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

IMF News, April 10, 2024

Source details

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

Remarks by Tobias Adrian, Financial Counsellor and Director of the Monetary and Capital Markets Department, delivered at Peterson Institute for International Economics on April 10, 2024.
Central message: Significant progress has been made on ending “too-big-to-fail,” but further work is required.

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.”
Actions by authorities in 2023:
- Successfully avoided deeper financial turmoil.
- Significant losses were shared with shareholders and some creditors of the failed banks.
- Extensive public support was used to protect more than just the insured depositors, leaving taxpayers on the hook.

US initiatives noted and welcomed:
- FDIC published options for deposit insurance reform.
- Federal regulatory agencies published proposals on expanding the scope of living wills and long-term debt requirements.
- Multiple lessons-learned reports on supervision of failed banks.
US policy proposals align with issues and recommendations from the IMF’s 2020 assessment of the US financial sector (“FSAP”), including proposals to expand resolution planning and loss-absorbing capacity requirements to more banks.
The US has published detailed planning requirements for a Title I resolution (relying on the US bankruptcy code and long-standing regimes for failed depository institutions and investment firms).
Less public information has been available about the Title II regime (Orderly Liquidation Authority) and how it would be used for cases involving serious systemic risk; a recent paper helps close that gap by explaining Title II’s role in protecting US financial stability.

2023 showed strong international cooperation between regulators and resolution authorities:
- SVB’s UK subsidiary was resolved by the Bank of England and ultimately sold to HSBC; the UK relied on deep relationships with US counterparts.
- Swiss authorities worked intensively with international counterparts preparing for a possible Credit Suisse resolution, which would have required supportive actions from supervisors and resolution authorities responsible for Credit Suisse’s main foreign operations, including in the US.
Cooperation in 2023 began earlier and functioned better than in similar cases during the global financial crisis (e.g., Lehman Brothers).
Global financial stability depends on peacetime establishment of routine contacts and ex ante understanding of likely actions by each authority.

US securities markets and foreign banks:
- Many major banks have debt securities issued in US dollars and/or under New York law; holders of such securities may incur losses in a resolution.
- Significant open questions remain about how disclosure and other US securities law requirements would apply in those circumstances.
- This issue is being taken forward by the Financial Stability Board, the Securities and Exchange Commission, and others.
Liquidity arrangements for banks entering resolution:
- Importance of strong arrangements to ensure access to adequate liquidity.
- The US already has robust arrangements, including:
- Federal Reserve facilities.
- Orderly Liquidation Fund arrangements described in the paper.
- FDIC’s other borrowing abilities.
- Further enhancements under consideration include collateral prepositioning and regular testing of access to the discount window.

Continue expanding scope of resolution planning and loss-absorbing capacity requirements to more banks.
Increase transparency about Title II (Orderly Liquidation Authority) use and operational details to aid industry and foreign resolution authorities.
Strengthen coordination ex ante among domestic and foreign supervisors and resolution authorities to support cross-border resolutions.
Clarify application of US securities law and disclosure requirements in cross-border resolution scenarios.
Enhance liquidity backstops for banks in resolution through measures such as collateral prepositioning and regular testing of discount window access.

Source: Remarks by Tobias Adrian, Peterson Institute for International Economics, April 10, 2024.