FSB Flags Weaknesses in Emergency Funding for Failing Banks

A recent Financial Stability Board (FSB) review found that many countries have significant gaps in their facilities to provide temporary public funding to systemic banks in resolution, with only four of 19 jurisdictions fully compliant with the FSB’s standards.

The FSB called for “urgent action” to strengthen public-sector backstop mechanisms that can provide temporary liquidity to a failing systemic bank during resolution. Only the US, UK, Japan, and Hong Kong were assessed as fully compliant. Canada, Mexico, Singapore, South Africa, and South Korea were largely compliant, while Australia, Brazil, China, the EU banking union, Indonesia, Saudi Arabia, Switzerland, and Turkey were “materially non-compliant.” The FSB additionally found that Argentina and India had no facility in place to provide such funding.

Soledad Núñez, Deputy Governor of Spain’s central bank and chair of the FSB review, said “having a credible public sector backstop funding mechanism is essential.” The FSB found that most shortcomings concerned whether such mechanisms could be used effectively in a crisis, with fewer than half of the jurisdictions having arrangements that were sufficiently clear, scalable, and timely.

The review also pointed to Credit Suisse’s 2023 rescue, when emergency liquidity helped keep the bank operating until its sale to UBS. The FSB said Switzerland demonstrated a “high level of readiness,” but noted that an ad hoc public liquidity backstop had been established through an emergency decree and that legislation for a permanent mechanism remains before parliament.