Any future framework must be consistent with the broad objectives of the single market and allow for the consolidation and rationalisation of banks across borders. The report will be considered for upcoming meetings of the Financial Stability Board and the G20.
In response to EU calls for consultation, the IMF has published a submission by its staff. It is worth recalling that this forms a vital component of the international policy response in the wake of the financial crisis. The report notes the need for any framework to be consistent with the broad objectives of the single market and to allow for the consolidation and rationalisation of banks across borders. But it also underscores what the authors say is the need for discipline: “The crisis has shown that “constructive ambiguity” is insufficient to deter banks from taking on excessive risks. It has also underscored the “too-big-to-fail”, “too-interconnected-to-fail”, and “too-big-to-save” problems, and shown the limitations of the existing deposit guarantee arrangements”.
The IMF makes some concrete suggestions:
a) "We see fundamental legal and practical obstacles that will likely limit the scope for progress toward integrated insolvency proceedings for banking groups. Notably, we do not support the full consolidation of insolvency estates, as this seems to offer more disadvantages than advantages.
b) Recognizing banks’ legitimate (and desirable!) wish to organize their cross-border operations efficiently within the internal market, it is of utmost importance that an effective framework be established for resolving individual banks, including their foreign (EU) branches. This would be the first pillar of our proposed framework.
c) Our proposed second pillar would provide group-wide tools and mechanisms to organize integrated early interventions and coordinated resolution of troubled banking groups, including for non-bank entities of such groups, drawing on the first pillar as appropriate. This would enable group-wide operational integration up to, but no further than, that allowed by the fundamental legal nature of the subsidiary-based banking model."
Although this study has only just been posted on the IMF’s website, its finding will, of course, have been discussed by various interested parties in the course of the last couple of months and the findings will therefore have been duly considered as part of the preparations for upcoming meetings of the Financial Stability Board and G20. One broad conclusion to be drawn from this study is that any successful EU cross-border resolution mechanism requires a whole range of accompanying measures to be effective. This then suggests that no mechanism is likely to be in place anytime soon.
© International Monetary Fund
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