IMF Survey : Partial Progress in Rule Design for Orderly Failure of Cross-Border Banks

IMF News, June 23, 2014

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Canonical URL: IMF Survey : Partial Progress in Rule Design for Orderly Failure of Cross-Border Banks

Publication date: June 23, 2014.
Main message: Policymakers need to finish and implement plans to deal with global banks when they fail; current internationally agreed principles on resolution exist but have not been fully implemented.
Commitment deadline noted: Member countries have committed to implement the new rules by the end of 2015.
Context: The collapse of Lehman Brothers in 2008 showed failures of cross-border banks have global consequences; the assets of some of the largest cross-border banking groups are several times their home country GDP and the largest banking groups typically have over half of their credit risk exposures and staff outside of their “home” country.

The euro area’s banking union cited as an example of progress toward more effective resolution of cross-border banks.
The Bank Recovery and Resolution Directive, approved by the European Parliament in April 2014, is highlighted as helping ensure failed banks are resolved speedily, minimizing risks to financial stability and with losses borne by shareholders and creditors.
The IMF issued its last review of progress on bank resolution in August 2012.

Quote (Ceyla Pazarbasioglu): “These banks have a global reach and when they fail they have global consequences.”
Quote (Ceyla Pazarbasioglu): “We now have internationally agreed principles on the resolution of global banks and systemic institutions, and this is important progress, but we are not there yet. If a cross-border financial institution were to fail tomorrow, it would not be possible to resolve it in an orderly manner. What was agreed must be implemented in practice, and more work is needed to make sure that countries can—and have the incentives to—act cooperatively to resolve a failing cross-border bank.”
Quote (Christine Lagarde): “This is a gaping hole in the financial architecture right now, and it calls for countries to put the global good of financial stability ahead of their parochial concerns.”

Bail-in capacity of private creditors.
- Rationale: To avoid the need for a bailout with public funds, big banks need to carry enough financial capacity to absorb the losses without damaging ripple effects on the financial system and the economy.
- Requirement: Determining the nature, amount, and location of this debt within a bank’s structure is essential to ensuring that a bail-in is not just legally feasible, but also credible as a policy option.
Creditor hierarchy.
- Rationale: Countries have different rules that determine the order in which investors take a hit when a bank fails.
- Risk: Big differences in the creditor hierarchies between countries can cause problems in a cross-border bank failure, because losses for specific groups of investors would be different depending on whether home or host country rules applied.
Use of taxpayer money to rescue banks.
- Observation: Since the global crisis, there is little appetite and less capacity to use public money to address the failure of a large bank.
- Policy aim: Regulatory reforms, including on resolution, aim to minimize the use of taxpayer money.
- Practical steps: Mechanisms to monitor and minimize the risk of public money being needed on an ongoing basis, and to recover from the financial industry any public money used.

The IMF will assess the strength of countries’ frameworks for the orderly resolution of global banks as part of its surveillance of financial stability.
Member countries committed to implement the Financial Stability Board’s Key Attributes for Effective Resolution by the end of 2015.

IMF Survey : Partial Progress in Rule Design for Orderly Failure of Cross-Border Banks (June 23, 2014).