Learning Objectives

• Evaluate the Credit Suisse case and its implications for the international resolution framework.
• Evaluate the US bank failures of 2023 and their implications for the international resolution framework.
• Identify and describe the strengths and weaknesses of the resolution framework as demonstrated by Credit Suisse case and the US bank failures of 2023.
• Describe the uncovered issues for bank resolution that require further studies and development for future improvements on the implementation of the international resolution framework.

Credit Suisse Case And Its Implications

Credit Suisse experienced significant financial stress during October 2022 and March 2023. Despite attempts to stabilize its liquidity and operations, it faced extreme pressure, leading to its acquisition by UBS under emergency measures. The resolution process involved the Swiss National Bank (SNB) providing liquidity backstops, a government guarantee, and the write-down of Additional Tier 1 (AT1) bonds, bypassing the formal resolution framework established under the Key Attributes of Effective Resolution Regimes for Financial Institutions.

Key Observations from the Credit Suisse Case

1. Preparedness for Resolution:
   • Extensive preparations had been made by the Swiss authorities, including valuation exercises and readiness to implement a Single Point of Entry (SPE) bail-in strategy.
   • These preparations demonstrated the operational effectiveness of resolution planning, with clear steps and international cooperation among authorities.
2. Decision Against Resolution:
   • Despite preparedness, resolution was not activated. Instead, a private transaction (merger with UBS) was pursued to avoid uncertainties associated with a formal resolution.
   • Authorities cited concerns over market confidence, the potential for contagion, and the mechanics of bail-in execution during a volatile period.
3. Impact on Stakeholders:
   • Shareholders and AT1 bondholders incurred significant losses, aligning partially with the principles of loss allocation under the resolution framework.
   • However, deviations occurred as the Swiss government provided guarantees, raising questions about taxpayer exposure.
4. Role of Public Liquidity Backstops:
   • The case emphasized the importance of robust and credible liquidity support mechanisms in stabilizing failing banks and restoring confidence.
   • Swiss authorities relied on emergency legislation to establish these backstops quickly, which could be a model for future crisis management.

Implications for the International Resolution Framework

1. Strengths Highlighted:
   • Resolution Planning: The resolution framework proved effective in preparing authorities for crisis scenarios. The ability to implement a resolution within a short time was notable.
   • Coordination and Cooperation: The Crisis Management Group (CMG) facilitated extensive cross-border collaboration, ensuring preparedness and clear communication among key stakeholders.
2. Challenges Identified:
   • Execution Risks of Bail-In: The complexity of executing bail-in strategies across borders, including legal and operational barriers, requires further refinement.
   • Market Confidence: The reluctance to use resolution tools suggests a need to enhance market understanding and trust in the framework to reduce the stigma associated with resolution.
   • Uncertain Market Impact: Concerns about potential contagion and investor behaviour during volatile periods highlight the need for better systemic risk assessments.
3. Lessons for Future Resolutions:
   • Flexibility in Resolution Tools: Authorities should prepare multiple resolution strategies, including combinations of bail-in and transfer tools, to enhance strategic optionality
   • Enhanced Communication: Effective crisis communication strategies are vital for restoring market confidence and ensuring public understanding of resolution objectives.
   • Legal Framework Improvements: Harmonizing legal frameworks across jurisdictions to support seamless execution of bail-in strategies is crucial for cross-border cases.
   • Public Sector Backstop Mechanisms: Governments must establish clear and credible liquidity facilities to ensure post-resolution stabilization without relying excessively on taxpayers.
4. Opportunities for Framework Enhancement:
   • Public Awareness and Credibility: Strengthening market awareness and confidence in resolution frameworks will encourage their use as viable alternatives to government bailouts.
   • Testing and Simulations: Frequent stress-testing and simulation exercises can prepare authorities for rapid decision-making and execution under crisis conditions.
   • Post-Stabilization Restructuring: Developing clear plans for restructuring resolved banks will be key to restoring trust and long-term viability.

The Credit Suisse case highlights both the strengths and limitations of the international resolution framework. While it validated the operational readiness of the framework, the decision to opt for a merger underscores the need for continuous improvement in execution strategies, market communication, and public sector support mechanisms. By addressing these challenges, the framework can become a more effective tool for safeguarding financial stability in future crises.

Us Bank Failures In 2023 And Their Implications

The failures of Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank in the first quarter of 2023 presented significant challenges and lessons for the international resolution framework. These cases highlighted vulnerabilities in bank management, regulatory frameworks, and the speed of contagion facilitated by modern financial systems.

Overview of the US Bank Failures

1. Key Events:
   • Silicon Valley Bank (SVB): SVB faced rapid deposit outflows after it announced a capital raise and significant losses on its bond portfolio. Within two days, it experienced a $40 billion deposit run, ultimately leading to its closure on March 10, 2023.
   • Signature Bank: Following SVB’s collapse, Signature Bank suffered a similar fate due to deposit outflows, leading to its closure by the New York Department of Financial Services on March 12, 2023.
   • First Republic Bank: This bank also faced significant stress due to its reliance on high-value deposits, resulting in financial instability and eventual resolution.
2. Key Drivers:
   • Concentration of Deposits: These banks relied heavily on large, uninsured deposits, leaving them vulnerable to rapid withdrawal in a crisis.
   • Asset-Liability Mismatch: Unrealized losses on long-duration bond holdings, coupled with rising interest rates, contributed to the liquidity crunch.
   • Social Media and Technology: The speed of deposit withdrawals was amplified by 24/7 payments, online banking, and rapid communication through social media, which fuelled depositor panic.
3. Resolution Measures:
   • The Federal Deposit Insurance Corporation (FDIC) acted swiftly by creating bridge banks, extending deposit insurance to uninsured depositors under the “systemic risk exception,” and facilitating the sale of these banks’ assets.
   • The Federal Reserve introduced the Bank Term Funding Program, providing additional liquidity to stabilize the financial system.

Implications for the International Resolution Framework

1. Strengths Highlighted
   • Bridge Banks as Effective Tools: The FDIC’s use of bridge banks allowed for the continuation of critical banking functions, preventing systemic disruptions and providing time for asset disposition.
   • Systemic Risk Exception: The use of systemic risk determinations ensured stability by protecting all depositors, reducing the risk of contagion to other banks.
   • Collaboration and Speed: Coordination among the FDIC, Federal Reserve, and US Treasury ensured rapid responses, limiting systemic repercussions.
2. Challenges Identified
   • Resolution Planning for Non-G-SIBs: Unlike global systemically important banks (G-SIBs), the failed banks were not subject to stringent resolution planning requirements. This gap led to ad hoc responses, increasing systemic risks.
   • Liquidity Mismatch: The failures emphasized the importance of banks maintaining adequate liquidity buffers and access to funding sources during stress scenarios.
   • Deposit Insurance Gaps: The reliance on uninsured deposits magnified the risk of bank runs. The uneven treatment of uninsured deposits across institutions could undermine depositor confidence in the resolution framework.
   • Speed of Contagion: The rapid pace of modern bank runs, facilitated by online banking and social media, overwhelmed traditional regulatory and resolution frameworks.
3. Lessons for the International Resolution Framework
   • Broadening Scope of Resolution Planning: The US failures revealed that non-G-SIBs could pose systemic risks. Expanding resolution planning and loss-absorbing capacity requirements to include large regional and mid-sized banks is critical.
   • Addressing the Speed of Bank Runs: The framework must account for the rapid pace of modern bank runs. This requires enhancing contingency planning, testing for accelerated liquidity crises, and ensuring depositors are reassured quickly during crises.
   • Enhanced Deposit Insurance: Reassessing the role of deposit insurance and its integration into resolution frameworks can help restore confidence. The design of deposit insurance schemes must balance depositor protection and moral hazard concerns.
   • Public Sector Backstop Funding: The introduction of the Federal Reserve’s Bank Term Funding Program underscored the importance of credible liquidity backstops to stabilize banks in distress and prevent panic contagion.
   • Transparency in Communication: Effective communication by authorities was essential in reducing panic. International frameworks should emphasize communication strategies to ensure public trust during crises.
4. Opportunities for Framework Enhancement
   • Systemic Risk Assessments: Resolution frameworks must incorporate assessments of how mid-sized banks or non-G-SIBs could pose systemic risks during stress scenarios.
   • Resolution Toolkits for Mid-Sized Banks: Developing specific resolution tools for banks that are not G-SIBs but could have systemic importance (e.g., bridge banks, sale strategies) is essential for broader applicability of the framework.
   • Strengthening Global Coordination: Since these crises have cross-border implications, international coordination and information-sharing must be strengthened to address systemic risks beyond domestic jurisdictions.

The 2023 US bank failures exposed critical vulnerabilities in the international resolution framework. While the actions taken by US authorities averted broader systemic crises, the events underscored the need for improvements, particularly for non-G-SIBs. By addressing gaps in resolution planning, enhancing liquidity backstops, and adapting to the challenges of modern banking systems, the international framework can better respond to future crises and ensure financial stability.

Strengths And Weakness Of The Resolution Framework

The events surrounding the failures of Credit Suisse and US banks (Silicon Valley Bank, Signature Bank, and First Republic Bank) highlight several strengths and weaknesses of the international resolution framework established after the Global Financial Crisis. These cases provide real-world tests of the framework’s robustness in managing financial crises.

Strengths of the Resolution Framework

1. Preparedness and Resolution Planning
   • Credit Suisse Case:
     • The resolution planning conducted for G-SIBs like Credit Suisse showcased a high level of preparedness, including pre-crisis valuations and Single Point of Entry (SPE) strategies.
   • US Bank Failures:
     • The US authorities successfully utilized bridge banks to ensure continuity of critical banking functions, limiting disruptions to customers and systemic risks.
2. International Coordination and Communication
   • Credit Suisse Case:
     • The Crisis Management Group (CMG) facilitated timely collaboration between home and host authorities, ensuring a unified approach to resolution planning.
     • The inclusion of host jurisdictions like the US (e.g., SEC and NYDFS) enhanced cross-border coordination.
   • US Bank Failures:
     • Swift cooperation between the FDIC, Federal Reserve, and US Treasury enabled the implementation of systemic risk exceptions to protect depositors and stabilize markets.
3. Loss Absorption Mechanisms
   • Credit Suisse Case:
     • The availability of Total Loss-Absorbing Capacity (TLAC) instruments provided a credible foundation for loss absorption in a bail-in scenario.
     • He write-down of Additional Tier 1 (AT1) bonds reduced the burden on taxpayers.
   • US Bank Failures:
     • Shareholders and unsecured creditors incurred significant losses, aligning with the principle of minimizing taxpayer exposure.
4. Public Sector Liquidity Backstops
   • Credit Suisse Case:
     • Emergency legislation allowed the Swiss authorities to establish liquidity facilities, restoring market confidence and preventing contagion.
   • US Bank Failures:
     • The Federal Reserve’s Bank Term Funding Program ensured adequate liquidity to banks, reducing the risk of panic contagion across the financial sector.
5. Systemic Risk Mitigation
   • US Bank Failures:
     • The systemic risk exception under the Federal Deposit Insurance Act enabled authorities to extend deposit insurance protection to uninsured depositors, preventing further destabilization.

Weaknesses of the Resolution Framework

1. Reluctance to Use Resolution Tools
   • Credit Suisse Case:
     • Despite the extensive planning, resolution tools were not activated, raising questions about the framework’s credibility. Authorities opted for a private merger, bypassing the formal resolution process.
     • This decision was influenced by concerns over market confidence, legal uncertainties, and potential contagion effects.
   • US Bank Failures:
     • The lack of pre-crisis resolution plans for regional banks like SVB and Signature Bank exposed a gap in resolution preparedness for non-G-SIBs.
2. Limited Applicability to Non-G-SIBs
   • US Bank Failures:
     • Non-G-SIBs are not subject to the same stringent resolution planning requirements, leaving authorities unprepared for their failure.
     • The rapid depositor runs exacerbated by uninsured deposits and social media-driven panic highlighted the framework’s inadequacy for mid-sized banks.
3. Challenges with Bail-In Execution
   • Credit Suisse Case:
     • Operational and legal challenges in executing cross-border bail-ins were significant, particularly in aligning Swiss and US securities laws for TLAC instruments held by US investors.
   • US Bank Failures:
     • These banks lacked sufficient loss-absorbing capacity, such as TLAC instruments, which could have supported orderly resolution.
4. Speed of Modern Bank Runs
   • Credit Suisse Case:
     • While Credit Suisse faced prolonged liquidity stress, the rapid pace of depositor withdrawals during the US bank failures revealed how 24/7 payments, online banking, and social media can outpace traditional resolution mechanisms.
   • US Bank Failures:
     • The framework was overwhelmed by the speed of withdrawals, with SVB losing over $40 billion in deposits in one day
5. Public Sector Exposure and Moral Hazard
   • Credit Suisse Case:
     • The Swiss government’s second-loss guarantee and liquidity support exposed taxpayers to potential losses, raising concerns about the over-reliance on public funds.
   • US Bank Failures:
     • The systemic risk exception and extended deposit insurance raised questions about moral hazard, particularly for large, uninsured depositors.
6. Communication Challenges
   • Credit Suisse Case:
     • Crisis communication strategies were insufficient to reassure markets, highlighting the need for better pre-crisis and real-time communication plans
   • US Bank Failures:
     • Authorities struggled to manage depositor panic fuelled by social media, demonstrating the limitations of current communication frameworks in modern banking crises.

Comparison of Strengths and Weaknesses

Aspect	Strengths	Weaknesses
Preparedness	Robust resolution planning for G-SIBs like Credit Suisse.	Gaps in resolution planning for non-G-SIBs.
Coordination	Effective cross-border collaboration via CMG.	Limited coordination with jurisdictions outside CMGs.
Loss Absorption	Use of TLAC and AT1 instruments to absorb losses.	Execution risks and reluctance to use bail-ins.
Liquidity Support	Effective public liquidity backstops.	Taxpayer exposure and potential moral hazard.
Systemic Risk Mitigation	Use of systemic risk exception to prevent contagion.	Ad hoc reliance on exceptions for uninsured depositors.
Modern Banking Challenges	Authorities managed crises quickly under pressure.	Speed of bank runs overwhelmed traditional mechanisms.

The resolution framework demonstrated its robustness in several areas, particularly for G-SIBs, by ensuring effective preparation, coordination, and loss absorption. However, weaknesses such as the reluctance to activate resolution tools, gaps in non-G-SIB coverage, and challenges posed by modern banking dynamics highlight the need for significant refinements. Addressing these weaknesses will be crucial for enhancing the framework’s credibility and effectiveness in future financial crises.

Uncovered Issues For Bank Resolution

The cases of the Credit Suisse resolution and the US bank failures of 2023 exposed several unresolved issues and challenges that require further examination and development to improve the implementation of the international resolution framework. Below is a detailed description of some of these issues:

1. Effective Public Sector Backstop Funding Mechanisms
   • Challenges Identified:
     • The importance of credible liquidity backstops was highlighted in both the Credit Suisse case and the US bank failures. Liquidity issues persisted even after recapitalization due to market volatility.
     • Public sector backstops were implemented in an ad hoc manner, such as the Federal Reserve’s Bank Term Funding Program and Swiss emergency legislation, raising concerns about consistency, scale, and pre-crisis planning.
   • Future Focus:
     • Develop pre-established public backstop mechanisms that can be rapidly deployed to stabilize banks in resolution while protecting taxpayers from loss.
     • Ensure transparency and market awareness of these backstops to reduce panic during crises.
2. Resolution Strategies and Optionality of Tools
   • Challenges Identified:
     • The lack of flexibility in resolution strategies was evident in both cases:
       • The Credit Suisse resolution heavily relied on a merger rather than the available bail-in strategy.
       • US banks lacked pre-planned, firm-specific resolution tools for non-G-SIBs
     • The absence of a combination of tools such as partial bail-in, asset transfers, or bridge banks restricted the ability to address crises dynamically.
   • Future Focus:
     • Enhance the framework to allow a mix of resolution tools to adapt to diverse bank structures and crisis scenarios.
     • Incorporate strategies for merging failing banks with private buyers in resolution, including addressing complexities in large-scale mergers
3. Cross-Border Legal and Operational Challenges
   • Challenges Identified:
     • Cross-border complexities, particularly in bail-ins, were significant in the Credit Suisse case:
       • Legal challenges arose from differing securities laws across jurisdictions (e.g., US and Swiss laws for TLAC instruments).
     • Coordination among authorities outside the Crisis Management Group (CMG) was limited, leaving gaps in cross-border execution of resolution strategies.
   • Future Focus:
     • Harmonize legal frameworks for cross-border bail-ins and ensure resolution tools align with international securities laws.
     • Expand the scope of international coordination to include non-CMG jurisdictions with potential systemic exposure.
4. Modern Banking Dynamics and Speed of Crises
   • Challenges Identified:
     • The unprecedented speed of bank runs facilitated by social media, 24/7 payments, and mobile banking overwhelmed traditional resolution frameworks, as seen in the US bank failures.
   • Future Focus:
     • Incorporate modern technology and banking dynamics into contingency planning.
     • Enhance real-time crisis management systems to track and respond to rapid deposit movements.
5. Resolution of Non-G-SIBs
   • Challenges Identified:
     • The US bank failures demonstrated that non-G-SIBs could have systemic importance, yet they lacked adequate resolution planning and loss-absorbing capacity.
     • The absence of stringent resolution requirements for mid-sized banks left authorities unprepared.
   • Future Focus:
     • Expand resolution planning and TLAC requirements to include large regional and mid-sized banks that could pose systemic risks.
     • Develop specific resolution tools tailored to non-G-SIBs.
6. Role of Uninsured Deposits in Resolution
   • Challenges Identified:
     • Uninsured deposits played a key role in exacerbating the crises, particularly in the US bank failures. Authorities were forced to extend insurance protection to uninsured deposits under systemic risk exceptions.
     • This reliance on exceptions could undermine depositor confidence and create moral hazard.
   • Future Focus:
     • Reassess the role of deposit insurance in resolution frameworks and explore mechanisms to protect uninsured deposits while minimizing moral hazard.
     • Ensure consistent treatment of uninsured deposits to reduce uncertainty and panic during crises.
7. Post-Stabilization Restructuring
   • Challenges Identified:
     • In the Credit Suisse case, authorities had limited plans for restructuring post-resolution, which is critical to restoring market confidence and long-term viability.
     • Ad hoc restructuring could lead to further uncertainty and systemic risks.
   • Future Focus:
     • Integrate post-stabilization restructuring plans into resolution frameworks, including credible business models and timelines for reorganization.
     • Define oversight mechanisms for restructuring efforts to ensure alignment with resolution objectives.
8. Communication and Market Confidence
   • Challenges Identified:
     • Poor communication during the crises amplified market panic. For example:
       • In the Credit Suisse case, inconsistent messaging about the resolution tools undermined confidence in the framework.
       • In the US bank failures, social media fueled depositor panic.
   • Future Focus:
     • Develop comprehensive communication strategies to reassure markets and depositors during crises.
     • Conduct regular public education campaigns about resolution frameworks to build trust and reduce uncertainty.
9. Legal and Operational Readiness for Bail-In
   • Challenges Identified:
     • Legal uncertainties around the execution of bail-ins, particularly across borders, delayed or discouraged their use.
     • Operational challenges such as generating pro-forma financial statements during resolution weekends also hindered implementation
   • Future Focus:
     • Improve the legal certainty of bail-ins by addressing jurisdiction-specific challenges and harmonizing laws.
     • Enhance banks’ operational capabilities to produce accurate financial information rapidly during resolution.
10. Addressing “Too Big to Fail” and Consolidation Risks
    • Challenges Identified:
      • The reliance on large financial institutions to resolve crises, as in the Credit Suisse-UBS merger, could exacerbate the “too big to fail” problem.
      • Consolidation resulting from such resolutions raises competition policy concerns and systemic risk implications.
    • Future Focus:
      • Develop alternative strategies to reduce dependency on large institutions in resolution processes.
      • Balance competition and stability objectives in post-crisis consolidations.

The Credit Suisse case and the US bank failures exposed critical gaps in the current international resolution framework. Addressing these uncovered issues—ranging from effective public backstops and cross-border coordination to modern banking dynamics and the treatment of non-G-SIBs—will be essential for strengthening the framework’s robustness and credibility. Continuous improvement through research, policy updates, and stress-testing will ensure the framework evolves to meet future challenges.