Basel Committee Issues Recommendations for Addressing Systemic Risk

The Basel Committee on Banking Supervision has issued the final ‘Report and Recommendations of the Cross-border Bank Resolution Group’.

Nout Wellink, chairman of the Basel Committee and president of the Netherlands Bank, noted that “the resolution of a cross-border bank is a complex and multidimensional process and the financial crisis exposed gaps in intervention techniques and tools needed for an orderly resolution. Based on the lessons of the crisis and our analysis of national resolution frameworks, I believe that implementation of the committee’s recommendations will help make meaningful progress toward addressing systemic risk and the too-big-to-fail problem.”

The report, which was first issued for consultation in September 2009, sets out 10 recommendations that fall into three categories:

1. Strengthening national resolution powers and their cross-border implementation: national authorities need to have powers to intervene sufficiently early and to ensure the continuity of critical functions.
2. Firm-specific contingency planning: banks, as well as key home and host authorities, should develop practical and credible plans to promote resiliency in periods of severe financial distress and to facilitate a rapid resolution should that be necessary. The plans should ensure access to relevant information in a crisis and assist the authorities’ evaluation of resolution options. One of the main lessons from the crisis was that the enormous complexity of corporate structure makes resolutions difficult, costly and unpredictable.
3. Reducing contagion: risk mitigation through mechanisms such as netting arrangements, collateralisation practices and the use of regulated central counterparties should be strengthened to limit the market impact of a bank failure.

Recognising the wide diversity in national legal and resolution frameworks, the committee’s report represents an internationally agreed set of recommendations for improving resolution. It recommends that national authorities seek convergence of national resolution tools and measures to promote the coordinated resolution of banks active in multiple jurisdictions. The report also recommends that systemically important cross-border banks and groups provide a plan to preserve the firm as a going concern, promote the resiliency of key functions, or facilitate a rapid resolution or wind-down should that prove necessary.

The committee also recommends that supervisors work closely with their foreign counterparts and relevant resolution authorities to understand how complex group structures and operations could be resolved in a crisis. If an institution’s group structures are too complex to permit an orderly and cost-effective resolution, national authorities should consider imposing regulatory incentives, through capital or other prudential requirements, to encourage simplification of the structures.

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