Governments and regulators must step up efforts to thrash out universal rules for dealing with insolvency at systemically important banks – or face the risk of future global crises – China’s chief banking regulator warns today.
Writing exclusively in Emerging Markets, Liu Mingkang, chairman of the China Banking Regulatory Commission, says that global regulatory reform efforts, including the Basel Committee on Banking Supervision, have fallen short in their failure to address cross-border resolution regimes.
Liu says that “while the world cheered” long-awaited accords on bank capital, the so-called Basel III rule, “more needs to be done” to “apply the concept in practice.”
“The harsh reality is that we still seem to lack the ability to deal with a large, complex cross-border financial institution,” Liu says. Authorities must adopt an “international treaty” for addressing the problem of too big to fail banks and other financial groups that go bust, he adds.
Liu’s comments come as regulators raise concern over the scope of new Basel III rules for banking. Swiss National Bank Chairman Philipp Hildebrand said yesterday that the problem of banks that were “too big to fail” was a global quandary that the new Basel III bank rules did not address.
Liu’s proposal resonates with a framework for cross-border resolution put forward in July by IMF deputy managing director John Lipsky. That plan required countries to agree on a method to deal “effectively and in an orderly fashion with the insolvency of a large international bank or financial group” – a scheme that Lipsky said could boost “systemic stability.”
Lipsky acknowledged at the time that there was “no prospect of an agreement on this anytime soon, and certainly not by the [November G20 Leaders] Summit.”
“The reason for this isn’t a lack of will or interest, but because creating an agreed resolution mechanism for cross-border institutions has no clear precedent and will involve difficult choice,” he said.
Liu says that while harmonizing legal frameworks across countries would be ideal, such an approach is a “mission impossible”.
“A more promising alternative is to introduce an international treaty, which sets fundamental rules for information-sharing, equal treatment of stakeholders across jurisdictions and depositor protection.”
Liu adds that financial stability could be enhanced through such an agreement which would provide clear guidelines for dealing with the insolvency of a large global bank or financial group. Moreover, such an approach would do away with problem of “engaging national authorities to find solutions.”
“To avoid another crisis,” says Liu, “we have to face up to this challenge.”
An international treaty has the added benefit of allowing for “credible” resolution regimes in any particular jurisdiction. “National authorities are expected to refer to these uniform rules in conducting resolution within their respective jurisdictions.
“As such, the treaty will provide clarity and predictability regarding applicable rules for resolution, and limit the discretion of national authorities to take unilateral actions.”
G20 leaders agreed to take action on financial regulation amid the turmoil that followed the collapse of Lehman Brothers in September 2008, but the momentum for developing rigorous new bank rules began to wane as the global economy began to recover this year, experts have said.
Regulators on the 27-nation Basel Committee reached an agreement on September 12 on new rules that more than double capital requirements for banks, while giving them up to eight years to comply in full.
But critics have charged that the reforms lack teeth. Former IMF chief economist Simon Johnson said that a rush to reach an agreement prior to the November G20 meeting resulted in a watered down proposal. “The result of Basel II increases capital requirements only modestly and phases those increases in only gradually,” he argued.