Bank failures and the subsequent liquidation can have far-reaching consequences for account holders, leading to devastating financial losses. Governments and regulatory authorities worldwide recognize this and have been implementing various measures to prevent similar situations from happening in the future. Here is an overview of some initiatives taken by international organizations and regulators in the EU, UK, and USA.
International Organizations:
Basel Committee on Banking Supervision (BCBS): The BCBS is an international body that sets global standards for banking regulation, supervision, and risk management. Following the 2008 global financial crisis, the BCBS introduced the Basel III framework, which aims to strengthen banks’ capital requirements, improve risk management, and enhance transparency in the banking sector.
Financial Stability Board (FSB): The FSB is an international body that monitors and makes recommendations to promote global financial stability. It has developed various policy recommendations and guidelines for strengthening the resilience of the global financial system, including measures to address systemically important financial institutions (SIFIs) and improve resolution frameworks for failed banks.
European Union (EU):
Single Supervisory Mechanism (SSM): The SSM is a supervisory framework for banks in the Eurozone, which centralizes the supervision of significant banks under the European Central Bank (ECB). The SSM aims to ensure consistent and effective supervision of banks, reducing the risk of bank failures.
Bank Recovery and Resolution Directive (BRRD): The BRRD provides a harmonized framework for the recovery and resolution of banks in the EU, aiming to minimize the impact of bank failures on the economy and taxpayers. It includes measures for early intervention, the establishment of resolution authorities, and the creation of resolution funds financed by the banking industry.
European Deposit Insurance Scheme (EDIS): EDIS is a proposed EU-wide deposit insurance scheme designed to protect depositors in the event of a bank failure. While not yet implemented, EDIS aims to strengthen depositor confidence and prevent bank runs across the EU.
United Kingdom (UK):
Prudential Regulation Authority (PRA): The PRA is a part of the Bank of England and is responsible for the prudential regulation and supervision of banks in the UK. It focuses on ensuring the safety and soundness of banks and minimizing the impact of bank failures on the UK’s financial stability.
Financial Services Compensation Scheme (FSCS): The FSCS is the UK’s deposit insurance scheme, which provides compensation to depositors in the event of a bank failure. The FSCS covers deposits up to £85,000 per person, per institution, and aims to maintain depositor confidence and prevent bank runs.
United States (USA):
Federal Deposit Insurance Corporation (FDIC): The FDIC is an independent US agency that insures deposits in banks and savings associations. The FDIC covers deposits up to $250,000 per depositor, per insured bank, and aims to maintain stability and public confidence in the nation’s financial system.
Dodd-Frank Wall Street Reform and Consumer Protection Act: Passed in response to the 2008 financial crisis, the Dodd-Frank Act introduced a comprehensive set of reforms to strengthen the US financial system. Among its provisions are enhanced capital and liquidity requirements, stress testing for large banks, and the establishment of the Orderly Liquidation Authority (OLA) to facilitate the resolution of failed banks.
In conclusion, governments and regulatory authorities across the world, including international organizations and regulators in the EU, UK, and USA, are actively working to implement measures to prevent bank failures and protect account holders from financial losses. While these measures cannot guarantee that bank failures will never occur, they aim to reduce the likelihood and impact of such events on the financial system and the wider economy.