New Delhi: Seeking to address the issue of “too-big-to-fail” institutions in times of acute financial crisis, the Bank for International Settlements (BIS) has called for close cooperation between regulators across borders.
The Switzerland-based BIS, an international group of central banks, has come out with a slew of recommendations to ensure that systemic risks are tackled properly, especially when complex financial companies fail.
The Basel Committee on Banking Supervision, which includes India, has stressed that supervisors should work closely with their foreign counterparts to understand how complex group structures and operations could be resolved in a crisis. The Committee’s Secretariat is based at BIS in Basel.
Nout Wellink, the Committee’s chairman in a recent statement said that implementation of these recommendations would help in making meaningful progress “toward addressing systemic risk and the too-big-to-fail problem.”
Ravaged by the financial turmoil, the failure of many entities such as the US-based Lehman Brothers, which had significant cross-border presence, had pushed the global economy into a tizzy.
Regulatory lapses and inability of countries to act in a coordinated manner, were exposed by such failures.
The Committee has also suggested the creation of a “national framework” in each country to monitor financial conglomerates in their respective jurisdictions.
These are part of the ‘Report and Recommendations of the Cross-border Bank Resolution Group´ prepared by the committee.
According to the committee, the aim is to reduce reliance on public support to institutions deemed “too big to fail”.
“The assumption, and reality, that some institutions are too big or too interconnected to fail has introduced additional risk and a greater likelihood of cross-border contagion into global finance,” the report pointed out.
Going by the report, “systemically important cross-border banks and groups” should have a plan to preserve the firm or facilitate a rapid wind-down, if the situation warrants.
“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,” it noted.
For instance, Lehman Brothers group consisted of 2,985 legal entities that operated in about 50 countries.
Following the financial meltdown, the US and the European authorities are looking at ways to strengthen their regulatory frameworks.
Apart from India, other committee members include the US, China, Britain, Brazil, France, Germany, Japan and Russia.