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A new report from the Basel Committee says that using public funds to resolve weak banks may be considered in systemic situations. If even capital rule-writers are willing to consider more bailouts, the only way to end "too big to fail" may be to break up the megabanks.
July 9 -
Federal Reserve Board Chair Janet Yellen sounded at least open to the idea that new regulations have contributed to potential liquidity problems, but said more study is needed.
July 15 -
The Federal Reserve's ability to provide emergency lending to institutions in the event of a crisis must be eliminated in order to end "too big to fail," said Richmond Fed President Jeffrey Lacker.
May 26
WASHINGTON The Dodd-Frank Act sought to prohibit direct government support for a dying bank, but international standard-setters want to keep it as a last resort for dire situations.
The Basel Committee on Banking Supervision, a forum for developing regulatory principles for member nations, left the door open to capital injections or other forms of aid in its final guidelines for handling "weak banks," issued Tuesday.
"In exceptional circumstances, the government may offer solvency support to a failed bank to allow it to remain open for business," the committee said in the guidelines, which finalize a June 2014 "consultative" document.
The committee added, "Such 'open bank assistance', to the extent authorized by national law, may take the form of a direct capital injection, or loans provided by the government to the bank, or the guarantee against loss extended to certain institutions that purchase troubled assets."
While many say U.S. regulators kept bailout authority following the financial crisis, lawmakers enacting Dodd-Frank in 2010 restricted it substantially to put an end to the kind of support given to firms like Bear Stearns and American International Group. Prior measures allowing emergency Federal Reserve Board lending or Federal Deposit Insurance Corp. support were curtailed to be available only when they have "broad-based" benefit for multiple institutions, not any one in particular.
Lawmakers have sought to further restrict the Fed's "lender-of-last-resort" authority over concerns the central bank still retains too much power, but Dodd-Frank removed the FDIC's authority to provide open bank assistance in systemically dangerous situations. Yet the new Basel guidelines appear to give nations license to continue providing such support in a crisis.
"Such support should be subject to strict conditions, including that all private means have been exhausted and any losses will be recovered from the industry," the international guidelines said.
The guidelines, which are meant to update the committee's 2002 supervisory guidance, more generally provide basic principles for regulators to follow when dealing with troubled banks. The committee emphasized the need for "early intervention," resolution regimes to deal with a failure in a way that limits systemic consequences and supervisory tools such as stress tests and macroprudential assessments.
"A corrective action plan of a bank identified as weak must be detailed and specific, showing how the bank's financial position can be restored," the committee said. "A supervisor must be able to discern whether progress is satisfactory or additional actions are necessary. A supervisor should also have mechanisms in place for consulting, or informing, the government, central bank, resolution authorities and other domestic and foreign regulatory agencies. Coordination with the relevant authorities should increase as the bank weakens."
Similar to powers granted the FDIC in Dodd-Frank and principles developed by other international bodies, the Basel guidelines emphasize resolution processes as a means to preventing further contagion.
"Where a bank is no longer viable, or likely to be no longer viable, and has no reasonable prospect of becoming so, the full array of resolution tools and powers should be available to the resolution authority to manage the failure in an orderly manner that minimizes the impact on financial stability," the committee said. "These tools include a business sale transaction, bail-in, a bridge institution or wind-down."
The guidelines say resolution regimes "should not rely on public solvency support or create an expectation that capital support will be available." But the committee said that in cases where a failed institution is "systemically important," public liquidity backing "during the resolution of the failing bank may be necessary."
"Public funds for liquidity purposes should be used in resolution only as a last resort and in exceptional circumstances, such as a major systemic crisis, along with a high-level political decision, e.g. by a prime minister or the appropriate minister-in-charge," the committee said.
