IMF published a policy paper that summarizes the general principles, strategies, and techniques for preparing for and managing systemic banking crises. The principles and techniques are based on the views and experience of the IMF staff and consider developments since the global financial crisis. The paper covers only two parts of the full reform agenda since the crisis—one on key elements of a legal and operational framework for crisis preparedness and the other on operational strategies and techniques to manage systemic crises if they occur.
The paper summarizes the relevant lessons learned during the global financial crisis and other recent episodes of financial distress. Part I of the paper covers on crisis preparedness and outlines the design and operational features of a well-designed financial safety net. It discusses how staff advice on these issues has evolved, drawing from the international standards and good practices that emerged in the aftermath of the global financial crisis. Effective financial safety nets play an important role in minimizing the risk of system wide financial distress—by increasing the likelihood that failing financial institutions can be resolved without triggering financial instability. However, they cannot eliminate that risk, particularly during times of severe stress. Part II of the paper covers crisis management and discusses aspects of the policy response to a full-blown banking crisis. It details the evolution of IMF advice in light of what worked well—or less well—during the global financial crisis, reflecting the experience of IMF staff in actual crisis situations. The narrative is organized around policies for dealing with the three distinct aspects of systemic banking crisis—containment, restructuring and resolution, and dealing with distressed assets.
Although much has been achieved since the crisis, strengthening the capacities of countries to prepare for and manage systemic banking crises remains a work in progress. Recent experience with bank failures in low-income countries reveals continuing weaknesses in the financial safety net, including the absence of options to resolve banks without resorting to public bail-outs, weak protections to small depositors, and inadequate arrangements on the provision of central bank liquidity to banks at times of stress. Reforms are underway in some countries, which is encouraging. It will require considerable political will and effort to make further progress and build capacity. IMF staff will continue to promote the adoption of financial sector standards and good international practices on the design and operation of the financial safety net in its engagement with IMF members. Staff will also continue to participate in various work streams of international standard-setting bodies, such as the FSB, to foster implementation of agreed reforms.
Enhancing resolvability of systemic banks—at the global, regional, and domestic level—is a key priority. In addition, new resolution frameworks are yet to be fully tested in practice, particularly in a cross-border failure, and significant challenges remain in making systemic banks resolvable, including to:
- Give cross-border effect to foreign resolution powers and removing impediments to cross-border cooperation (for example, national depositor preference)
- Adequately resource independent resolution authorities to develop recovery and resolution planning with powers to remove impediments to resolvability, including requiring changes to group structures and business operations
- Ensuring that sufficient (quality and quantity if) loss-absorbing capacity, or LAC, is issued from the appropriate group entities to make resolution plans feasible, including across borders, requiring close coordination between home and host jurisdictions on “internal LAC” committed to material subsidiaries in other jurisdictions.
Related Link: Policy Paper
Keywords: International, Banking, Systemic Risk, Research, Resolution Framework, TLAC, Crisis Management Framework, IMF
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
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