Ninth conference on crisis management, resolution and deposit insurance: what's next and how to prepare
Basel, Switzerland, 4-5 September 2019
What progress has been made towards ensuring that systemic financial institutions are resolvable, and what are the remaining impediments? Are authorities sufficiently prepared to deal with failures, and how can crisis simulation exercises help build that capacity? Are current crisis management frameworks adequate in the face of emerging and future risks? What are the challenges of designing effective resolution regimes for small and emerging banking markets?
These and other questions were tackled at the FSI-IADI conference on crisis management, resolution and deposit insurance, which took place in Basel on 4-5 September 2019. This was the ninth conference in the series, bringing together over 170 officials from supervisory and resolution authorities, central banks and deposit insurers.
Mark Branson, CEO of the Swiss Financial Market Supervisory Authority (FINMA), and Sir Paul Tucker, Chair, Systemic Risk Council and Research Fellow, Harvard Kennedy School, delivered keynote speeches.
Mark Branson highlighted the risks to global financial stability arising from super-systemic CCPs and their potential to act as procyclical accelerators in a crisis. Supervisory and regulatory responses might include more aggressive stress testing of CCPs and capital treatment that recognises their utility-like status coupled with the materiality of model risk and a non-zero chance of failure.
The systemic risks of CCPs have vastly increased as a result of the policy response to the financial crisis, and need to be tackled with the same urgency as the global community has shown in tackling systemic banks.
Paul Tucker urged authorities to publish the cumulative effect on individual firms' equity and liquidity requirements of the incremental relaxation of regulatory and supervisory standards that appears to be under way. Against this background, in the event of a bank failure, loss allocation in resolution may one day need to go beyond bail-in-able debt, and the official sector needs to be clear in advance about the order in which it would haircut other liabilities. As part of second-stage reforms, regulators ought to require that to be reflected in each bank's creditor hierarchy.
Resolution authorities and deposit insurers need to be more assertive to ensure that the post-crisis regime, including prudential regulation and LOLR assistance, facilitates orderly resolution in almost any circumstances if taxpayer bailouts are to be avoided.
Panel discussions considered the challenges of making systemic banks resolvable, and the trade-offs that measures to improve resolvability may entail. Recurrent themes in these discussions included the need for effective arrangements for the provision of temporary liquidity, including public backstops; the complexities of ensuring that bail-in strategies can be implemented; and the risks of ring-fencing and its potential impact, if widespread, on the resilience of cross-border banking groups. The challenges in improving resolvability of systemic insurers are different and include policy questions about loss absorbency arising from the capital structure of insurers and the current lack of a full insurance resolution toolkit in many jurisdictions.
The international standards for resolution regimes may need to be adapted when applied to small and emerging banking markets, to take into account factors such as the size of banks, concentration, and the nature of loss absorbency and funding options. Deposit insurance may be a key element of resolution funding in such markets.
In the decade since the financial crisis, we have made tangible progress towards resolvability for the largest global banks, although that work is not complete. Smaller and more traditional banks have not been the focus of international attention in the same way, but the question of the design of effective regimes for managing non-systemic bank failures is important and gaining increasing attention.
While the global financial system and regulatory structure have changed dramatically in the last decade or longer, change is constant. Regulators will need to continue to adapt and develop their ability to respond to new challenges, especially in the light of emerging risks from rapidly changing areas such as fintech and cyber crime.
Speakers also considered a range of emerging risks, including those arising from fintech developments and climate change, and the ability of regulators and resolution authorities to anticipate and manage those risks using the tools and resources at their disposal. Detailed planning cannot cover all eventualities, and effective crisis response is likely to require flexibility in frameworks. However, simulation exercises can help improve authorities' preparedness and ability to react and coordinate in a crisis. Several authorities shared their experience of domestic and cross-border crisis simulation exercises and "do's and don'ts" for other authorities that are considering carrying out such exercises.