FSB warns most major economies lack bank failure backstops

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FSB: most economies lack bank backstops

Highlights

FSB reports that only the U.S., UK, Japan, and Hong Kong fully meet crisis funding recommendations, while 15 of 19 major jurisdictions lack credible public sector backstop mechanisms.
FSB urges urgent establishment of government funding arrangements as last-resort lenders to prevent resorting to nationalisation during significant bank failures.
The 2023 Credit Suisse rescue used SFr168bn in emergency Swiss central bank facilities, with loans repaid or cancelled in months, but formal Swiss public liquidity backstop remains pending.

FSB review highlights gaps in crisis funding

As reported by Financial Times, citing the Financial Stability Board, four out of five major jurisdictions reviewed are not fully prepared for a significant bank failure and many still lack credible public sector mechanisms to provide emergency liquidity during a resolution process.

The watchdog calls for urgent action to establish government funding arrangements that can act as a lender of last resort, allowing failing banks to be wound down or sold without resorting to nationalisation. Soledad Núñez, deputy governor at Spain’s central bank and chair of the review, says a credible public sector backstop funding mechanism is essential and that further work is urgently needed to complete implementation of the FSB’s recommendation.

Among the 19 jurisdictions assessed, the U.S., UK, Japan and Hong Kong are the only ones that fully meet the FSB’s recommendations. India and Argentina are described as completely non-compliant because they have not established any public sector facility to provide last-ditch funding to a failing bank, while Australia, Brazil, China, the EU, Indonesia, Saudi Arabia, Switzerland and Turkey are judged materially non-compliant.

Credit Suisse case underlines wider industry risks

The FSB says most shortcomings relate to questions of credibility, with fewer than half of jurisdictions having mechanisms that are clear, capable of delivering liquidity at the necessary scale and usable in a timely way. It warns that when large banks come under stress, they can quickly need substantial funding to meet deposit withdrawals and creditor demands.

The 2023 rescue of Credit Suisse illustrates the scale of support that may be required. The Swiss central bank provided emergency liquidity and loan facilities worth SFr168bn to keep the lender operating until a sale to UBS could be agreed, and those loans were later repaid or cancelled within months.

While the FSB says that episode shows Switzerland has a high level of readiness, it notes that support was delivered through an emergency decree and that a formal Swiss public liquidity backstop is still pending before parliament. In the EU, the Single Resolution Fund has raised more than €81bn for failing banks, but the watchdog says its effectiveness is limited by uncertainty over its ability to raise more money in debt markets if those resources are exhausted.

Our earlier report on the IMF’s warning about hedge funds’ rapid growth highlighted how rising leverage, crowded positioning and reliance on a concentrated group of prime brokers could amplify market stress. It also noted that hedge funds have become bigger players in sovereign bond markets, increasing the risk of forced, simultaneous unwinds that can spill over into broader financial conditions. The takeaway was that non-bank leverage may not start the next crisis, but it can intensify shocks when funding and liquidity conditions tighten.

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