The challenges of cross- border crisis management Rupert Thorne Financial Stability Forum June 8

Why is cross-border cooperation in crisis management important? Lack of coordination almost certain to produce suboptimal “global” outcomes It can prolong the crisis and add to the eventual costs Current obstacles to coordination: –Different national frameworks –Different preferences for crisis resolution outcomes –Conflicts of interest with regard to cross-border institutions –Countries need to develop their own crisis management expertise before they can cooperate –Lack of crisis management tools –In many cases, reflects lack of experience of CB crises But there are areas where progress can be made

The FSF’s interest FSF founded to promote international stability through information exchange and cooperation Unique membership comprising key official bodies in major financial centers FSF seeks to prompt action to address vulnerabilities affecting the international financial system Ongoing interest in crisis management and business continuity issues

“Winding Down” Task Force 2001: Task Force on the Winding Down of Large and Complex Financial Institutions Recommendations: –Readily available information on LCFIs –Contingency plans at LCFIs –Contingency plans at authorities –Communication between authorities Recommendations useful for other types of crisis too

Types of crisis Different forms of crisis –Liquidity –Solvency –Market –Business continuity Individual incidents may be a mix of these Crises may well involve nonbanks as well as banks, or bank/nonbank groups – this leads to challenges in defining authorities’ goals and in coordination

Cross-border and cross-sector coordination challenges Different institutional frameworks and responsibilities Conflicting objectives and interests of authorities –Liquidity provision –Cost of crisis resolution –Deposit insurance Home-host issues Information sharing and communication needs –In contingency planning –During a crisis

Coordination challenges Liquidity Provision Who decides (and how) whether illiquid cross-border firm is still solvent? Who provides liquidity support? What collateral requirements? FX currency needs? Other difficult questions over liquidity provision to: –financial groups with banking and non-banking units –parent banks with systemically important units in other countries –foreign branches vs. foreign subsidiaries Legal constraints on use of liquidity to resolve problems in foreign countries Should nonbanks ever receive official liquidity?

Coordination challenges Resolution of Solvency crisis Meeting resolution costs naturally involves governments Providing guarantees also involves governments Political and legal factors may inhibit cross- border cooperative solutions to burden-sharing Inevitably, governments are reluctant in advance to constrain their room for maneuver. Prior understanding of technical aspects, smoother information exchange, may free up more time to focus on policy issues in a crisis.

Coordination challenges Deposit insurance Issues concerning: –coverage of, and contributions by, cross-border institutions –coverage of bank/nonbank groups Burden-sharing issues here too Statutory constraints may limit deposit insurers’ freedom of action Perhaps deposit insurers need to be have more dialogue with each other and with supervisors and other authorities

Coordination challenges Market crisis Market crises can lead to undue retreat from risk-taking and to solvency and liquidity problems in a variety of institutions Underlying problem or affected markets may not be confined to one jurisdiction Tools for addressing market crises less well developed than for solvency or liquidity crises at individual firms Institutional responsibilities for market crisis prevention and resolution also often not clear

Coordination challenges Business continuity crisis After 9/11 and several other events, more senior management attention to business continuity crises Because the financial system is a network, systemic continuity is more important than in other industries Joint Forum draft principles of business continuity published Avian flu has further heightened attention More work needed on communication channels in business continuity crises Increasing recognition of links with financial crisis planning, risk management, but more work on links needed

Responses to challenges National contingency planning Prerequisite for cross-border cooperation is articulation and testing of national plans Legal and other powers for handling crises need to exist, distribution of responsibilities made explicit Public communication about crisis handling arrangements may be helpful For different types of crisis, contingency planning increasingly taking place and increasingly formalised But flexibility to respond to individual cases still an important part of all plans Most planning still at a national, not international, level

Contingency planning Authorities’ powers Division of legal responsibilities between ministry of finance, central bank, supervisory agency etc Framework for decision-making Prescribed objectives of crisis intervention Powers to exchange information between national and other bodies Legal powers to act – tools available

Contingency planning Information availability “Winding Down” Task Force recommended authorities have available, on ongoing basis, LCFI information that might be needed in crisis FSF working group created fact book template in 2003 Since then, fact book development has been mostly at national level, with focus on liquidity and risk data But still at development stage, with little cross- border data sharing between authorities at present

Contingency planning Testing and crisis simulations Crisis simulation exercises becoming common Exercises can test: –information availability, –powers to act, –coordination between authorities But exercises can only test those aspects built into the simulation; they cannot fully substitute for real-life experience Cross-border participation in some cases - especially EU, where euro and TARGET make this especially relevant More room to share lessons, especially cross-border

Contingency planning Preserving core functions Some contingency planning explores how to ensure continuity of a firm’s systemically important payment and settlement functions in a crisis E.g. “NewBank”, that could be activated to clear US government securities But early stage of thinking and largely on a national scale

Responses to challenges Cross-border cooperation Growth of LCFIs Increasingly blurred line between banking and nonbanking business Need for authorities to cooperate and communicate cross-sector and cross- border: –MoUs –Colleges of supervisors –Is this enough? What else is feasible?

Responses to challenges Memoranda of understanding Increasing numbers of bilateral and multilateral MoUs Cross-border, cross-sector or cross-institutional (i.e. regulators, central banks, finance ministries) Often cover both ongoing supervision and crisis communication Typically set out broad principles, not detailed procedures Largely untested in crises

Responses to challenges Colleges of supervisors Ongoing supervisory cooperation structure Regular sharing of information Lead supervisor concept Still issues over how the supervisors will coordinate Who to include? All supervisors or just the most important? What about nonsupervisory authorities? Colleges of supervisors help with building up cross- border understanding but are not, as currently designed, a crisis management mechanism

Responses to challenges Regional initiatives Regional initiatives – MoUs but also other cooperation and contingency planning EU, Scandinavia, Australasia EU: Political and economic integration, single market, have helped propel process Wide-ranging MoUs cross-border and cross-sector, but confidential and still untested in practice

Outstanding issues Coordination Progress on cross-border financial crisis cooperation slow: Differing national institutional structures and policy issues Differing national priorities on home/host issues Concerns that cross-border planning may reduce national discretion Issues of appropriate burden-sharing In some areas, national laws inhibit cross-border solutions In absence of crises, difficulty in defining what the potential problems to be addressed are.

Outstanding issues Home-host Principle of home supervision established for ongoing bank supervision, but less clear for crisis management and for nonbanks Potential issue where crisis institution is systemic in host country but not in home A subsidiary’s activities and risks may be difficult to isolate from the rest of the group For home country acting alone, cross-border firm may be “too big to save” Potential conflicts regarding ring-fencing, liquidity, bail-out, deposit insurance

Outstanding issues Information sharing For both financial and business continuity crises, scope for further information sharing about crisis planning and during crisis itself Sharing lessons from national contingency planning and games Cooperation in contingency planning, especially for cross-border crises Home/host issues Pre-specifying systems for information sharing in crises

Outstanding issues Communication channels In crises, not only what to communicate, but how to communicate Incidents such as London bombing exposed need to pre-specify communication channels Affected countries should “push” information, not wait for it to be “pulled” by others Up-to-date key contact lists Alternate communication channels Testing needed

The way forward? Further development of national plans Informal information-sharing and cooperation Sharing of experiences and ideas Workshops and other discussion fora Identify areas where joint work may be useful More formal regional and bilateral arrangements? May be an area for small steps forward, rather than a grand plan