Speech

Making Progress on “Too-Big-to-Fail” Policies for Global Systemically Important Banks

April 10, 2024

The bank failures in 2023 in the US and Switzerland presented the most significant test since the global financial crisis of the reforms to end “too-big-to-fail.” In our view, they showed that significant progress has been made, but further work is required.

On the one hand, as we noted in a recent report, the actions the authorities took last year successfully avoided deeper financial turmoil. In addition, unlike many of the failures during the global financial crisis, significant losses were shared with the shareholders and some creditors of the failed banks. However, taxpayers were once again on the hook as extensive public support was used to protect more than just the insured depositors of failed banks.

So, I want to start by saying we very much welcome the significant efforts by the Federal Deposit Insurance Corporation (FDIC) and other US authorities to learn lessons from last year’s banking turmoil. The FDIC has published options for deposit insurance reform, the federal regulatory agencies have published proposals on expanding the scope of living wills and long-term debt requirements, and there have been multiple lessons learned reports on the supervision of the failed banks. Relatedly, we also have just seen the report from the Swiss finance ministry on reforms to their Too-Big-to-Fail framework following the Credit Suisse failure.

Several of the US policy proposals pick up on issues and recommendations that were discussed in the IMF’s assessment of the US financial sector (“FSAP”) in 2020. We welcome, for example, proposals to expand the scope of resolution planning and loss-absorbing capacity requirements to more banks.

The US has in many ways led the world in publishing information about the detailed and demanding planning that the major banks are required to do for a Title I resolution, which would rely on the US bankruptcy code and the long-standing regimes for dealing with failed depository institutions and investment firms. There has been less information publicly available until now, about how the newer Title II regime—the Orderly Liquidation Authority—would be used for cases involving serious systemic risk.

This paper is a very valuable step in closing that gap. It will be useful both for the industry and for foreign resolution authorities who would be responsible for handling the non-US operations of a failing US group. While the paper focuses rightly on how a Title II resolution could protect US financial stability, I want to say a few words about cross-border issues and the role of the US resolution regime and authorities in preserving global financial stability.

One notable feature of last year’s bank failures was the degree of international cooperation between regulators and resolution authorities in their handling of these cases. SVB’s UK subsidiary was resolved by the Bank of England, ultimately being sold to HSBC, and the Financial Stability Board’s lessons learned report highlights that the UK relied on the deep relationships built over the years with their US counterparts to help implement this. The Swiss authorities had worked intensively with international counterparts to prepare for a resolution of Credit Suisse, which would have needed supportive actions from the supervisors and resolution authorities responsible for Credit Suisse’s main foreign operations, including in the US. This cooperation seems to have begun much earlier and worked a lot better than in similar cases during the global financial crisis, such as the failure of Lehman Brothers.

That experience I think highlights how global financial stability depends on authorities being able to work together across borders and to build in peacetime the routine contacts and a good understanding ex ante of what each authority would be likely to do to make that possible. This is one reason why this paper makes such a useful contribution.

Another key lesson, as highlighted in the Financial Stability Board’s report on the bank failures, was the importance of US securities markets to most major foreign banks. Credit Suisse and most other major banks have debt securities issued in US dollars and/or under New York law, the holders of which may incur losses in a resolution. As a recent report of the Financial Stability Board highlighted, there remain significant open questions about how disclosure and other US securities law requirements would be applied in those circumstances. This an important issue where further work is needed and is being taken forward by the Financial Stability Board, the Securities and Exchange Commission, and others.

Lastly, I want to highlight in particular the importance of having strong arrangements for ensuring banks heading into resolution can access adequate liquidity. The US already has robust arrangements, including Federal Reserve facilities, the Orderly Liquidation Fund arrangements described in the paper, the FDIC’s other borrowing abilities, and is looking at how they can be further enhanced through, for example, collateral prepositioning and regular testing of access to the discount window.

The bottom line is that progress has been made, but there is still further to go in putting an end to too-big-to-fail. Last year’s bank failures provided a valuable check on the progress that policymakers are making on the reform agenda and to set course for the remaining ground to be covered.