A number of major international banks and numerous banks of lesser size in developed countries still are crippled by large amounts of “legacy” assets which they are unable to value and which impede their return to normal lending activity, while capital markets are unable or unwilling to provide them to sufficient equity capital to pull them out of their dire straits.
Government responses have greatly differed, from straight nationalization to providing capital support in forms entailing varying degrees of shareholder dilution and intervention in management, to guaranteeing banks against potential losses on certain asset classes. In the main, the problems have been rolled over rather than resolved, despite increasing capital injections and risk exposure of governments, and there has been a great deal of uncertainty as to the real situation of banks which has impeded a return to normal functioning of the interbank and credit markets. Only in one instance – that is the US FDIC crisis resolution procedures – banks have been taken over, restructured and placed back to the market fairly rapidly.
Crisis resolution cannot be separated from crisis prevention; to the extent that crisis prevention measures can be moved to supranational level, crisis resolution measures should also move to supranational level, with adequate funding.
The following key issues should be examined by this Task Force:
I. Crisis prevention: there is a fundamental issue to be decided preliminarily on what are the sources of systemic instability and hence what are the instruments to safeguard bank stability.
a. Systemic instability can be traced back to three main aspects: using bank money to finance capital market bets; excessive concentration of counterparty risks in certain markets (e.g. OTC trades, derivatives, etc.), which may endanger the payment and settlement system; the moral hazard problems stemming from the fact that certain institutions are too large to fail. General point: systemic relevance relates to certain functions performed by financial institutions, rather than the institutions themselves.
b. The instruments to tackle instability are in principle capital requirements (including surcharges for special functions and risks); insurance schemes to protect against systemic risks posed by systemically relevant institutions; and risk management requirements imposed on banks (including remuneration policies).
II. Crisis resolution:
a. Surveying bank crisis resolution procedures existing in the main countries, notably the US and the main EU countries, and identifying existing gaps, e.g. the bank holding companies within some national jurisdictions. To the extent that this will appear feasible and desirable, propose “best practice” standards for capital injections, guarantees and overall bank rescue operations.
b. Lack of adequate and homogeneous procedures, and source of funding, for handling trans-national crises of complex supra-national institutions; feasible alternatives.
c. The specific EU problem: procedures and resources for handling cross-border bank crises, including the relation between home and host country supervisory authorities, the provision of lending of last resort, notably when the liabilities of local subsidiaries of foreign banks largely exceed government resources. Also, need to review adequacy of the Directive on winding down of credit institutions.
1st meeting: 17 July 2009 (agenda)
2nd meeting: 12 October 2009 (agenda)
3rd meeting: 25 January 2010 (agenda)
Task Force Report launched at CEPS on 15 March 2010, download Task Force Report here.
Outline of the Task Force (incl. Registration Form)
Presentations 1st meeting:
Selection of Background Papers for the 2nd meeting:
Why and How Resolution Policy must be improved – Richard J. Herring
Reprinted from the book The Road Ahead for the Fed, edited by John D. Ciorciari & John B. Taylor, with the permission of the publisher, Hoover Institution Press. Copyright 2009 by the Board of Trustees of the Leland Stanford Junior University.
Presentations 2nd meeting:
Contingency Planning for Cross-Border Banks – Eva Hüpkes
Germany’s path into the financial crisis and resolution activities – Hans-Joachim Dübel, Finpolconsult, Berlin
Multiple safety net regulators and agency problems in the EU: is Prompt Corrective Action a partial solution? Bank of Finland Research Discussion Papers – David G Mayes, Maria J Nieto, Larry Wall
The Need for Special Resolution Regimes for Financial Institutions. The Case of the European Union – Martin ?ihák and Erlend Nier, International Monetary Fund
Contingency Plan: The Point of View of the Industry – Sergio Lugaresi and Micol Levi, Regulatory Affairs, UniCredit Group
“Living wills” for cross-border banking groups: The EU case – María J. Nieto, Banco de España
Reform der Finanzmarktaufsicht in Deutschland. Kommentar zu den spezifisch deutschen Ursachen der deutschen Finanzkrise, der derzeitigen Krisenbekämpfungsstrategie und Reformdebatte. Anhörung Finanzausschuss am 27.5.2009 – Hans-Joachim Dübel, Finpolconsult
Scope and Effects of Public Credit Guarantees in Housing Finance. The case of the U.S. government-sponsored enterprises Fannie Mae and Freddie Mac (2003) – Hans-Joachim Dübel, independent consultant for Real Estate and financial sector development, Berlin
International Financial Conglomerates: Implications for Bank Insolvency Regimes (draft, 2003) – Richard Herring, Wharton School, University of Pennsylvania
Europe’s Second Pillar – Hans-Joachim Dübel
Basel Committee on Banking Supervision. Consultative Document. Report and Recommendations of the Cross-border Bank Resolution Group (2009) – Bank for International Settlements
EU Framework for Safeguarding Financial Stability: Towards an Analytical Benchmark for Assessing its Effectiveness. IMF Working Paper 2007 – Maria J. Nieto and Garry J. Schinasi
Presentations 3rd meeting:
Overcoming too-big-to-fail. A regulatory framework to limit moral hazard and free riding in the financial sector – Stefano Micossi, Assonime
Early Corrective Action and Bank Crisis Resolution – Rosa M Lastra, Queen Mary University, London