More Work is Needed to Make Big Banks Resolvable
IMF Blog, March 18, 2024
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- Authors: Tobias Adrian, Marc Dobler
- Published: March 18, 2024
Overview of recent failures and context
- Almost a year ago, Credit Suisse, a globally systemic bank with $540 billion in assets and the second-largest Swiss lender, founded in 1856, failed and was sold to UBS.
- In the United States, Silicon Valley Bank, Signature Bank and First Republic Bank failed at around the same time amid Federal Reserve interest rate hikes to contain inflation.
- With a combined $440 billion of assets, these were the second, third, and fourth biggest bank resolutions since the Federal Deposit Insurance Corporation was created during the Great Depression.
- The turmoil represented the most significant test since the global financial crisis of ending too-big-to-fail—resolving a systemic bank while preserving financial stability and protecting taxpayers.
Key findings and lessons learned
- Progress made, but further work required:
- Authorities’ actions last year successfully avoided deeper financial turmoil, and financial soundness indicators for most institutions signal continued resilience.
- Significant losses were shared with the shareholders and some creditors of the failed banks, unlike many failures during the global financial crisis.
- Taxpayers were once again on the hook as extensive public support protected more than just the insured depositors of failed banks.
- Credit Suisse-specific observations:
- Amid a massive creditor run, the Credit Suisse acquisition was backed by a government guarantee and liquidity nearly equal to a quarter of Swiss economic output.
- While the public support was ultimately recovered, it entailed very significant contingent fiscal risk and created a larger, more systemic bank.
- Use of standing resolution powers to transfer ownership of Credit Suisse, after bailing in shareholders and creditors, rather than relying on emergency legislation to effect a merger would have seen Credit Suisse shareholders fully wiped out and potentially less public support extended.
- U.S. intervention observations:
- Authorities invoked an exception allowing protection of all deposits in two of the failed banks, citing systemic concerns.
- This significantly increased costs for the deposit insurer which will need to be recouped from the industry over time.
- Even very large and sophisticated depositors were protected—not just the insured.
- Supervisory shortcomings:
- Intrusive supervision and early intervention are critical; supervisors in both cases should have acted faster and been more assertive and conclusive.
- The ability and will to act remain critical—and can suffer from unclear mandates or inadequate legal powers, resources, and independence as well as powerful financial sector lobbies.
- Scope of systemic risk:
- Even smaller banks can be systemic; supervisory and resolution authorities should ensure sufficient recovery and resolution planning for the sector, including banks that may not be systemic in all circumstances but could be in some.
- This was a key recommendation of the IMF’s latest Financial Sector Assessment Program for the US.
- Resolution flexibility:
- Resolution regimes and planning need sufficient flexibility to balance financial stability risks and taxpayer interests.
- Government support may still be required in some circumstances—for example, to avoid a systemic financial crisis.
- IMF staff recommended the equivalent of a systemic risk exception for the euro area.
- Authorities should pursue plan A but retain flexibility to depart from it and combine different resolution tools as necessitated by specific circumstances.
- Liquidity in resolution:
- Liquidity in resolution is crucial because banks typically fail because creditors lose confidence, even before balance sheets reflect potential losses.
- Rebuilding capital buffers in resolution may not be sufficient on its own to restore confidence.
- Authorities must make further progress on how quickly banks heading into resolution could receive liquidity support—including prepositioning of collateral and testing preparedness—while still protecting central bank balance sheets.
- Deposit insurance readiness:
- Authorities in many countries need to strengthen deposit insurance regimes—as recommended to Switzerland.
- New technology like 24/7 payments, mobile banking, and social media have accelerated deposit runs.
- Last year’s failures followed rapid deposit withdrawals, and deposit insurers and other authorities should be ready and able to act more quickly than many currently can.
- The US banks that failed were outliers—with balance sheets that had grown very rapidly, funded by a high degree of uninsured deposits.
- Where wider coverage is being considered, it would need to be adequately funded.
- Particularly in countries with deposit insurance that is not backed by a sovereign with deep pockets, policymakers should be careful not to overextend deposit insurance coverage. If not backed by a commensurate rise in deposit insurance funding, depositors could quickly lose confidence.
Policy recommendations and IMF engagement
- Strengthen supervisory frameworks:
- Better empower banking supervisors to act early and with authority if needed, addressing unclear mandates, inadequate legal powers, resources, and independence.
- Ensure comprehensive recovery and resolution planning:
- Include banks that could become systemic in some circumstances and build sufficient flexibility into resolution rules and plans.
- Improve liquidity preparedness in resolution:
- Preposition collateral, test preparedness, and clarify how quickly liquidity support can be provided while protecting central bank balance sheets.
- Reinforce deposit insurance frameworks:
- Strengthen funding, speed, and operational readiness of deposit insurance regimes; exercise caution when expanding coverage without commensurate funding.
- IMF support:
- IMF staff are working actively to support efforts in member countries to strengthen their supervision, resolution, liquidity assistance and deposit insurance frameworks including through FSAPs, technical assistance.
- IMF staff are contributing to policy formulation at the international level, including a recently announced review of the international deposit insurance standard, and by earlier this year hosting with the Financial Stability Board a workshop for policy makers on the use of transfer powers in resolution.
Source: IMF blog post by Tobias Adrian and Marc Dobler, March 18, 2024.
Content in this bundle
- Country Report
- Executive Summary and Key Recommendations
- United States: Financial System Stability Assessment; IMF Country Report No. 20/242; July 17, 2020
- Working Paper