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 ArticleMAS Publishes Notice 653 on Net Stable Funding Ratio Disclosures
ECB published Guideline 2021/975, which amends Guideline ECB/2014/31, on the additional temporary measures relating to Eurosystem refinancing operations and eligibility of collateral.
EIOPA published a report, from the Consultative Expert Group on Digital Ethics, that sets out artificial intelligence governance principles for an ethical and trustworthy artificial intelligence in the insurance sector in EU.
HKMA published the seventh and final issue of the Regtech Watch series, which outlines the three-year roadmap of HKMA to integrate supervisory technology, or suptech, into its processes.
EC launched a targeted consultation to improve transparency and efficiency in the secondary markets for nonperforming loans (NPLs).
BIS, Danmarks Nationalbank, Central Bank of Iceland, Norges Bank, and Sveriges Riksbank launched an Innovation Hub in Stockholm, making this the fifth BIS Innovation Hub Center to be opened in the past two years.
FDITECH, the technology lab of FDIC, announced a tech sprint that is designed to explore new technologies and techniques that would help expand the capabilities of community banks to meet the needs of unbanked individuals and households.
EC released the EU Taxonomy Compass, which visually represents the contents of the EU Taxonomy starting with the EU Taxonomy Climate Delegated Act.
FDIC is seeking comments on a rule to amend the interagency guidelines for real estate lending policies—also known as the Real Estate Lending Standards.
EIOPA published its annual report, which sets out the work done in 2020 and indicates the planned work areas for the coming months.
The ESRB paper that presents an analytical framework that assesses and quantifies the potential impact of a bank failure on the real economy through the lending function.