Global: Never Let a Good Crisis Go To Waste

In line with the famous Churchillian statement "Never let a good crisis go to waste," regulators have reacted to varying degrees to the 2023 bank crisis.

Having previously looked at the United States, Europe, Asia and the United Kingdom, we pause to consider recent activity by global regulatory authorities.

The Financial Stability Board (FSB) previously noted that the banking failures in 2023 were the most significant system-wide banking stress since the 2008 Global Financial Crisis. The bank failures had largely distinct causes but triggered a broader crisis of confidence in the resilience of banks, banking systems and financial markets across multiple jurisdictions.

In March the FSB issued a revised version of its 2016 guidance on arrangements to support operational continuity in resolution. Given financial institutions increasing their dependency on third-party service providers the revisions focused on a new addendum which contained a supplementary note on the digitalisation of critical shared services. Among the issues covered by the new addendum, which firms may wish to consider generally, are data storage and supply chains.

When an institution uses cloud services it needs to be aware that data storage may be shared between several institutions and in a resolution scenario this may lead to uncertainties regarding the ownership of data or uncertainties regarding access to the data. Therefore, institutions need to think about access rights.

Services may involve complex and specialised supply chains, as some third-party providers are in turn dependent on other IT providers. This can significantly increase the complexity of service models, leading to further issues in the case of resolution. In light of this an institution needs to think about a number of things including maintaining visibility of the supply chain, maintaining an up-to-date list of sub-outsourced service providers and regularly reviewing contracts to see if sub-outsourcing is allowed.

A month later in April 2024 the FSB published a speech by its chair, Klaas Knot, who spoke about "maintaining momentum" and "advancing the work on bank resolvability." In terms of what this would entail, he gave some snippets that included the FSB focusing on public-sector backstop funding mechanisms, better operationalizing a range of resolution options, and looking at the impact of social media and digital innovation on resolution and depositor runs. A summary of these analyses will be available in October.

And finally, in June the Bank for International Settlements issued an interesting speech reflecting on post-turmoil bank failure management. In particular, it noted that:

• Resolution plans should contemplate different options and not focus on just a single resolution strategy. The events of 2023 showed that the preparatory work conducted around the development of an institution's resolution plan proved very useful for managing the failure of the institution, even if the plan was not ultimately implemented.
• As there is no way to foresee all the possible conditions that might occur in a resolution weekend and affect the feasibility of resolution measures, planned resolution strategies should be more an array of options for the deployment of different tools than a rigid playbook.
• Resolution plans for international banks should address practical issues related to the making of resolution actions—particularly bail-in—operational in a cross-border context. Given that securities qualifying as total loss-absorbing capacity are typically issued in international financial centers, it is important that resolution decisions—such as a conversion of debt securities into equity—be effective in all relevant jurisdictions.
• From a conceptual point of view, there is merit in, at least, limiting the eligibility of equity to satisfy gone-concern capital requirements. Experience shows that, unlike long-term debt, equity instruments tend to disappear quite quickly as an institution approaches the point of non-viability and during the resolution process itself as hidden losses emerge in the balance sheets. Therefore, equity, being the most powerful loss-absorbing instrument in going-concern, might simply not be available in gone-concern.