The Financial Stability Board (FSB) released a statement on the importance of resolution planning and loss-absorbing capacity for banks systemic in failure. Lessons from the 2023 bank failures reinforced the need to maintain momentum and advance the work on bank resolvability and to avoid complacency and underscored that any financial institution that could be systemically significant or critical if it fails should be subject to a resolution regime.
The FSB’s work on bank resolution until now has primarily focused on global systemically important banks (G-SIBs). However, existing FSB guidance on resolution planning and resolution execution may also be relevant for other banks that may be systemically significant or critical if they fail (banks systemic in failure). The failure of such banks could also have severe consequences for the financial system or the broader economy, and authorities and such banks should be prepared for resolution.
Authorities should assess which banks may be systemically significant or critical if they fail
Resolution authorities, in coordination with other relevant authorities, should assess which banks may be systemically significant or critical if they fail. Authorities should ensure they have sufficient information to make this assessment in normal times and in a crisis. This also includes banks that were not explicitly designated as systemically significant or critical prior to their failure.
Authorities and banks systemic in failure should be prepared for resolution: authorities should have the appropriate resources, tools, and powers to, if needed, resolve banks systemic in failure. Authorities’ preparedness includes having an up-to-date assessment of the options available to conduct such resolution, and assurance that such options can be implemented quickly and effectively. Banks systemic in failure should ensure they are resolvable in a way that protects their critical functions without severe systemic disruption and avoids the use of taxpayers’ money.
Authorities should consider the need for loss-absorbing capacity (LAC): LAC on the balance sheet of a bank enhances authorities’ ability to resolve the bank without severe systemic disruptions and without the use of taxpayers’ money. It also provides for an additional layer of loss-absorption that may prevent negative systemic effects and uninsured depositors from taking losses, which may forestall or reduce deposit runs.
At the same time, banks and banking systems in different jurisdictions have different characteristics. For this reason, jurisdictions need to consider how to best implement the concept of LAC for banks established in their jurisdictions. A number of FSB jurisdictions have already adopted external LAC requirements for banks, beyond G-SIBs, that could be systemically significant or critical if they fail, where authorities set the amount, quantity and implementation timeline on a case-by-case basis. Such LAC requirements are for instance applied to all banks (EU, Hong Kong, UK), to domestic systemically important banks (D-SIBs) in Canada, Mexico and Switzerland, or to a subset of D-SIBs (Japan).