Featured Product

    FSI Chairman on Rules Versus Discretion in Early Intervention Regime

    September 12, 2017

    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

    Related Articles
    News

    HKMA Consults on Supervisory Policy for OTC Derivatives Transactions

    HKMA is consulting on revisions to the Supervisory Policy Manual module CR-G-14 on margin and other risk mitigation standards for non-centrally cleared over-the-counter (OTC) derivatives transactions.

    May 25, 2020 WebPage Regulatory News
    News

    PRA on Regulatory Capital and IFRS 9 Requirements for Payment Holidays

    PRA provided further information on the application of regulatory capital and IFRS 9 requirements to payment holidays granted or extended to address the challenges arising from COVID-19 outbreak.

    May 22, 2020 WebPage Regulatory News
    News

    HKMA on Fintech Adoption and Innovation by Banks in Hong Kong

    HKMA announced the publication of a report on fintech adoption and innovation in the banking industry in Hong Kong.

    May 20, 2020 WebPage Regulatory News
    News

    BIS on Impact of Increasing Use of Cloud Technology on Cyber Risk

    BIS published a working paper that examines the drivers of cyber risk, especially in context of the cloud services.

    May 20, 2020 WebPage Regulatory News
    News

    ECB Consults on Guide for Managing Climate and Environmental Risks

    ECB launched consultation on a guide specifying how the Banking Supervision expects banks to consider climate-related and environmental risks in their governance and risk management frameworks and when formulating and implementing their business strategy.

    May 20, 2020 WebPage Regulatory News
    News

    ECB Issues Opinion on Revisions to CRR in Response to COVID Crisis

    ECB published an opinion (CON/2020/16) on amendments to the prudential framework in EU in response to the COVID-19 pandemic.

    May 20, 2020 WebPage Regulatory News
    News

    EBA Assesses Interlinkages Between Recovery and Resolution Planning

    EBA published a report that examines the interlinkages between recovery and resolution planning under the Bank Recovery and Resolution Directive (BRRD).

    May 20, 2020 WebPage Regulatory News
    News

    SRB Publishes Final MREL Policy Under the Banking Package

    SRB published the final Minimum Requirements for Own Funds and Eligible Liabilities (MREL) policy under the Banking Package.

    May 20, 2020 WebPage Regulatory News
    News

    US Agencies Amend Interim Final Rule on Transition Period for CECL

    US Agencies (FDIC, FED, and OCC) published a final rule that makes technical changes to the March 31, 2020 interim final rule that provides a five-year transition period for the impact of the current expected credit loss (CECL) methodology on regulatory capital.

    May 19, 2020 WebPage Regulatory News
    News

    ECB Releases Results of March Survey on Credit Terms and Conditions

    ECB published results of the March 2020 survey on credit terms and conditions in euro-denominated securities financing and over-the-counter (OTC) derivatives markets.

    May 19, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5208