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4 ways to make cleaning up a failed bank easier

“Globally active, systemically important banks cannot simply be broken up according to the ‘too big to fail’ plan,” the Swiss finance minister said at the weekend. “It would be legally possible, but in practice the economic damage would be considerable.”

freshly made Rescue by Takeover Credit Suisse, Karin Keller-Sutter Identified Obvious problem. Bank resolutions were thought to be the gold standard for emergency regulatory action in the midst of the Great Financial Crisis of 2007-2008, but are likely to be largely cosmetic. there is.

Bank resolution mechanisms clearly need an overhaul before the next financial turmoil.

The digitized speed of execution at Silicon Valley banks has revealed serious problems with other emergency measures, such as deposit insurance and central bank funding. A few days later, Keller-Sutter and his colleagues were able to bring Credit Suisse under his UBS umbrella. But in the process, it wiped out contingent convertible bonds that were supposed to be above equity in the established debt hierarchy. A significant new tool in the post-2008 regulatory box, “Coco”, has been shown to be unfit for purpose.

Four major adjustments will help achieve an orderly resolution of the imminent failed banks.

as US President Joe Biden proposed this weekRegulators will begin by factoring in the impact of a sharp rise in interest rates on their balance sheets into their pre-tightening stress tests for financial institutions, and by limiting the impact of medium-sized banks under the stronger Dodd-Frank Act, which applies to systemically important banks. I need to get the bank back.

Supervisors and central banks should also be aware that online banking crackdowns can evolve rapidly. A 24/7 crisis requires a 24/7 response. It is no longer enough that he limits the time the US Federal Reserve opens its discount window to a few hours a day. The Fed may also consider expanding the range of securities that can be pledged as collateral against teller loans and perpetuating the new bank term funding program it set up in the wake of the SVB implosion.

Third, we need to adjust the deposit insurance system. Because at this time, all deposits are recognized as virtually guaranteed. This is delicate. Permanent backstops increase moral hazard and give banks permission to pursue risky strategies.A temporary backstop for all deposits, as suggested by Sheila BearFormer Chairman of the Federal Deposit Insurance Corporation.

What is clear is that as the coverage of mutualized deposit guarantee schemes increases, banks will have to pay a higher price to participate. The rules regarding assets backing bank deposits need to be tightened, and later strengthened against attempts to loosen them.

Finally, after the Credit Suisse bailout, banking supervisors will have to codify investor hierarchies and ensure that they are applied consistently across jurisdictions.

The SVB and Credit Suisse lawsuits should drown out banks’ demands for deregulation and curb the government’s desire to use looser regulation as a competitive tool. A less profitable but safer banking system built on a fortress-like capital structure is again the goal.

But the recent turmoil is a reminder that local politics and pragmatism tend to triumph over purism when banks falter. Such ad-hoc decision-making fosters further uncertainty. More than a year passed between the first credit crunch quake in 2007 and the collapse of Lehman Brothers in 2008. Before the next earthquake, now is a good time to strengthen the predictive framework intended to avoid a recurrence of that crisis.

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“Globally active, systemically important banks cannot simply be broken up according to the ‘too big to fail’ plan,” the Swiss finance minister said at the weekend. “It would be legally possible, but in practice the economic damage would be considerable.”freshly made Rescue by Takeover Credit Suisse, Karin Keller-Sutter Identified Obvious problem. Bank resolutions were thought to be the gold standard for emergency regulatory action in the midst of the Great Financial Crisis of 2007-2008, but are likely to be largely cosmetic. there is. Bank resolution mechanisms clearly need an overhaul before the next financial turmoil.The digitized speed of execution at Silicon Valley banks has revealed serious problems with other emergency measures, such as deposit insurance and central bank funding. A few days later, Keller-Sutter and his colleagues were able to bring Credit Suisse under his UBS umbrella. But in the process, it wiped out contingent convertible bonds that were supposed to be above equity in the established debt hierarchy. A significant new tool in the post-2008 regulatory box, “Coco”, has been shown to be unfit for purpose.Four major adjustments will help achieve an orderly resolution of the imminent failed banks.as US President Joe Biden proposed this weekRegulators will begin by factoring in the impact of a sharp rise in interest rates on their balance sheets into their pre-tightening stress tests for financial institutions, and by limiting the impact of medium-sized banks under the stronger Dodd-Frank Act, which applies to systemically important banks. I need to get the bank back.Supervisors and central banks should also be aware that online banking crackdowns can evolve rapidly. A 24/7 crisis requires a 24/7 response. It is no longer enough that he limits the time the US Federal Reserve opens its discount window to a few hours a day. The Fed may also consider expanding the range of securities that can be pledged as collateral against teller loans and perpetuating the new bank term funding program it set up in the wake of the SVB implosion. Third, we need to adjust the deposit insurance system. Because at this time, all deposits are recognized as virtually guaranteed. This is delicate. Permanent backstops increase moral hazard and give banks permission to pursue risky strategies.A temporary backstop for all deposits, as suggested by Sheila BearFormer Chairman of the Federal Deposit Insurance Corporation.What is clear is that as the coverage of mutualized deposit guarantee schemes increases, banks will have to pay a higher price to participate. The rules regarding assets backing bank deposits need to be tightened, and later strengthened against attempts to loosen them.Finally, after the Credit Suisse bailout, banking supervisors will have to codify investor hierarchies and ensure that they are applied consistently across jurisdictions.The SVB and Credit Suisse lawsuits should drown out banks’ demands for deregulation and curb the government’s desire to use looser regulation as a competitive tool. A less profitable but safer banking system built on a fortress-like capital structure is again the goal. But the recent turmoil is a reminder that local politics and pragmatism tend to triumph over purism when banks falter. Such ad-hoc decision-making fosters further uncertainty. More than a year passed between the first credit crunch quake in 2007 and the collapse of Lehman Brothers in 2008. Before the next earthquake, now is a good time to strengthen the predictive framework intended to avoid a recurrence of that crisis.
https://www.ft.com/content/3ebe50b5-6310-4213-b799-aeec71dba476 4 ways to make cleaning up a failed bank easier

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