Making Progress on “Too-Big-to-Fail” Policies for Global Systemically Important Banks

Advancing “too big to fail” policies for global systemically important banks

Peterson Institute for International Economics
Words from Tobias Adrian, Financial Advisor and Director of the Monetary and Capital Markets Department

April 10, 2024

The 2023 bank failures in the United States and Switzerland presented the biggest test since the global financial crisis of reforms to end “too big to fail” institutions. In our opinion, they demonstrated that significant progress has been made, but that more work is needed.

On the one hand, as we pointed out in a recent report, measures taken by authorities last year successfully averted deeper financial turmoil. Furthermore, unlike many of the bankruptcies during the global financial crisis, significant losses were shared with shareholders and some creditors of the failed banks. However, taxpayers were hit again, as extensive public support was used to protect more than just the insured depositors of failing banks.

So I want to start by saying that we very much welcome the important efforts of the Federal Deposit Insurance Corporation (FDIC) and other US authorities to learn lessons from last year's banking turmoil. The FDIC has published options for deposit insurance reformFederal regulatory agencies have published proposals to expand the scope of living wills and long-term debt requirements, and there have been multiple reports of lessons learned on the supervision of failing banks. In relation to this, we have also just seen the report of the Swiss Finance Ministry on reforms to its too-big-to-fail framework following the bankruptcy of Credit Suisse.

Several of the US policy proposals return to issues and recommendations that were discussed in the IMF report. assessment of the US financial sector (“FSAP”) in 2020. We welcome, for example, proposals to expand the scope of resolution planning and loss absorption capacity requirements to more banks.

In many ways, the United States has led the world in publishing information on the detailed and demanding planning that major banks must undertake for a Title I resolution, which would be based on the US bankruptcy code and bankruptcy regimes. long history of dealing with failed bankruptcies. depository institutions and investment companies. Until now there has been less publicly available information on how the new Title II regime (the Orderly Liquidation Authority) would be used in cases involving serious systemic risk.

This paper It is a very valuable step to close that gap. It will be useful both to the industry and to foreign resolution authorities who would be responsible for managing the non-US operations of a bankrupt US group. While the paper rightly focuses on how a Title II resolution could protect US financial stability, I want to say a few words about cross-border issues and the role of the US resolution regime and authorities in preserving stability. global financial.

A notable feature of last year's bank failures was the degree of international cooperation between regulators and resolution authorities in handling these cases. SVB's UK subsidiary was wound up by the Bank of England and eventually sold to HSBC, and the Financial Stability Board lessons learned report It highlights that the UK drew on the deep relationships built over the years with its US counterparts to help implement this. Swiss authorities had worked extensively with their international counterparts to prepare a resolution of Credit Suisse, which would have required supportive actions by supervisors and resolution authorities responsible for Credit Suisse's main foreign operations, including in the US. This cooperation appears to have started much earlier and worked much better than in similar cases during the global financial crisis, such as the bankruptcy of Lehman Brothers.

I think that experience highlights how global financial stability depends on authorities being able to work together across borders and establish routine peacetime contacts and good understanding. since before of what each authority would probably do to make that possible. This is one of the reasons why this article is such a useful contribution.

Another key lesson, as highlighted in the Financial Stability Board's report on bank failures, was the importance of US stock markets to most major foreign banks. Credit Suisse and most other major banks hold debt securities issued in U.S. dollars and/or under New York law, the holders of which may incur losses in a resolution. As a recent Financial Stability Board report highlighted, important open questions remain about how disclosure and other US securities law requirements would apply in such circumstances. This is an important issue that needs further work and is being driven by the Financial Stability Board, the Securities and Exchange Commission and others.

Finally, I want to particularly highlight the importance of having robust arrangements in place to ensure that banks heading into resolution can access adequate liquidity. The United States already has robust arrangements, including Federal Reserve facilities, the Orderly Liquidation Fund arrangements described in the document, and other FDIC borrowing capabilities, and is exploring how they can be further enhanced through, for example, prior placement of guarantees and periodic access tests. to the discount window.

The bottom line is that progress has been made, but there is still more to do to put an end to too-big-to-fail companies. Last year's bank failures provided a valuable check on the progress the authorities are making on the reform agenda and to set the course for the remaining road ahead.