In this edition of Regulation Around the World we review the position regarding recovery and resolution for banks which has recently been in the spotlight given events in the United States and Europe. Following the 2008 global financial crisis, the G20 leaders endorsed at the Cannes Summit in November 2011, the Financial Stability Board’s (FSB) Key Attributes of Effective Resolution Regimes for Financial Institutions as the international standard for resolution regimes. An important component of the Key Attributes are the bail-in powers that authorities should have to achieve or help achieve continuity of critical functions. Most jurisdictions have adopted bank resolution planning frameworks based on the Key Attributes although the extent of their implementation varies across jurisdictions particularly for banks other than systemically important banks.
Key considerations include:
- Global – A recent letter from the Financial Stability Board noted that the financial stability outlook had become more challenging, as a consequence of turmoil in the banking sector. The FSB’s ongoing surveillance had highlighted vulnerabilities associated with elevated debt levels, business models based on the presumption of low and stable interest rates, stretched asset valuations, and the combination of leverage and liquidity mismatches in non-bank financial intermediation.
- United Kingdom – The Bank of England (BoE) is repeating its resolvability assessment of the major UK firms in 2023-24. The BoE used one of its five stabilisation powers - transfer to a private sector purchaser – following the failure of Silicon Valley Bank UK Limited. There was no formal bank insolvency procedure.
- United States – The Federal Reserve has issued a report concerning the failure of Silicon Valley Bank in which it states that the report is the first step in a process that will strengthen its supervision and regulation. The administration of US President Joseph Biden has issued a statement urging Congress to pass legislation providing financial regulators with broader powers to punish bank executives deemed responsible for the collapse of financial institutions.
- Europe – The EU recovery and resolution regime is relatively untested. So far the Single Resolution Board has published two resolution cases and four non-resolution cases. In addition, the European Commission has published legislative proposals that would amend the Bank Recovery and Resolution Directive, the Single Resolution Mechanism and the Deposit Guarantee Schemes Directive.
- Netherlands – So far, the Dutch Central Bank (DNB) has not used its resolution tools. On 28 April 2023, DNB published a speech by its President, Klaas Knot, entitled ‘Mamma Mia, Here We Go Again? Lessons from SVB and Credit Suisse’.
- France – On 28 April 2023, François Villeroy de Galhau (Governor of the Banque of France) gave a speech ‘Banking turmoil - three blessings and a funeral’. The speech provided some very interesting observations on the current bank failures and may point towards future initiatives within France and the EU.
- Germany – An important principle of the Recovery and Resolution Act (Sanierungs- und Abwicklungsgesetz) is to avoid the resolution of institutions (i.e. credit institutions and investment firms) right from the outset. An effective recovery plan that offers the institution an adequate range of recovery options to handle a crisis by its own efforts is key.
- Luxembourg – As of today, only one Luxembourg bank has so far been referred to the Single Resolution Board (SRB). However, the SRB decided that a resolution action was not necessary as it was not in the public interest. As a consequence, the winding up took place under the law of Latvia and Luxembourg, respectively.
- United Arab Emirates - On 10 June 2022, the Council of the Islamic Financial Services Board, which the Dubai Financial Services Authority is a member of, resolved to approve the adoption of a new Technical Note, “TN-4: Technical Note on Recovery and Resolution for Institutions Offering Islamic Financial Services”.
- Hong Kong – The Financial Institutions (Resolution) Ordinance vests the Hong Kong Monetary Authority with a range of powers to effect the orderly resolution of a non-viable, systemically important banking sector entity for the purpose of maintaining financial stability, while seeking to protect public funds.
- Singapore – The bail-in powers allow the Monetary Authority of Singapore to cancel, modify, convert and/or change the eligible instruments of a failing bank to facilitate its orderly resolution. The regime applies only to Singapore-incorporated banks and Singapore-incorporated bank holding companies (at least one subsidiary which is a Singapore-incorporated bank).
- PRC – In 2021, the China Banking and Insurance Regulatory Commission (CBRIC) published interim measures for the implementation of recovery and resolution plans of bancassurance institutions together with questions and answers on these measures. On 6 April 2022, the People’s Bank of China (PBOC) issued a consultation paper on the proposed Financial Stability Law. The consultation closed on 6 May 2022. In the consultation paper the PBOC proposed, among other things, a cross-agency mechanism for maintaining financial stability and a recovery and resolution regime for financial institutions as well as financial market infrastructures operating in China.
- South Africa – The Financial Sector Regulation Act, 2017 (as amended by the Financial Sector Laws Amendment Act, 2021) has extended the scope of the recovery and resolution framework to cover both banking and non-banking financial institutions.