## More Work is Needed to Make Big Banks Resolvable _IMF Blog, March 18, 2024_ ## Source details **Canonical URL:** [More Work is Needed to Make Big Banks Resolvable](https://www.imf.org/en/blogs/articles/2024/03/18/more-work-is-needed-to-make-big-banks-resolvable) ## Other formats - [Markdown version](/en/blogs/articles/2024/03/18/more-work-is-needed-to-make-big-banks-resolvable/index.md) - [Structured JSON version](/en/blogs/articles/2024/03/18/more-work-is-needed-to-make-big-banks-resolvable/index.json) - [Bundle manifest](/en/blogs/articles/2024/03/18/more-work-is-needed-to-make-big-banks-resolvable/bundle-manifest.json) ## Bibliographic details - 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** - [Country Report (Markdown version)](/-/media/files/publications/cr/2018/cr18226.pdf.md){rel="alternate" type="text/markdown"} - [Country Report (PDF)](/-/media/files/publications/cr/2018/cr18226.pdf){rel="external" type="application/pdf"} - **Executive Summary and Key Recommendations** - [Executive Summary and Key Recommendations (Markdown version)](/-/media/files/publications/cr/2019/1cheea2019003.pdf.md){rel="alternate" type="text/markdown"} - [Executive Summary and Key Recommendations (PDF)](/-/media/files/publications/cr/2019/1cheea2019003.pdf){rel="external" type="application/pdf"} - **United States: Financial System Stability Assessment; IMF Country Report No. 20/242; July 17, 2020** - [United States: Financial System Stability Assessment; IMF Country Report No. 20/242; July 17, 2020 (Markdown version)](/-/media/files/publications/cr/2020/english/1usaea2020002.pdf.md){rel="alternate" type="text/markdown"} - [United States: Financial System Stability Assessment; IMF Country Report No. 20/242; July 17, 2020 (PDF)](/-/media/files/publications/cr/2020/english/1usaea2020002.pdf){rel="external" type="application/pdf"} - **Working Paper** - [Working Paper (Markdown version)](/-/media/files/publications/wp/2023/english/wpiea2023181-print-pdf.pdf.md){rel="alternate" type="text/markdown"} - [Working Paper (PDF)](/-/media/files/publications/wp/2023/english/wpiea2023181-print-pdf.pdf){rel="external" type="application/pdf"} --- ## References - [report](https://www.imf.org/en/Publications/global-financial-stability-notes/Issues/2024/03/04/The-US-Banking-Sector-since-the-March-2023-Turmoil-Navigating-the-Aftermath-544809) - [Financial Sector Assessment Program](https://www.imf.org/en/About/Factsheets/Sheets/2023/financial-sector-assessment-program-FSAP) _Source: https://www.imf.org/en/blogs/articles/2024/03/18/more-work-is-needed-to-make-big-banks-resolvable_