The Financial Stability Institute (FSI) Chairman Mr. Fernando Restoy spoke at the FSI-IADI Meeting on early supervisory intervention, resolution, and deposit insurance in Basel, Switzerland. He focused on the evolution, nature, and use of early intervention frameworks, including their role during the financial crisis. He also discussed the appropriate balance between rules and discretion in the context of early intervention frameworks and concluded by providing some high-level observations on this.
The FSI Chairman highlighted that legislation or prudential regulation requires supervisors to impose or, at least formally consider imposing, certain supervisory actions if a financial institution breaches defined thresholds or meets certain conditions. Depending on the jurisdictions involved, those regimes are referred to as prompt corrective action or early intervention measures. The FSI Chairman also talked about finding the right balance between rules and discretion, particularly in the context of taking action against weak banks. The limited data points from the financial crisis indicate a pragmatic application of the early intervention rules in both the United States and the EU. In both cases, the evidence suggests that, in practice, corrective actions taken against systemically important weak banks were addressed by supervisors using mainly their normal supervisory powers, which are typically more discretionary and discreet in nature. Public disclosures of formal early intervention actions and the potential adverse effects such disclosures might have on financial stability may also have contributed to the use of more discreet supervisory powers in both the United States and the EU. In conclusion, Mr. Restoy shared the following thoughts on the implications for the design and role of early intervention frameworks as well as on some key implementation challenges:
- Supervisors must have the necessary powers to take a range of discretionary measures during the normal course of supervision.
- Effective discretionary-based supervisory actions should be taken well before a bank starts showing stress in its capital position. Various forward-looking, judgment-based supervisory tools that have been introduced post-crisis (such as supervisory review of business models and supervisory stress tests) provide a tangible means of addressing problems at an early stage.
- Formal early intervention regimes, such as prompt corrective action and early intervention measures, are useful backstops to discretionary-based, forward-looking supervisory tools. Nevertheless, supervisors need to retain sufficient flexibility in their use of enforcement tools to tailor the supervisory response to institution- and context-specific circumstances.
- Close cooperation among all relevant players—supervisors, deposit insurers and resolution authorities—is particularly important in dealing with problem banks. While fully respecting the specific responsibilities of the supervisory authority to assess banks' solvency and viability, all relevant safety-net players must be involved when supervisory action is taken against weak banks, not only when those banks are subject to formal early intervention regimes or when they are failing or likely to fail.
Related Link: Speech
Keywords: International, Banking, Prompt Corrective Action, Early Intervention Measures, Resolution, Deposit Insurance, FSI
Previous ArticleOCC Consults on Information Collection for Certain Banking Entities
PRA published a set of questions and answers (Q&A) covering common queries regarding residential and commercial property valuations, for the purpose of the Capital Requirements Regulation (CRR), during the period of disruption caused by COVID-19 pandemic.
IOSCO proposed updates to its principles for regulated entities that outsource tasks to service providers.
MAS announced that the first phase of the Veritas initiative will commence with the development of fairness metrics in credit risk scoring and customer marketing.
BoE published the Statistical Notice 2020/4 to update the buy-to-let (BTL) Phase 2 and Phase 3 definitions for the Interest Rate Type data item.
FSI published a brief note that examines challenges facing the banking sector as a result of the payment deferral programs put in place to support borrowers affected by the COVID-19 pandemic.
PRA published the policy statement PS14/20, which contains the supervisory statement SS1/20 and the feedback to responses to the consultation paper CP22/19 on expectations for investment by firms in accordance with the Prudent Person Principle, or PPP, as set out in the Investments Part of the PRA Rulebook.
EBA published an opinion following the notification by the French macro-prudential authority, the Haut Conseil de Stabilité Financière (HCSF), of its intention to extend a measure introduced in 2018 on the use of Article 458(9) of the Capital Requirements Regulation (CRR).
As part of a Research Bulletin on the recent policy-relevant work, ECB published an article that examines the lessons learned from past crises for nonperforming loan resolution in the post COVID-19 period.
RBNZ published the financial stability report for May 2020. This review of the financial system in the country highlights that the economic disruption associated with COVID-19 will present challenges to the financial system.
ECB updated the guidance notes for reporting related to the statistics on holdings of securities by reporting banking groups (SHSG).