The challenges of cross-border crisis management

1. The challenges of cross-border crisis management Rupert Thorne Financial Stability Forum June 8

2. Why is cross-border cooperation in crisis management important? • Lack of coordination almost certain to produce suboptimal “global” outcomes • It can prolong the crisis and add to the eventual costs • Current obstacles to coordination: • Different national frameworks • Different preferences for crisis resolution outcomes • Conflicts of interest with regard to cross-border institutions • Countries need to develop their own crisis management expertise before they can cooperate • Lack of crisis management tools • In many cases, reflects lack of experience of CB crises • But there are areas where progress can be made

3. The FSF’s interest • FSF founded to promote international stability through information exchange and cooperation • Unique membership comprising key official bodies in major financial centers • FSF seeks to prompt action to address vulnerabilities affecting the international financial system • Ongoing interest in crisis management and business continuity issues

4. “Winding Down” Task Force • 2001: Task Force on the Winding Down of Large and Complex Financial Institutions • Recommendations: • Readily available information on LCFIs • Contingency plans at LCFIs • Contingency plans at authorities • Communication between authorities • Recommendations useful for other types of crisis too

5. Types of crisis • Different forms of crisis • Liquidity • Solvency • Market • Business continuity • Individual incidents may be a mix of these • Crises may well involve nonbanks as well as banks, or bank/nonbank groups – this leads to challenges in defining authorities’ goals and in coordination

6. Cross-border and cross-sector coordination challenges • Different institutional frameworks and responsibilities • Conflicting objectives and interests of authorities • Liquidity provision • Cost of crisis resolution • Deposit insurance • Home-host issues • Information sharing and communication needs • In contingency planning • During a crisis

7. Coordination challenges Liquidity Provision • Who decides (and how) whether illiquid cross-border firm is still solvent? • Who provides liquidity support? What collateral requirements? FX currency needs? • Other difficult questions over liquidity provision to: • financial groups with banking and non-banking units • parent banks with systemically important units in other countries • foreign branches vs. foreign subsidiaries • Legal constraints on use of liquidity to resolve problems in foreign countries • Should nonbanks ever receive official liquidity?

8. Coordination challengesResolution of Solvency crisis • Meeting resolution costs naturally involves governments • Providing guarantees also involves governments • Political and legal factors may inhibit cross-border cooperative solutions to burden-sharing • Inevitably, governments are reluctant in advance to constrain their room for maneuver. • Prior understanding of technical aspects, smoother information exchange, may free up more time to focus on policy issues in a crisis.

9. Coordination challengesDeposit insurance • Issues concerning: • coverage of, and contributions by, cross-border institutions • coverage of bank/nonbank groups • Burden-sharing issues here too • Statutory constraints may limit deposit insurers’ freedom of action • Perhaps deposit insurers need to be have more dialogue with each other and with supervisors and other authorities

10. Coordination challenges Market crisis • Market crises can lead to undue retreat from risk-taking and to solvency and liquidity problems in a variety of institutions • Underlying problem or affected markets may not be confined to one jurisdiction • Tools for addressing market crises less well developed than for solvency or liquidity crises at individual firms • Institutional responsibilities for market crisis prevention and resolution also often not clear

11. Coordination challenges Business continuity crisis • After 9/11 and several other events, more senior management attention to business continuity crises • Because the financial system is a network, systemic continuity is more important than in other industries • Joint Forum draft principles of business continuity published • Avian flu has further heightened attention • More work needed on communication channels in business continuity crises • Increasing recognition of links with financial crisis planning, risk management, but more work on links needed

12. Responses to challengesNational contingency planning • Prerequisite for cross-border cooperation is articulation and testing of national plans • Legal and other powers for handling crises need to exist, distribution of responsibilities made explicit • Public communication about crisis handling arrangements may be helpful • For different types of crisis, contingency planning increasingly taking place and increasingly formalised • But flexibility to respond to individual cases still an important part of all plans • Most planning still at a national, not international, level

13. Contingency planningAuthorities’ powers • Division of legal responsibilities between ministry of finance, central bank, supervisory agency etc • Framework for decision-making • Prescribed objectives of crisis intervention • Powers to exchange information between national and other bodies • Legal powers to act – tools available

14. Contingency planningInformation availability • “Winding Down” Task Force recommended authorities have available, on ongoing basis, LCFI information that might be needed in crisis • FSF working group created fact book template in 2003 • Since then, fact book development has been mostly at national level, with focus on liquidity and risk data • But still at development stage, with little cross-border data sharing between authorities at present

15. Contingency planningTesting and crisis simulations • Crisis simulation exercises becoming common • Exercises can test: • information availability, • powers to act, • coordination between authorities • But exercises can only test those aspects built into the simulation; they cannot fully substitute for real-life experience • Cross-border participation in some cases - especially EU, where euro and TARGET make this especially relevant • More room to share lessons, especially cross-border

16. Contingency planningPreservingcore functions • Some contingency planning explores how to ensure continuity of a firm’s systemically important payment and settlement functions in a crisis • E.g. “NewBank”, that could be activated to clear US government securities • But early stage of thinking and largely on a national scale

17. Responses to challengesCross-border cooperation • Growth of LCFIs • Increasingly blurred line between banking and nonbanking business • Need for authorities to cooperate and communicate cross-sector and cross-border: • MoUs • Colleges of supervisors • Is this enough? What else is feasible?

18. Responses to challengesMemoranda of understanding • Increasing numbers of bilateral and multilateral MoUs • Cross-border, cross-sector or cross-institutional (i.e. regulators, central banks, finance ministries) • Often cover both ongoing supervision and crisis communication • Typically set out broad principles, not detailed procedures • Largely untested in crises

19. Responses to challengesColleges of supervisors • Ongoing supervisory cooperation structure • Regular sharing of information • Lead supervisor concept • Still issues over how the supervisors will coordinate • Who to include? All supervisors or just the most important? What about nonsupervisory authorities? • Colleges of supervisors help with building up cross-border understanding but are not, as currently designed, a crisis management mechanism

20. Responses to challengesRegional initiatives • Regional initiatives – MoUs but also other cooperation and contingency planning • EU, Scandinavia, Australasia • EU: Political and economic integration, single market, have helped propel process • Wide-ranging MoUs cross-border and cross-sector, but confidential and still untested in practice

21. Outstanding issuesCoordination • Progress on cross-border financial crisis cooperation slow: • Differing national institutional structures and policy issues • Differing national priorities on home/host issues • Concerns that cross-border planning may reduce national discretion • Issues of appropriate burden-sharing • In some areas, national laws inhibit cross-border solutions • In absence of crises, difficulty in defining what the potential problems to be addressed are.

22. Outstanding issues Home-host • Principle of home supervision established for ongoing bank supervision, but less clear for crisis management and for nonbanks • Potential issue where crisis institution is systemic in host country but not in home • A subsidiary’s activities and risks may be difficult to isolate from the rest of the group • For home country acting alone, cross-border firm may be “too big to save” • Potential conflicts regarding ring-fencing, liquidity, bail-out, deposit insurance

23. Outstanding issuesInformation sharing • For both financial and business continuity crises, scope for further information sharing about crisis planning and during crisis itself • Sharing lessons from national contingency planning and games • Cooperation in contingency planning, especially for cross-border crises • Home/host issues • Pre-specifying systems for information sharing in crises

24. Outstanding issuesCommunication channels • In crises, not only what to communicate, but how to communicate • Incidents such as London bombing exposed need to pre-specify communication channels • Affected countries should “push” information, not wait for it to be “pulled” by others • Up-to-date key contact lists • Alternate communication channels • Testing needed

25. The way forward? • Further development of national plans • Informal information-sharing and cooperation • Sharing of experiences and ideas • Workshops and other discussion fora • Identify areas where joint work may be useful • More formal regional and bilateral arrangements? • May be an area for small steps forward, rather than a grand plan