News Column

Big Bank Failures - IMF Issues Fresh Guidelines

June 24, 2014

Chima Akwaja with Agency Reports

International Monetary Fund (IMF) has asked policy makers and central banks around the world to agree on the legal and financial measures to ensure failures of big cross-border banks are managed in an orderly way to minimise losses and protect global financial stability. The new rules contained in IMF's Financial Stability Board's Key Attributes for Effective Resolution of Cross-border Bank Crisis are to be implemented by end of 2015.

Ceyla Pazarbasioglu, a deputy director in the IMF's Monetary and Capital Markets Department, who with the Legal Department produced the report, said the collapse of the U.S. investment bank, Lehman Brothers in 2008 demonstrated that when one of these institutions was in trouble, the impact reverberated around the world.

"These banks have a global reach and when they fail they have global consequences. 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 explaining the developing the strategy and tools for dealing with these big global banks was 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 was a top priority. "This is a gaping hole in the financial architecture right now, and it calls for countries to put the global good of financial stability ahead of their parochial concerns," said Lagarde.

In the wake of the global crisis, policymakers from finance ministries, central banks, and banks supervisory agencies agreed on the necessity of having a set of principles and best practices to deal with the failure of big banks that operate across borders.

Assets of some of the largest cross-border banking groups are several times their home country's gross domestic product (GDP) with some of the banking groups typically having over half of their credit risk exposures and staff in other countries or operations. The new measures noted that to avoid the need for a bailout with public funds, big banks needed to carry enough financial capacity to absorb the losses without damaging ripple effects on the financial system and the economy. The IMF issued its last review of progress on bank resolution in August 2012.

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Source: AllAfrica

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