Fernando Restoy, the Chair of the Financial Stability Institute (FSI) of BIS, spoke at the FSI-IADI conference on crisis management, resolution, and deposit insurance. He highlighted that FSB reviews show an uneven and incomplete implementation of the FSB-issued Key Attributes of Effective Resolution Regimes. In most FSB jurisdictions, resolution planning to date has largely concentrated on global and domestic systemic banks. However, the design of effective regimes for managing smaller bank failures is also important and gaining increasing attention. Such strengthening of the crisis management frameworks might also benefit the emerging market economies where the nature of the local financial system does not support the smooth application of international standards designed for large, complex institutions.
Mr. Restoy point out that it is unclear that bail-in is an appropriate tool for smaller banks with little experience of tapping capital markets in the way that would be necessary to issue sufficient amounts of bail-in-able liabilities. Such retail-focused banks are mainly funded by capital and deposits and may not easily satisfy, within their current business models, the loss-absorbing capacity requirements that would be required for resolution. Additionally, in many jurisdictions, smaller banks that do not meet thresholds for the use of special resolution powers are subject to an ordinary corporate insolvency regime. This may not provide suitable tools for dealing with the public interest considerations that may arise in the insolvency of any bank, irrespective of whether it is systemic.
He explained that deposit insurance is a fundamental element of an effective bank crisis management framework. In its most basic form, depositor protection contributes to financial stability by reducing the risk of depositor runs. However, where the mandate allows the funds to be used for purposes other than payout, this can support alternatives to liquidation for banks that do not meet the threshold conditions for the use of resolution powers. He highlighted the role of deposit insurance in bank failure management, as discussed in a recently published FSI Insights paper. The paper shows a wide range of approaches to the use of deposit insurance funds to support measures within resolution or insolvency that maintain access to insured deposits, or to prevent the failure of a member bank. The ability of deposit insurers to fund alternative measures can increase options for managing bank failures. This may be especially relevant for medium-size or non-systemic banks, in which deposits may be the main form of loss absorbency.
The FSI Chair added that these considerations are gaining prominence in the policy arena. In EU, a promising debate is gaining momentum on the eventual creation of an FDIC-like authority backed by a harmonized insolvency regime for banks that do not meet the thresholds for resolution. He concluded that improvements to bank insolvency regimes along the lines suggested may help strengthen crisis management frameworks in emerging market economies, where the nature of the local financial system does not support the smooth application of international standards designed for large, complex institutions.
Keywords: International, Banking, Deposit Insurance, G-SIBs, Small Banks, Resolution Planning, Crisis Management Framework, BIS, FSI
Previous ArticleEIOPA Publishes Annual Report for 2018
Next ArticleEBA Single Rulebook Q&A: Second Update for June 2019
The Hong Kong Monetary Authority (HKMA) revised the Supervisory Policy Manual module CG-5 that sets out guidelines on a sound remuneration system for authorized institutions.
The European Banking Authority (EBA) published the final guidelines on the monitoring of the threshold and other procedural aspects on the establishment of intermediate parent undertakings in European Union (EU), as laid down in the Capital Requirements Directive (CRD).
In a recent Market Notice, the Bank of England (BoE) confirmed that green gilts will have equivalent eligibility to existing gilts in its market operations.
The Financial Conduct Authority (FCA) published the policy statement PS21/9 on implementation of the Investment Firms Prudential Regime.
The European Banking Authority (EBA) proposed regulatory technical standards that set out criteria for identifying shadow banking entities for the purpose of reporting large exposures.
The Board of the International Organization of Securities Commissions (IOSCO) proposed a set of recommendations on the environmental, social, and governance (ESG) ratings and data providers.
The European Securities and Markets Authority (ESMA) published recommendations from the Working Group on Euro Risk-Free Rates (RFR) on the switch to risk-free rates in the interdealer market.
The European Central Bank (ECB) published a paper as well as an article in the July Macroprudential Bulletin, both of which offer insights on the assessment of the impact of Basel III finalization package on the euro area.
The International Swaps and Derivatives Association (ISDA) published a paper that explores the impact of the Fundamental Review of the Trading Book (FRTB) on the trading of carbon certificates.
The Prudential Regulation Authority (PRA) published the remuneration policy self-assessment templates and tables on strengthening accountability.