Prudential, Pragmatic and Prescient, Reform of Bank Resolution Schemes

Abstract

The 2008-2009 global financial crisis highlighted the interdependency of financial institutions and markets worldwide. Globally, fiscal support packages totaling 3 trillion USD were introduced, placing enormous strain on the public finances of a number of countries. Even in jurisdictions such as Canada, with relatively well-managed banking systems, a generalized loss of confidence led to a sharp rise in funding costs. The largest negative effects of the financial crisis on the Canadian economy stemmed from crises originating in other countries, with adverse contagion effects on the Canadian banking system, making it very difficult for Canadian banks to fund themselves in foreign markets. Bank supervisory authorities and financial institutions now appreciate that financial systems must be strengthened to enhance their capacity to withstand shocks There is considerable international initiative to devise mechanisms to prevent such failures in the future and to create new insolvency resolution schemes to address financial firm failure. Bank supervisors and other regulators are trying to discern the appropriate mix of prudential oversight and private sector governance. This paper examines two discreet issues within this much larger topic. Part II examines the need for regulatory oversight and coordination in preventing liquidity and solvency issues related to banks and other financial institutions. Reform is required to smooth out highs and lows within capital cycles and to address the need for cross-border resolution mechanisms for bank insolvency. Part III then examines the role of bank governance in preventing and addressing bank insolvency, suggesting that governance needs to be prudential, pragmatic and prescient if we are to reduce the frequency and severity of future bank failures