scope and size.
- The deficiencies are recognized and being addressed in regulatory reforms under discussion in Congress; recommendations in this paper generally push in the same direction but differ on some specifics.
- Assessment focus: current arrangements, design and readiness of crisis management tools (the financial stability safety net), with recommendations. The note draws on meetings held between October 16 and November 4, 2009, and a review of agency material.

### II. Crisis Management Process — Desirable Properties
- A robust crisis management framework should include:
  - Information-sharing: mechanisms to ensure information is shared among relevant authorities, both during a crisis and on emerging risks in advance.
  - Systemic assessment: a common approach to evaluate emerging risks and determine systemic impact and transmission across institutions, markets, and sectors.
  - Decision-making: coordinated arrangements to determine best policy responses and use of measures, recognizing legal responsibility usually rests with a single authority but crises often require combined measures.
  - External communication: coordinated external communication with markets, public, overseas investors and other constituencies to maintain confidence.
  - Review and Testing: regular review and testing to ensure arrangements remain current and effective and that authorities are ready for emerging risks.

### III. U.S. Crisis Coordination Arrangements — Observed Features
- A striking feature of U.S. arrangements: informality.
- Micro-prudential supervision featured ongoing bilateral contact and some cross-agency coordination (e.g., FFIEC).  
- For system-wide monitoring and crisis oversight, the only body bringing together agencies across sectors was the President’s Working Group (PWG).

### IV. Principal Recommendations
- Clarify responsibilities for financial stability and establish a formal council of regulatory agencies, the Fed, and the Treasury to serve as the systemic risk regulator (SRR) with a mandate for financial stability.
  - The council should meet regularly (at least quarterly) to discuss potential risks to financial stability.
  - Risk assessment should be comprehensive and cross-sectoral with periodic stress tests to check capacity of financial institutions to withstand severe shocks (cf the Supervisory Capital Assessment Program (SCAP) undertaken by the U.S. authorities in early 2009).
  - Where significant potential risks are identified, the council should consider whether and how these should be mitigated by regulatory or other changes (e.g., development of market infrastructure).
  - The council should oversee a continuous program of work on crisis preparation, ensuring effective coordination and information-sharing arrangements are in place and that crisis management tools remain up-to-date and are tested against potential risks.
- Clarify how responsibility for systemic risk oversight will be discharged for monitoring and, where necessary, introducing regulatory changes.
  - Provide the council with the power to demand information and require regulatory and/or supervisory action, after consultation with the appropriate prudential regulator.
  - Assign one agency as the council’s agent and lead executor to avoid dissipation of responsibility within a committee structure; the Fed would be the most natural lead executor given:
    - the close relationship between monetary stability and financial stability;
    - the Fed’s daily interaction with key market participants in carrying out monetary policy and its role as operator and overseer of key payment systems and as liquidity provider to the banking system;
    - the Fed’s current role as the consolidated supervisor of bank holding companies.
- Define principles for future access to emergency liquidity assistance for banks and non-banks in light of the wider access to central bank liquidity support provided during the crisis.
  - Ensure capacity to provide liquidity support in crisis situations is not so circumscribed as to be ineffective.
  - Review prudential liquidity requirements for any institutions with potential access to liquidity support.
- Review funding arrangements for the deposit insurance fund by removing the ceiling on the size of the fund or increasing its size to address procyclicality in current arrangements and to target premiums that take account of systemic risk.
- Adopt a comprehensive resolution regime for dealing with failure of large financial firms in an orderly manner that appropriately incentivizes shareholders and debt-holders through sharing of losses.
  - Resolution arrangements need to be credible with management, shareholders and the market and provide for adequate access to funding to allow both an orderly resolution and mitigation of systemic risk.
  - Ex ante resolution plans (“living wills”) are a device to help promote credibility; if a group’s plan is not credible, impose higher prudential requirements or require changes in the plan or the group’s size and/or structure.
- Ensure all financial groups that are potentially systemic are subject to effective consolidated supervision and to prudential requirements (larger capital or liquidity buffers) that reflect the risk they bring to the system.
- As part of resolution planning, review arrangements for resolution of cross-border groups and compatibility of resolution arrangements in different countries with the authorities of those countries.
  - If credibility of resolution arrangements is doubtful, consider requiring revisions in resolution plans, increased prudential requirements, or changes in group structures.
- Within the proposed SRR council, establish responsibilities among agencies for coordinating with authorities overseas, building on existing practices and responsibilities.
  - The council should ensure the Financial Stability Forum (FSF) Principles for Cross-Border Coordination in Crisis Management are implemented by the U.S. agencies.

*Executive Summary, IMF staff note CR/10120 — "Executive Summary" (content provided).*

### 8. In the years preceding the crisis processes were developed in some of the agencies

### _cr10120 - 8. In the years preceding the crisis processes were developed in some of the agencies

### Pre-crisis monitoring arrangements within agencies
- Umbrella groups at the Federal Reserve Board (FRB) and Federal Reserve Bank of New York (FRBNY) brought together banking supervision, monetary affairs, international, research, operations and payment systems staff to coordinate work and share information on financial stability issues across divisions.
- Under these arrangements, every six months a report was submitted to the Board of Governors, providing a conjunctural overview and a deeper analysis of two or three issues identified as priorities in their work or as requested by the Governors.
- FRBNY produced a Financial Sector Overview report that went to FRB staff quarterly (from 2006).
- In the Office of the Comptroller of the Currency (OCC), internal policy groups on capital markets and credit issues supplemented supervisory risk identification; Examiners In Charge (EIC) of the fifteen largest banks met quarterly offsite to review risks in their institutions.
- Within the Federal Deposit Insurance Corporation (FDIC) there were mechanisms to focus on horizontal risks, thematic concerns, and overall risks to the industry, supplementing institution-specific analysis.
- No equivalent systematic interagency process for reviewing risks to financial stability existed beyond a tour de table at PWG meetings where each agency briefly outlined major issues.

### President’s Working Group on Financial Markets (PWG) — role and evolution
- Established in 1988 by Executive Order to address issues related to the 1987 stock market crash; membership: Secretary of the Treasury (chair), chairs of FRB, SEC, and CFTC.
- Used intermittently for cross-agency coordination on issues aligned with its mandate (examples: OTC derivatives report in 1998; hedge funds report in 1999).
- Other agencies (including FRBNY, OCC, OTS, FDIC) were included informally as required.
- PWG coordinated Y2K preparation, business continuity after September 11, and set up the Financial and Banking Information Infrastructure Committee (FBIIC) to improve reliability and security of financial information infrastructure.
- From 2006 PWG meetings were regularized, participation expanded (including FRBNY, OCC, OTS, FDIC, and FHFA), and PWG assumed a crisis coordination role; in 2008 PWG produced reports on financial market turmoil and OTC derivatives.
- Financial stability was not an explicit PWG mandate under the Executive Order; its role evolved in response to events and issues.

### Interagency coordination and crisis response (2007–2008)
- After Henry Paulson’s appointment as Treasury Secretary in July 2006, PWG undertook work to enhance information-sharing arrangements, draw up plans for specific scenarios (e.g., failure of a major financial firm), and review available crisis tools.
- From August 2007 onwards, interagency coordination intensified; coordination evolved into a combination of PWG communication protocols and frequent contacts among subsets of principals.
- At the core were regular conference calls (several times a day at the height of the crisis) between Treasury, FRB, FRBNY, other Reserve Banks, and bringing in SEC, OCC, and FDIC as required.
- Agencies used ongoing close contacts with institutions and markets for market intelligence (examples: OCC on-site exam staff obtained market and bank data for real-time analysis; Fed relationship managers contacted BHC group treasurers several times a day).
- FRBNY and SEC established a new information-sharing MOU between FRB and SEC in July 2008; the FRBNY-SEC relationship intensified after creation of the Primary Dealer Credit Facility (PDCF).
- Between September 14 and November 30, 2008, exceptional powers under Section 13(3) of the Federal Reserve Act and the systemic risk exception in the Federal Deposit Insurance Act were used on thirteen separate occasions alongside the commitment of US$315 billion made by the Treasury of funds available under Emergency Economic Stabilization Act of 2008 (EESA).
- Treasury interventions under EESA comprised:
  - Capital Purchase Program—US$250 billon
  - investment in senior preferred stock of AIG─US$40 billion
  - credit protection for Term Asset-Backed Securities Loan Facility (TALF) purchases by the Fed─US$20 billion
  - guarantee on the US$306 billion Citigroup asset pool─US$5 billion
- Decisions to act were based on the specific legal authorities of each agency rather than any collective legal determination of systemic risk; the Treasury Secretary, often with the Fed Chairman, led communication of overall direction and coordination.

### Evaluation of U.S. crisis management arrangements — identified gaps
- No clear responsibility for financial stability existed, either collectively or in individual agencies.
- Risk monitoring in inter-agency forums and individual agencies did not fully recognize the build-up of risks in the U.S. system; potential risks were missed or mis-calibrated and correlations/interconnections were not clearly identified.
- Examples of missed or underestimated risks include:
  - true extent of U.S. housing market exposures
  - scale of investment bank leverage and leverage in other non-bank entities
  - general dependency on wholesale funding flows
- There was a lack of a formal systematic approach in the PWG toward assessing system-wide risks; individual agencies reported on sectoral risks but risks outside regulated sectors or in regulated sectors not represented in PWG were overlooked or underestimated.
- Information blind-spots existed both from financial activity beyond regulatory reach and from statutory restrictions on sharing information among PWG members; PWG members agreed bilateral information-sharing arrangements to try to overcome restrictions but gaps remained in sectoral information collected.
- Coordinating interagency actions was complex and could be slow; example: interagency agreement on supervisory guidance on non-traditional and subprime mortgages took more than a year and did not apply to all nonbanks engaged in origination activity (mortgage brokers, real estate agents, state-regulated or unregulated entities).
- Testing of crisis tools and arrangements was limited:
  - Extensive testing had been undertaken on business continuity arrangements via FBIIC (exercises included system outages, pandemic flu, cyber-attack), which helped establish channels and relationships.
  - Little testing at the PWG level of financial-crisis arrangements; FDIC and others ran simulations and table-top exercises, but no comprehensive tests had been conducted involving all PWG agencies for key crisis scenarios (e.g., failure of an investment bank).
- External communication on crisis management and financial stability had been left to individual agencies and tended to be on specific issues rather than comprehensive system-wide overviews.

### Proposed regulatory reforms (legislative proposals under consideration)
- Two sets of reform proposals before Congress aimed to address many identified issues: the law passed in December 2009 by the House of Representatives and the draft law published by Chairman Dodd of the Senate Banking Committee.
- Common features in proposals:
  - allocating explicit responsibility for financial stability and mechanisms for interagency coordination
  - removing obstacles to obtaining and sharing information for monitoring risks to financial stability
  - establishing authorities for systemic risk regulation to designate non-bank financial holding companies as potentially systemic
  - subjecting systemic firms to higher prudential risk requirements in proportion to the risk they bring to the rest of the system
  - introducing regulations to address emerging financial stability risks, even within subsidiaries subject to primary regulation by another agency
- Differences between proposals:
  - House Act: overall responsibility for financial stability in a Financial Services Oversight Council (FSOC) chaired by the Treasury and including the Fed, OCC, SEC, CFTC, FDIC, NCUA, and FHFA; gives the Fed authority to supervise and set prudential requirements for systemic Financial Holding Companies (FHCs), regardless of whether they own a bank.
  - Senate Banking Committee Bill (Chairman Dodd): FSOC would be the systemic risk regulator with day-to-day supervision of FHCs carried out by the Fed under FSOC direction.
- Implementation challenge: ensuring responsibility for financial stability is not dissipated in a committee structure given a still relatively complicated and fragmented institutional framework.
- Strength noted: both models envisage a central role for the Fed as consolidated supervisor of systemic FHCs, building on its existing role in bank holding company supervision and internal financial stability monitoring; combined with the Fed’s role in markets and payment systems and aggregate credit monitoring for monetary policy, it is well placed to identify potential systemic risks.

*Source: _cr10120 - 8. In the years preceding the crisis processes were developed in some of the agencies*

### 26. Either model would be an improvement on the current PWG structure that lacks a

### 26. Either model would be an improvement on the current PWG structure that lacks a

### Interagency coordination for financial stability
- The current PWG structure lacks a clear mandate and authority.
- Proposal: establish an interagency council with:
  - explicit responsibility for financial stability and monitoring systemic risks;
  - the power, where necessary, to require regulatory changes to address systemic risks after consultation with the appropriate prudential regulator;
  - assignment of an agency as its executor to strengthen coordination of management of financial stability.
- The council should meet regularly (at least quarterly) and undertake comprehensive, cross-sectoral risk assessment with periodic stress tests.

### Communication and crisis preparation
- More investment is needed in communicating potential risks to financial stability and how they would be managed if crystallized.
- Agencies must convey to the market readiness and ability to wind up institutions, regardless of size, with a minimum of systemic impact and public cost.
- Investment required in detailed preparation of measures for handling a crisis, including arrangements for external communication during a crisis.
- Both sets of reform proposals contain provisions for periodic reports on financial stability to Congress; the body should publish a regular (six-monthly) assessment of risks to financial stability.

### Recommendations on governance and powers
- Clarify responsibilities of agencies contributing to delivery of financial stability and establish a formal coordinating council:
  - meet at least quarterly;
  - comprehensive cross-sectoral risk assessment and periodic stress tests;
  - consider mitigation (regulatory or other changes) where significant potential risks are identified (e.g., development of market infrastructure);
  - oversee continuous crisis-preparation program, ensure coordination and information-sharing, maintain and test crisis management tools;
  - publish regular (six-monthly) assessments of risks to financial stability and be accountable to Congress.
- Clarify how responsibility for systemic risk oversight will be discharged for monitoring and introducing regulatory changes:
  - provide the council power to demand information and require regulatory and/or supervisory action after consultation with the appropriate prudential regulator;
  - assign one agency as agent and lead executor to avoid dissipation of responsibility within a committee structure — most naturally the Fed given its roles (monetary/financial stability link, interactions with market participants, operator/overseer of key payment systems, liquidity provider, consolidated supervisor of bank holding companies).

### Crisis management policy design — overall framing
- Even with good regulation and supervision, crises remain unpredictable and tools are needed to:
  - contain impact on the rest of the system and the broader economy;
  - minimize public cost (fiscal cost and/or moral hazard).
- FSAP reviewed U.S. crisis management policies in three key areas: emergency liquidity assistance, deposit insurance, and resolution arrangements for financial institutions.

### Emergency Liquidity Assistance — findings and implications
- Pre-crisis, discount window access at the Fed was restricted to depository institutions; lending was usually very short-maturity, fully collateralized, and at a rate above the Fed Funds rate.
- During the crisis:
  - Fed extended maturity via the Term Auction Facility and, under Section 13(3) of the Federal Reserve Act, introduced an array of facilities for lending to non-banks and operations to lend to individual non-banks.
  - FDIC, invoking the systemic risk exception for least cost resolution, provided guarantees on senior debt under the Temporary Liquidity Guarantee Program (TLGP) and participated in programs to support certain individual institutions.
- Some facilities were inclusive to combat stigma, but the scale of exceptional liquidity support was:
  - US$3.5 trillion in facilities provided,
  - US$1.4 trillion in liquidity drawn at the peak for each facility,
  - US$0.9 trillion of debt guarantees.
- The expansion of central bank liquidity support to non-banks (investment banks and money-market funds) may have weakened incentives to manage liquidity prudently — moral hazard concern.
- Continuing a policy where only depository institutions have direct access to central bank emergency liquidity support would lack credibility post-crisis.
- Need to articulate a policy for future use of Section 13(3), including:
  - defining the test for “unusual and exigent circumstances” and how it will be evidenced;
  - clarifying how Section 13(3) facilities would be structured (operational challenges were significant during the crisis).
- Reform proposals attempt to rule out use of Section 13(3) to lend to individual firms, transferring responsibility to enhanced resolution authority; but the flexibility afforded by Section 13(3) during the crisis argues against losing it entirely.
- Increased accountability proposals:
  - House: written approval of the Secretary of the Treasury for any use of Section 13(3).
  - Senate: require the Fed to report to Congress within seven days on any use of Section 13(3), including justification, identity of borrowers, and terms of lending (duration, collateral and rate).
- Managing moral hazard will also require functional regulators and the new systemic risk regulator to increase prudential requirements on non-bank financial institutions judged systemic individually or in aggregate.

### Deposit insurance — performance and fiscal position
- Performance through the crisis:
  - From February 2007 through to end-June 2009, FDIC was named receiver for 73 failed institutions with US$411 billion in assets.
  - Confidence among retail depositors was maintained; no run on deposits of the kind seen in some other countries.
  - As part of EESA, Congress increased coverage for insured deposits from US$100,000 to US$250,000 (marginal effect on proportion/value of insured deposits and not requested by FDIC).
  - As part of TLGP, FDIC extended unlimited insurance to demand deposits.
- Runs that occurred mainly related to uninsured deposits, often where solvency problems meant likely failure regardless.
- FDIC’s capacity to resolve banks quickly (typically transferring insured deposits over a weekend) bolstered depositor confidence.
- Deposit Insurance Fund (DIF) status and actions:
  - End-2007: US$52 billion in DIF and reserve ratio stood at 1.22 percent.
  - By September 2009: DIF funding level was negative at─US$8.2 billion.
  - FDIC put in place a restoration plan and increased amounts assessed on industry, but successively extended the planned restoration period:
    - from five years in October 2008,
    - to seven years in February 2009,
    - and then to eight years in June 2009.
  - FDIC favored prepayment of US$45 billion of assessments for the next three years rather than further increase immediate assessments.
- Confidence sustained because FDIC insurance is backed by the full faith and credit of United States Government:
  - May 2009 increase in FDIC’s borrowing rights from Treasury from US$30 billion to US$100 billion permanently and to US$500 billion temporarily (until December 2010).
- The fall in fund resources and reluctance to impose immediate assessments on a weakened industry highlight the systematic nature of insurance and procyclicality of current funding arrangements.
- Additional factual notes from the crisis:
  - As of March 2009, FDIC insured approximately US$4.8 trillion or 55 percent of total deposits.
  - The seventy nine banks failing in the two years to March 2009 had an average of brokered deposits four times the national average.
  - Of the 125 failures, only six involved deposit payouts (cases where proportion of insured deposits was small and uninsured depositors could be paid out from receivership proceeds).

*Italicized source-attribution: IMF staff report content (PDF chapter/section).*

### 1.15 percent.

### _cr10120 - 1.15 percent.

### Deposit Insurance Fund (DIF) funding, premiums, and procyclicality
- Helping Families Save Their Homes Act of May 2009 amended the Reform Act to allow the FDIC to extend the restoration period from five to eight years.
- FDIC proposals and actions on special assessments:
  - A special assessment of 20bps was proposed by FDIC in February 2009, reduced in May and then withdrawn in September in favor of prepayment of assessments (with a special assessment of 3bp for 2011 and 2012).
- Under current DIF rules banks only pay premiums up to a certain level of funding after which all premiums are rebated; the reserve ratio is capped.
  - From 1997 until 2006 95 percent of banks paid no premiums.
- Procyclicality and incentives:
  - The cap on the reserve ratio means banks do not pay the true cost of the insurance they enjoy, providing an incentive to increase leverage to maximize the subsidy.
  - In downturns it is difficult, from a systemic perspective, to increase assessments to force banks to restore the fund.
- Systemic risk not priced:
  - Premiums have not incorporated a systemic risk element needed to achieve actuarially fair premiums; FDIC has taken steps to incorporate risk-based elements for the largest institutions only.
  - When multiple banks fail together, DIF faces greater difficulty recovering value as receiver, implying a larger subsidy passed from DIF to multiple failing banks.
- Recommendations and options for DIF funding:
  - DIF funding arrangements should be reviewed, revisiting premiums and the size of the fund.
  - Historical benchmark: up until 2006 the reserve ratio was set under FDICIA at 1.25 percent.
  - Comparison: The average designated reserve ratio in EU funds with ex ante funding was 0.84 percent.
  - Under FDIRA FDIC obtained discretion to target a ratio between 1.1 percent and 1.5 percent; previously a reserve ratio of 1.25 percent was amended in FDIRA to 1.50 percent (a proportion of premiums are rebated when the reserve ratio exceeds 1.35 percent).
  - Possible responses to insufficient pre-funding:
    - Increase the targeted reserve ratio (reduces taxpayer risk but increases deadweight cost and would not eliminate taxpayer risk).
    - Remove the fund and have premiums accrue directly to Treasury with FDIC borrowing from Treasury as needed, while retaining benefits of an ex ante industry-established fund and avoiding politicized payout processes.
- Policy design note: Premiums need to take account of systemic risk and reflect the probability of joint bank failures.

### Resolution framework, tools, and limitations
- Current U.S. sectoral resolution arrangements:
  - Insolvent insurance companies resolved at state level by insurance commissioners; policyholders’ claims typically backed by industry-funded guaranty associations.
  - SIPC can appoint a trustee to ensure liquidation of a broker dealer returns assets to customers; SIPC compensation up to US$500,000 from the SIPC Fund funded by assessments on broker-dealers.
  - FDIC acts as receiver for insured depositories with tools to resolve institutions at least cost to DIF; a separate OCC regime exists outside bankruptcy for uninsured national banks.
- Bankruptcy Code limitations:
  - Other financial institutions subject to the Bankruptcy Code, narrowing resolution options to sale prior to failure or liquidation—desirable from moral hazard perspective but not credible for large complex institutions.
- Crisis experience and ad hoc interventions:
  - Agencies repeatedly intervened with public support for large institutions (Appendix II referenced).
  - Lehman failure (no support) led to large systemic impact and subsequent need to support other institutions.
  - FDIC tools were inadequate for the largest banking groups, applying only to banking entities within groups.
  - Repeated use of Section 13(3) to fund transfers/support (e.g., Bear Stearns to JP Morgan; AIG).
  - Improvised, case-by-case approaches produced outcomes that were opaque or inconsistent.
- Fiscal and moral hazard consequences:
  - The amount of public money put at risk has been enormous (see Appendix II); macroeconomic effects have damaged the government’s public debt position.
  - Direct fiscal cost is hard to estimate but may in the end not be large.
  - Example Capital Purchase Program figures: of the US$205 billion disbursed under the Capital Purchase Program, US$71 billion had been repaid along with dividend payments of US$7 billion and warrant proceeds of US$3 billion (by September 2009).
  - Liability holders (other than shareholders) in large banks and non-banks were made good in many cases (e.g., Bear Stearns bondholders on US$75 billion of bonds outstanding in March 2008; AIG commercial paper holders and derivative counterparties).
  - Implicit subsidy evidence: between 2000 and 2007 the spread between the cost of funding for small and large banks (the eighteen bank holding companies with assets greater than US$100 billion) averaged 29bps but widened in the fourth quarter of 2008 to 78bps on average. If gap costs were entirely attributed to too-big-to-fail, this would be equivalent to a US$34bn subsidy in the first quarter of 2009.

### Need for new resolution powers and proposed reforms
- Recognition of shortcomings and legislative proposals:
  - House and Senate proposals agree on new resolution arrangements to enable orderly wind-down of large financial groups at the expense of shareholders and other liabilityholders rather than taxpayers.
  - Proposed framework: when group failure would have large systemic impact, a resolution agency can take control and resolve the firm with objectives to maximize net asset value while minimizing costs to the Treasury and systemic impact.
  - The agency would have a full range of tools (including providing funding/guarantees/injecting capital) and various financing options under consideration; both proposals would require any public financing cost be recouped from the industry.
  - FDIC would perform the resolution agency role, with possible exception for broker-dealer–dominated groups where SEC would take the role.
- Credibility and implementation challenges:
  - Without credible mechanisms to intervene and impose losses on debt holders, the assumption of too big or too difficult to fail will remain.
  - Large groups lost viability rapidly during the crisis due to reliance on wholesale funding and market access; decisions had to be made quickly.
    - Example market exposures: Bear Stearns had CDS of US$2.5 trillion outstanding and was a significant participant in the US$2.8 trillion triparty repo market (March 2008). AIG had life insurance policies of US$1.9 trillion and derivative positions with a notional principal of US$1.6 trillion outstanding (September).
  - Practical constraints: achieving rapid, orderly resolution for very large complex groups—imposing losses on uninsured liabilityholders and unwinding or staying portfolios—may be hard to attain in practice.
  - FDIC’s typical resolution preparatory timeline for smaller banks: starts work preparing for resolution ninety days in advance and after forty five days starts to market the bank to potential acquirers if conditions do not improve.
  - Bridge bank arrangements may provide flexibility to transfer and ensure continuity of systemically important functions.

### Ex ante preparation, resolution planning, and firm obligations
- Importance of ex ante preparation:
  - Agencies must have complete powers and well-honed procedures to instill market confidence that a resolution would be handled predictably.
  - Firms must maintain a group structure that is resolvable without systemic impact or public cost and be able to furnish agencies with the information needed for orderly wind-down.
- Living wills and resolution plans:
  - Both reform proposals require firms to draw up resolution plans (“living wills”) for discussion with regulators demonstrating they can be wound up smoothly in distress.
  - Plans should ensure information needed for an orderly resolution is readily available, including:
    - Exposures across the group by legal entity to other firms and from other firms.
    - Location and availability of client assets.
    - Contracts outstanding under netting agreements by counterparty.
  - Firms should maintain in a state of readiness the information likely needed by counterparties and customers.
- Regulatory responses if group structure is not resolvable:
  - The resolution planning process should enable discussion on whether the group structure is resolvable at all without significant cost.
  - If not resolvable, regulators should consider actions ranging from requiring firms to revise resolution plans, increasing prudential requirements, to more drastic measures such as forcing groups to simplify structures or divest assets.

*Italic: Source: _cr10120 - 1.15 percent.*

### 67. The risk that firms represent to the system should also be reflected in the regulatory

### 67. The risk that firms represent to the system should also be reflected in the regulatory requirements they are subject to and their ex ante supervision

### Designation and prudential requirements for systemic financial groups
- Senate proposals: Agency for Financial Stability (AFS) as systemic risk regulator would have the power to designate specified FHCs on systemic grounds; if not already bank holding companies, specified nonbank FHCs would have to register with the Financial Institutions Regulatory Administration (FIRA) for supervision, and AFS would define enhanced prudential requirements for these groups.
- House proposals: designation of an FHC as systemic rests with FSOC; the Fed defines increased prudential requirements for, and supervises, designated groups.
- Key trade-off in designation scope:
  - Narrow list:
    - Underlines that specific groups are systemic.
    - May increase moral hazard unless resolution arrangements are credible and regulatory requirements are sufficiently tough.
    - Risk that large non-bank groups that are somewhat systemic fall short of designation criteria but still need monitoring.
  - Broad list (using a graduated set of criteria):
    - A larger number of firms would be systemic to some degree, making publication of a list less problematic.
    - Regulatory requirements could be graduated to reflect systemic risk.
    - Designation would have less deterrent effect compared with a narrow list with more stringent requirements.
- Conclusion: On balance a broader list seems better on moral hazard and systemic monitoring grounds, but in both narrow and broad cases the systemic regulator must set higher prudential requirements and demand credible resolution plans to mitigate the moral hazard of too big to fail.

### Key statistics and contextual notes
- Estimating costs is not straightforward given that systemic impact will to some extent be state contingent, dependent on market conditions at the time.
- Section 165 of the Senate Proposal describes a similar process for systemically significant financial institutions.

### Recommendations (from paragraph 70)
- Define principles for future access to emergency liquidity assistance for banks and non-banks to manage the widening in access to central bank liquidity support provided during the crisis.
  - Ensure capacity to provide liquidity support in crisis situations is not so circumscribed as to be ineffective.
  - Review prudential liquidity requirements for any institutions with potential access to liquidity support.
- Review the funding arrangements for the Deposit Insurance Fund by removing the ceiling on the size of the fund or increasing its size, to address the procyclicality in the current arrangements and to target premiums that, with more flexibility in the funding arrangements and adjustment to take account of systemic risk, are actuarially on a sound basis.
- Adopt a comprehensive resolution regime for dealing with the failure of large financial firms in an orderly manner and one that appropriately incentivizes shareholders and debt-holders through a sharing of losses.
  - Resolution arrangements need to be credible with management, shareholders and the market and provide for adequate access to funding to allow both an orderly resolution and the mitigation of systemic risk.
  - Ex ante resolution plans (“living wills”) are one device to help promote this credibility.
  - If agencies conclude a group’s plan is not credible, they should take steps to make it so by pressing the group to revise the plan, by imposing higher prudential requirements or by forcing the group to change its size and/or structure.
- Ensure that all financial groups that are potentially systemic are subject to effective consolidated supervision and to prudential requirements (larger capital or liquidity buffers) that reflect the risk they bring to the system.

*Source: IMF staff report, section covering paragraphs 67–70.*

### IV. CROSS-BORDER ISSUES (paragraphs 71–84)

### International dimension and linkages
- At end-June 2007:
  - Consolidated overseas claims of U.S. banks amounted to US$3.2 trillion.
  - Consolidated claims of foreign banks on the U.S. stood at US$6.5 trillion.
- U.S. financial groups include a number of large complex financial institutions (LCFIs) that are active globally and play a leading role in international financial markets.
- Pre-crisis coordination occurred via the Financial Stability Forum (FSF), the Bank for International Settlements (BIS), the Basel Committee on Banking Supervision, and the International Organization of Securities Commissions (IOSCO).
  - Despite frequent contacts, no formal agreements were in place for coordinated cross-border crisis management or failure of an international firm, leading to lack of clarity on responsibilities and how problems would be handled.

### Crisis-era coordination and central bank actions
- After August 2007, coordination among central banks was needed to respond to money market problems as market participants hoarded liquidity.
- Example: On December 12, 2007, the Federal Reserve, the European Central Bank (ECB), and the Swiss National Bank (SNB) introduced temporary central bank liquidity swap lines in dollars simultaneously with the Fed’s announcement introducing the Term Auction Facility.
- Swap arrangements expanded after the failure of Lehman, both in facility size and the central banks included.
- When the foreign exchange swap program was expanded to central banks in emerging market economies (EMEs), selection criteria included size and stability of countries and financial systems, and the quality of their relationships with the Fed.
  - If U.S. stability motivated the swaps, dollar lending to market counterparties was transacted by foreign central banks, which assumed credit risk in those operations.

### Intensified supervisory coordination
- FRBNY established the Senior Supervisors Group (SSG) in September 2007, including representatives from FSA, Commission Bancaire, BaFin, Swiss Financial Market Supervisory Authority (FINMA), FRB, OCC, FDIC and SEC; OSFI and the Japanese FSA were later added.
- SSG aimed to draw out supervisory issues across major firms and pool information on counterparty risks, though firms’ management information limitations hindered consolidated exposure matrices.
- SSG held frequent conference calls and became a focal point for exchanging information on specific problems; other central bank representatives sometimes joined as problems intensified.
- Coordination efforts concentrated on countries most relevant to U.S. institutions or markets, creating potential mismatches in crises given the global reach of large firms and the number of countries with an interest in outcomes.

### Lehman example and cross-border resolution challenges
- Lehman Brothers Holdings Inc. (LBHI) was put into Chapter 11 bankruptcy on September 15.
  - Lehman Brothers Inc, the broker-dealer subsidiary of LBHI, with FRBNY liquidity support and intraday liquidity from JP Morgan Chase, continued functioning until its sale to Barclays Capital was completed on September 20.
  - Lehman Brothers International Europe (LBIE), reliant on LBHI for funding, was put into administration on September 15 and could not meet liabilities falling due.
- The Lehman group consisted of 2,985 legal entities that operated in some 50 countries.
- Overseas subsidiaries faced separate insolvency proceedings in Switzerland, Japan, Singapore, Hong Kong, Germany, Luxembourg, Australia, the Netherlands and Bermuda, with no strong framework for coordinating those proceedings, resulting in a drawn-out and costly process that will take years to complete.
- The disorderly wind-down amplified negative impacts, including uncertainty for prime brokerage clients over the location and availability of assets (many re-hypothecated).

### Need for ex ante international work and resolution planning
- Much more ex ante work is required among international authorities and closer coordination among resolution authorities in different countries.
- If not addressed, domestic reforms alone will not fully mitigate the stability risk posed by the largest firms, which may still require government support absent workable cross-border resolution arrangements.
- Implementation of FSF Principles and recommendations of the Cross-border Bank Resolution Group should help, but resolution planning for international groups will reveal inconsistencies and tensions between legal frameworks across jurisdictions.
  - U.S. agencies must decide whether inconsistencies can be managed or whether they require revisions to resolution plans, increased prudential requirements, or changes in group structures.

### FSF Principles for Cross-Border Coordination in Crisis Management (summarized)
- Adopted by G20 Leaders in April 2009 for immediate implementation.
- In preparing for financial crises, authorities will:
  - develop common support tools for managing a cross-border financial crisis, including key data lists and a common language for assessing systemic implications;
  - meet at least annually to consider issues and barriers to coordinated action that may arise in handling severe stress at specific firms;
  - work to ensure that all countries in which the firm has systemic importance are kept informed of arrangements developed by core college country authorities;
  - share at a minimum information on group structures, contingency funding arrangements and bank resolution procedures of the countries in which the firm operates;
  - ensure that firms can supply information required by authorities in managing a financial crisis and maintain robust, up-to-date funding plans for stressed market scenarios and contingency/wind-down procedures;
  - seek to remove practical barriers to efficient, internationally coordinated resolutions identified when developing contingency plans.
- In managing a financial crisis, authorities will:
  - strive to find internationally coordinated solutions that take account of impacts on other countries, drawing on ex-ante information and plans;
  - share national assessments of systemic implications;
  - share information as freely as practicable with relevant authorities from an early stage;
  - if a fully coordinated solution is not possible, discuss national measures promptly with other relevant authorities;
  - share plans for public communication with appropriate authorities from other affected jurisdictions.
- Implementation is being taken forward in the Financial Stability Board (FSB) along with guidance for systemic assessment; U.S. agencies are participating in this work.

### Cross-border recommendations (from paragraph 84)
- As part of resolution planning, review arrangements for resolution of cross-border groups and compatibility of resolution arrangements in different countries with authorities from those countries.
  - If credibility of resolution arrangements is doubtful, U.S. agencies should consider steps: seek revisions in resolution plans, apply increased prudential requirements, or require changes in group structures.
- Within the proposed body for coordinating work on financial stability, establish responsibilities among agencies for coordinating with authorities overseas, building on existing practices and responsibilities.
  - The body should ensure that the FSF Principles for Cross-Border Coordination in Crisis Management are implemented by the U.S. agencies.

*Source: IMF staff report, section covering paragraphs 71–84.*

### Box 3. Cross-Border Insolvency and Interdependencies in Lehman Brothers

### Box 3. Cross-Border Insolvency and Interdependencies in Lehman Brothers

### Overview of group structure and immediate effects of LBHI bankruptcy
- Lehman was run day-to-day along global product lines with extensive linkages between entities in the U.S. and elsewhere.
- Liquidity management for the group was centralized in LBHI.
- Large volumes of intra-group transactions were used for financing or risk management purposes.
- Group companies shared IT platforms, staff and other services (settlement, accounting, risk management, legal etc).
- Following the bankruptcy of LBHI and Lehman entities elsewhere being placed into insolvency proceedings, links between group companies were effectively broken and all transactions had to be viewed on a legal entity basis.

### Summary of intra-group interdependencies in LBIE at September 15
- Collateral placed by LBIE with other group companies under repo and stock lending transactions totaled US$210 billion (collateral received US$208 billion).
- Counterparties asserted rights of set-off complicating claims on similar transactions with third parties, another US$283 billion and US$278 billion of collateral placed and received respectively.
- More than 300 debtor and creditor balances between LBIE and other Lehman entities amounted to US$10.5 billion receivable and US$11 billion payable.
- A priority in administration was resolving an estimated US$26 billion of claims for client money and assets in LBIE.
  - Of this, US$1 billion in cash was on deposit in Bankhaus (a Lehman bank subsidiary in Germany).
  - US$6.6 billion in assets was held with LBI.
  - A further US$1 billion with Lehman entities in Japan and Hong Kong.
- LBIE has made claims on LBHI for US$217 million in payments made to LBIE’s account at LBHI on 15 September by third parties under standard settlement instructions (SSIs), even though one of the administrator’s first acts that morning was to amend the SSIs.
- LBIE was dependent on other Lehman entities for staff and IT services (all provided from LBL, a dedicated service company for LBIE and other Lehman entities in Europe), for operational management of many of its accounts, for sub-custodian and settlement services in many markets.
  - Administrators for the different entities were forced to set up alternative arrangements or to negotiate service agreements to allow the provision of services to continue.
- Closing accounting records for 15 September had to be coordinated across Lehman entities taking account of failed trades (800,000 in the case of LBIE).
  - This involved 200,000 manual ledger entries for LBIE alone and ongoing discussions with administrators for the other entities to reconcile balances.

*Source: _cr10120 - Box 3. Cross-Border Insolvency and Interdependencies in Lehman Brothers*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10120.pdf_