Crisis Management
and bank resolution
workshop organised by
The Islands and Small States Institute, Malta
16-20 April 2012
The views and opinions expressed in this presentation are those of the author and
do not necessarily reflect the official policy or position of the Central Bank of Malta
“A set of actions taken by authorities in order to contain a
financial crisis and avoid potentially disruptive effects on the
financial system or the real economy.”
The Brouwer Report
• Costs of crises:
April 17, 2012
Rationale for crisis management
• Global financial crisis – trillions of $
• Past crises – 15-20% of GDP
• Various studies and organisations
(IMF/World Bank) recommend a
credible crisis management
framework
• Countries must ensure sound frameworks for the
management of financial crises and the orderly resolution of
banks.
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• G20 – core elements of a new global financial regulatory
framework
• FSB – “Key attributes of Effective Resolution Regimes for
Financial Institutions”, requires jurisdictions to:
• Designate resolution authorities with powers to intervene and
resolve non-viable institutions using a number of tools
• Provide incentives for cross-border cooperation to get the best
outcome for financial stability for jurisdictions affected by a
financial institution’s failure
• Make sure all institutions have recovery and resolution plans that
are regularly reviewed, updated and tested each year
• Put in place crisis management groups appropriate for each
cross-border bank, involving the relevant authorities and
underpinned by cooperation agreements
April 17, 2012
Global initiatives
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The Commission’s Communication (Oct 2010) sets out a general
framework for a comprehensive EU framework for troubled and
failing banks:
• STEP 1: A legislative proposal for a harmonised EU regime for
crisis prevention and bank recovery and resolution
• STEP 2: Further harmonisation of bank insolvency regimes –
legislative proposals by December 2012
• STEP 3: The creation of an integrated resolution regime,
possibly based on a single European Resolution Authority, by
2014
April 17, 2012
An EU framework for troubled
and failing banks
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“Technical details of a possible EU framework for bank recovery
and resolution” DG Internal Market and Services Working
Document
• Measures: all stages from prevention to early intervention to
resolution to winding up
• Scope: banks and investment firms (initially, subject to review)
• Overriding objective: reduce ‘social cost’ of bank failure and
moral hazard, by orderly restructuring and dissolution of
banks in severe financial difficulty, whilst avoiding costs to
taxpayers and preserving critical services essential for financial
stability, as an alternative to insolvency and consequent
market disruption (Lehman 09/2008).
April 17, 2012
An EU regime for crisis prevention,
bank recovery and resolution
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The EU framework for prevention, crisis management
and resolution is based on the following objectives :
• Put prevention and preparation first – planning = preparation
• Provide credible resolution tools – minimise risks and ensure
continuity of services
• Enable fast and decisive action – clarity and legal certainty
• Reduce moral hazard – appropriate allocation of losses
• Contribute to a smooth resolution of cross border groups
• Ensure legal certainty – appropriate safeguards for
stakeholders
• Limiting distortions of competition
April 17, 2012
7 core principles of the EU
framework
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Role and responsibilities
During a crisis
Institution itself
Ensure its safety and soundness Minimise costs and
Conduct proper risk
negative externalities
management
Authorities
Strong regulatory framework
Adequate supervision
Early intervention
Resolution
Central bank
Financial stability
Payments system overseer
Monetary operations
Emergency liquidity
assistance (LOLR)
Regulator
Regulation
Supervision
Compliance
Micro-data
Solvency state of the
institution
Finance Ministry
Recapitalisation public funds
Guarantees
April 17, 2012
In peace time
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Definition of a financial crisis
Systemic impact assessment
Legislative issues for consideration
Structure for cooperation and deliverables
Exchange of information
Resolution of potential conflicts
Cross-border implications
Communication
Logistics
April 17, 2012
Implementation of a domestic
crisis management framework
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Defining a crisis situation
• Not all crises are systemic
• Not all banks must be saved – nature of the crisis (fraud?)
• Need to assess cost of acting or not acting
• Case for a systemic impact assessment
April 17, 2012
Main elements of a crisis
management framework
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Systemic Impact Assessment
• Aim – to determine the costs and benefits of saving or letting
the bank go
• Potential impact on
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April 17, 2012
Main elements of a crisis
management framework
Other financial institutions
Financial markets
Financial infrastructure
Real economy
• A common language for the authorities identifying the extent
of interconnectedness, the size and substitutability.
• Heat map
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Main elements of a crisis
management framework
April 17, 2012
The systemic impact assessment heat map
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Legislation underpinning the response to a financial crisis
• Legal mandate and responsibilities
• The provision of Emergency Liquidity Assistance
• Resolution powers and resolution measures
• Exchange of information domestic and across countries
• Insolvency and winding up measures
• Procedures for liquidation
• Deposit Guarantee Scheme
• The provision of public funds
• Competition issues
• What are the implication of state aid?
• What are the issues arising in cross-border cooperation?
April 17, 2012
Main elements of a crisis
management framework
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• Central banks act as lenders of last resort
• Emergency liquidity assistance (ELA) is provided to illiquid but
solvent institutions
• The responsible authority must prepare guidelines for the
provision of ELA and agree on specific principles e.g. eligible
institutions, the acceptable collateral, the interest rate,
applicable haircuts, the term of the loan
• ELA should be short term and temporary and not qualify as
monetary financing
• Formal decision making structure
April 17, 2012
Emergency liquidity assistance
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Main elements of a crisis
management framework
• Needs further input when central bank and supervisory
authorities are separate and therefore cooperation issues are
important
• MoUs
• Bilateral or tripartite Committees
April 17, 2012
• Structure for cooperation and deliverables
• Need for clarity regarding
• Responsibilities of authorities – solvency, liquidity, public funds
• The evaluation stage
• Recommendations by individual authorities in line with
responsibilities
• Be in a position to advise Governors / Minister
• Policy decisions
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Main elements of a crisis
management framework
• Is the institution illiquid and/or insolvent?
• Is it systemically important?
In a crisis, it is difficult to determine decisively the state of the
institution
• What is the information that is required?
• How would the central bank be able to cooperate in the
resolution of a systemically important but insolvent
institution?
April 17, 2012
• Resolution of potential conflicts
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• Information to be exchanged
• What is information is essential and what is relevant?
• Who is in the best position to provide it?
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Micro data
Macro analysis
Economic information
Public sector assessment
April 17, 2012
Main elements of a crisis
management framework
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Main elements of a crisis
management framework
• Presence of cross-border international banks
• Presence of systemically important branches or subsidiaries
• What are the principles for cooperation?
April 17, 2012
• Cross-border implications – home / host issues arising from:
• Cross-border impact can be large
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transfer of liquidity and assets
use of collateral
presence or value of parental guarantee
other home / host country issues (consolidated supervision;
impact of resolution by home country; provision of information
regarding a systemically important bank in a small country)
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• It is important not only to understand the underlying
principles which regulate the management and resolution of
crises but also to have a tested operational framework that
would a priori facilitate the process of crisis management.
• Simulation exercises may be aimed at (inter alia): Testing the
functioning and operational effectiveness of existing
arrangements
• Testing the assessment of systemic risk at domestic and crossborder level
• Testing coordination of decision-making, and
• Enhancing preparedness of competent authorities with a focus on
information-sharing.
• Logistics involved
April 17, 2012
Crisis simulation exercises
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• Resolution measures can be taken when a credit institution is
failing or likely to fail, and the conditions for resolution are
met
• Three possible trigger conditions considered for resolution:
April 17, 2012
Resolution
• Institution has incurred or is likely to incur losses that will deplete
its equity or is likely to become balance sheet insolvent
• Institution no longer meets, or is likely to fail to meet its licensing
requirements
• Institution no longer possesses, or is likely to fail to possess,
sufficient regulatory Tier 1
• No other measures are likely to avert failure and restore the
condition of the institution in a reasonable timeframe
• Necessary in the public interest
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• To enable authorities to ensure the continuity of essential
services and to manage failure in an orderly way
• Powers to effect the takeover of a failing bank or firm by a
sound institution
April 17, 2012
Resolution tools
• Sale of business tool
• Asset separation tool
• Debt write-down
• Or, to transfer all or part of its business to a temporary bridge
bank
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• MS must have financial arrangements in place to ensure that
resolution is backed by adequate financial measures
• Issues for consideration:
• Fund target size (% of eligible liabilities?)
• Contributions determined for each institution (pro-rata on the
basis of its eligible liabilities?)
• Relationship with Deposit Guarantee Schemes – DGS funds may
be used under certain conditions to finance the transfer of
deposits to another bank, provided guaranteed depositors do not
loose claim to non-transferred deposits up to guaranteed amount
(confidence)
April 17, 2012
Resolution financing
arrangements
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Way forward
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Domestic Standing Group
Contingency plan for resolution
Crisis management framework
Simulation exercises
Operational guidelines
Cross border cooperation
Preparedness of institutions
April 17, 2012
• The Central Bank of Malta:
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Thank you
Graziella Gatt
Manager
Policy, Crisis Management & Stress Testing
Financial Stability Department
Email: gattg@centralbankmalta.org
April 17, 2012