Most countries unprepared for bank failures, watchdog warns

Four out of five big countries are unprepared for a major bank failure, the world’s financial stability watchdog has warned, singling out India and Argentina as lacking any kind of emergency liquidity facility to deal with troubled lenders.

The Financial Stability Board on Friday called for “urgent action” by many countries to establish government funding mechanisms that can act as a lender of last resort and enable failing banks to be safely wound down or sold without needing nationalisation.

Almost two decades after the 2008 global financial crisis, the FSB published a review of public sector backstops that found many governments had still not implemented one of the key tools they were likely to need the next time a big bank crashes.

The US, UK, Japan and Hong Kong were the only ones of the 19 jurisdictions the FSB reviewed to have fully met its recommendations by setting up liquidity facilities for crisis-hit banks, it said.

“Having a credible public sector backstop funding mechanism is essential,” said Soledad Núñez, deputy governor at Spain’s central bank who chaired the FSB review. “Further work is urgently needed to complete implementation of the FSB’s recommendation.”

The watchdog said India and Argentina were both completely non-compliant with its recommendations as they had not established any kind of public sector facility to provide last-ditch funding to a failing bank.

Several jurisdictions were judged to be “materially non-compliant”, including Australia, Brazil, China, the EU, Indonesia, Saudi Arabia, Switzerland and Turkey. It found Canada, Mexico, South Africa, South Korea and Singapore were largely compliant.

Most of the gaps in preparations related to credibility problems, the FSB said, “with fewer than half of jurisdictions having mechanisms that are clear, capable of providing liquidity at the required scale, and able to be used in a timely manner”. 

When big banks are in trouble, they can quickly require a massive injection of funds to cover demands by depositors to withdraw their money and creditors wanting to be repaid. 

After Credit Suisse was hit by a crisis in 2023, the Swiss central bank provided emergency liquidity and loan facilities worth SFr168bn to keep the lender afloat until a sale to rival UBS could be agreed. The loans were repaid or cancelled a few months later.

The FSB said the Credit Suisse rescue showed Switzerland had a “high level of readiness”. But it added that this was achieved via an emergency decree and a Swiss public liquidity backstop was still pending before parliament.

The 21-country European banking union has raised over €81bn in the Single Resolution Fund to provide emergency funds to failing banks. But the FSB said the SRF was constrained by its uncertain ability to raise more in debt markets if its funds are exhausted.

“A resolution strategy may be difficult or impossible to execute without temporary public funding, even if the legal tools to impose losses on shareholders and recapitalise the systemic bank are available,” the FSB said.

Argentina’s central bank said the report did not reflect banking conditions in the country, which has a tiny private credit market after decades of macroeconomic volatility and is undergoing a stabilisation process under the country’s president, Javier Milei.

“The capitalisation level of Argentine banks exceeds the international average and the central bank more than meets international liquidity standards,” said a spokesperson.

Additional reporting by Ciara Nugent in Buenos Aires