Partial Progress in Rule Design for Orderly Failure of Cross-Border Banks

Cross-border banks resolution lynchpin of “too-big-to-fail”

Countries committed to implement new rules by end-2015

Bail-in, creditor hierarchy, use of public funds outstanding issues

As the collapse of U.S. investment bank Lehman Brothers in 2008 demonstrated, when one of these institutions is in trouble, the impact reverberates around the world.

The assets of some of the largest cross-border banking groups are several times their home country GDP. The largest banking groups typically have over half of their credit risk exposures and staff outside of their “home” country.

Policymakers have to agree on the legal and financial measures to ensure failures of big cross-border banks are managed in an orderly way. This will help minimize losses and protect global financial stability.

“These banks have a global reach and when they fail they have global consequences,” said Ceyla Pazarbasioglu, a deputy director in the IMF’s Monetary and Capital Markets Department, who with the Legal Department produced the report.

“We now have internationally agreed principles on the resolution of global banks and systemic institutions, and this is important progress, but we are not there yet. If a cross-border financial institution were to fail tomorrow, it would not be possible to resolve it in an orderly manner. What was agreed must be implemented in practice, and more work is needed to make sure that countries can—and have the incentives to—act cooperatively to resolve a failing cross-border bank,” said Pazarbasioglu, referring to the Financial Stability Board’s Key Attributes for Effective Resolution. Member countries have committed to implement the new rules by the end of 2015.

The euro area’s banking union is one recent example of progress toward more effective resolution of cross-border banks when they fail. In particular, the Bank Recovery and Resolution Directive, approved by the European Parliament in April 2014 will help ensure failed banks are resolved speedily, minimizing risks to financial stability and with losses borne by shareholders and creditors.

Fixing “too-big-to-fail”

Developing the strategy and tools for dealing with these big global banks is part of the solution to the “too-big-to-fail” problem. In a recent speech in London, the IMF’s Managing Director Christine Lagarde said taking further steps towards an effective framework for the resolution of cross-border banks is a top priority.

“This is a gaping hole in the financial architecture...