Navigating Through Financial Turbulences with Preparedness, Competence, and Confidence
IMF News, September 18, 2024
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- Published: September 18, 2024
Overview
- Speech by Tobias Adrian, IMF Financial Counsellor and Director of the Monetary and Capital Markets Department, delivered at OeNB | SUERF | Joint Vienna Institute | Yale Program on Financial Stability Conference on Building Resilience and Managing Financial Crises, Vienna, Austria, September 18, 2024.
- Focus: progress and remaining gaps in handling bank runs and bank failures, assessment of the 2023 bank failures in the US and Switzerland, and the IMF’s work to help members strengthen frameworks for supervision, resolution, liquidity support, and deposit insurance.
Major findings from the 2023 failures
- The 2023 failures (Credit Suisse, SVB, Signature, First Republic) were the most significant test since the global financial crisis of reforms aimed at ending “too-big-to-fail.”
- Mixed outcomes:
- Actions by authorities in 2023 avoided deeper financial turmoil.
- Significant losses were shared with shareholders and some creditors, unlike many failures during the global financial crisis.
- Extensive public support was used to protect more than just insured depositors, leaving taxpayers exposed.
- Switzerland-specific point:
- Credit Suisse’s acquisition was backed by a government guarantee and liquidity facilities nearly equal to a quarter of Swiss economic output.
- Public support was ultimately recovered but entailed very significant contingent fiscal risk and created a larger, more systemic bank.
- UBS now has the largest ratio of assets to home country GDP of any individual G-SIB.
- Alternative approach:
- Use of standing resolution powers to transfer ownership of Credit Suisse, after bailing in shareholders and creditors, rather than emergency legislation, would have fully wiped out equity of Credit Suisse shareholders and limited public support needs.
Key lessons highlighted
- Intrusive supervision and early intervention:
- Credit Suisse depositors lost confidence after prolonged governance and risk management failures.
- US failures pursued risky business strategies and very rapid growth with inadequate risk management.
- Supervisors should have acted faster and more assertively; policymakers need to empower supervisors with ability and will to act.
- Even relatively small banks can prove systemic:
- Authorities should be prepared for crises affecting medium-sized banks.
- Banking supervisory and resolution authorities should ensure sufficient recovery and resolution planning across the banking sector on a proportional basis.
- Central bank liquidity preparedness:
- Central banks should be prepared to provide extensive liquidity support during a crisis.
- Banks should be familiar with central bank operations and facilities and ready to use them at short notice.
- Access questions: liquidity risks have partially moved away from usual central bank counterparties; widening the counterparty list helps but raises regulatory-arbitrage risks and difficult trade-offs.
- Prepositioning collateral could aid operational preparedness; open questions remain on whether prepositioning should be voluntary or required and its calibration.
- Need to compare benefits of enhanced lending “fire power” with costs to banks and central bank balance sheets and consider impacts on intermediation and interaction with prudential regulation.
- Flexibility in resolution plans and regimes:
- Support for the Financial Stability Board’s conclusion that resolution authorities need to “better operationalize a range of resolution options for different circumstances.”
- Authorities should balance rules versus discretion and detailed planning versus optionality.
- Rapid sale of Credit Suisse prompts consideration of what would be needed for successful sale in resolution of the largest banking groups in some circumstances.
- Transfer powers as core resolution tool:
- All Spring 2023 cases involved transfer of failing bank’s business lines to an acquiring bank, sometimes via bridge banks.
- Transfer powers should be planned for and implementable at short notice.
- Cross-border cooperation and implementation:
- 2023 failures featured extensive international cooperation between regulators and resolution authorities.
- Swiss authorities worked intensively with international counterparts; SVB’s UK subsidiary was resolved by the Bank of England and sold to HSBC.
- Cooperation was earlier and better than in some global financial crisis cases (e.g., Lehman Brothers).
- Remaining wrinkle: US securities markets’ role—debt securities issued in US dollars and/or under New York law raise open questions about disclosure and US securities legal requirements if securities are converted over a short period (e.g., over a resolution weekend). Further work is being taken forward by the Financial Stability Board, the Securities and Exchange Commission, and others.
- Importance of effective deposit insurance:
- Banks typically fail when creditors lose confidence, often before balance-sheet losses are visible.
- New technology like 24/7 payments, mobile banking, and social media have accelerated deposit runs.
- Deposit insurers and other authorities should be ready and able to act more quickly.
IMF actions, assessments, and next steps
- IMF staff are actively supporting members to strengthen supervision, resolution, liquidity assistance, and deposit insurance frameworks through FSAPs and technical assistance.
- Observations:
- US lessons learned reports and policy proposals pick up issues discussed in the IMF’s FSAP assessment of the US financial sector in 2020.
- Planned work:
- Next FSAPs for Switzerland and the Euro Area will be published next year; IMF will take a close look at authorities’ and the FSB’s findings and likely reiterate previous findings including on strengthening deposit insurance regimes.
- IMF contributing to international policy formulation, including a recently announced review of the international deposit insurance standard.
- Earlier this year IMF hosted with the Financial Stability Board a workshop for policymakers on the use of transfer powers in resolution.
Policy implications and recommendations
- Strengthen and empower supervisors to act early and decisively.
- Ensure recovery and resolution planning across the banking sector, including medium-sized banks on a proportional basis.
- Prepare central banks operationally for extensive liquidity provision, including legal claims on collateral, haircut calibration, and possible prepositioning arrangements—carefully weighing trade-offs.
- Build resolution regimes with sufficient flexibility and a well-operationalized toolkit, including transfer powers and options for rapid sale in resolution.
- Deepen cross-border cooperation and peacetime planning among supervisors and resolution authorities to enable coordinated action during crises.
- Strengthen deposit insurance frameworks and operational readiness to address rapid deposit runs accelerated by new payment technologies.
Key dates and references in the speech
- 2023: Year of the bank failures referenced (Credit Suisse, SVB, Signature, First Republic).
- 2020: IMF FSAP assessment of the US financial sector referenced.
- September 18, 2024: Date of the speech.
- Next FSAPs for Switzerland and the Euro Area: to be published next year.
- Earlier this year: IMF hosted a workshop with the Financial Stability Board on transfer powers.
Source: Speech by Tobias Adrian, IMF Financial Counsellor and Director of the Monetary and Capital Markets Department, Vienna, September 18, 2024.