Nearly two decades after the global financial crisis, important weaknesses remain in the mechanisms designed to manage the failure of major banks. A review by the Financial Stability Board found that only four of 19 assessed jurisdictions fully meet its recommendations for public-sector liquidity funding during bank resolution.
The findings highlight a critical distinction in financial stability regulation. Authorities may have the legal powers to restructure a failing bank and impose losses on shareholders and creditors, but they also need immediate access to sufficient liquidity to maintain essential banking operations during a crisis.
Only Four Jurisdictions Fully Meet the Standards
The Financial Stability Board assessed 19 jurisdictions based on their ability to provide temporary public-sector liquidity to systemically important banks undergoing resolution. The United States, United Kingdom, Japan and Hong Kong were the only jurisdictions classified as fully meeting the recommendations.
Canada, South Korea, Mexico, Singapore and South Africa were assessed as largely meeting the standards. Australia, Brazil, China, the EU banking union, Indonesia, Saudi Arabia, Switzerland and Turkey were found to materially fall short, while Argentina and India were classified as not meeting the recommendations.
According to the Financial Stability Board, fewer than half of the assessed jurisdictions have mechanisms that simultaneously provide sufficient clarity, funding capacity and speed. These three characteristics become particularly important when a major bank experiences rapid deposit withdrawals and deteriorating market confidence.
Why Capital Is Not the Same as Liquidity
Following the 2008 financial crisis, banking regulation increasingly focused on ensuring that shareholders and creditors, rather than taxpayers, absorb losses when financial institutions fail. Authorities introduced stronger capital requirements, resolution plans and mechanisms for writing down or converting eligible liabilities.
However, a bank can remain financially viable after restructuring while still facing an immediate liquidity shortage. Large deposit withdrawals, collateral requirements and payment obligations can create substantial cash needs even when the institution has sufficient capital to absorb losses.
If private lenders are unwilling to provide financing during a crisis, authorities may need to supply temporary liquidity. Without such arrangements, even a well-designed resolution process could fail before a restructuring or controlled sale is completed.
Credit Suisse Demonstrated the Scale of the Challenge
The collapse of Credit Suisse in 2023 provides an important example. During the crisis, the Swiss National Bank made emergency liquidity and credit facilities totalling up to CHF168bn available to support the institution and facilitate its acquisition by UBS.
Much of the assistance was subsequently repaid or the corresponding facilities were closed. Nevertheless, the intervention demonstrated the extraordinary scale of funding that can become necessary when confidence in a systemically important bank deteriorates.
The Financial Stability Board recognised the Swiss authorities’ operational response but also identified weaknesses in the permanent framework. Significant emergency powers had to be introduced during the crisis itself, while Switzerland’s permanent public liquidity backstop remained subject to legislative development.
Europe’s €81bn Resolution Fund Faces a Funding Test
The EU banking union illustrates another challenge. Its Single Resolution Fund has accumulated more than €81bn to support the orderly resolution of failing banks. However, the existence of a substantial fund does not automatically guarantee sufficient liquidity during a systemic crisis.
If available resources prove inadequate, authorities must be able to obtain additional financing quickly. The Financial Stability Board highlighted uncertainty about the European mechanism’s ability to raise large amounts of supplementary funding through debt markets during periods of severe financial stress.
This distinction matters because the funding requirements of a future crisis cannot be predicted precisely. A credible resolution framework therefore needs not only existing financial reserves but also reliable mechanisms for expanding available liquidity without lengthy political or administrative procedures.
Digital Banking Is Accelerating Liquidity Risks
The speed of modern banking transactions makes emergency funding arrangements increasingly important. Mobile applications and online banking allow customers to withdraw or transfer deposits almost instantly, while social media can accelerate the spread of concerns about an institution’s financial condition.
The banking turmoil of 2023 demonstrated how rapidly confidence can deteriorate. Deposit outflows that previously developed over several days may now accelerate within hours, leaving regulators significantly less time to organise emergency financing.
Consequently, the effectiveness of a resolution framework depends heavily on preparation before a crisis begins. Legal authorisations, funding channels and operational responsibilities must be established in advance if authorities are to respond quickly enough.
Emergency Support Must Not Become a Permanent Bailout
Public liquidity assistance also creates risks of its own. If banks and investors expect governments to provide unconditional support, incentives to control financial risks may weaken. This is commonly described as moral hazard.
The Financial Stability Board therefore emphasises the distinction between temporary liquidity funding and absorbing economic losses. Shareholders and eligible creditors should bear losses through established resolution mechanisms, while public funding should be used as a temporary liquidity source when private alternatives are unavailable.
Appropriate safeguards, repayment arrangements and restrictions on access are essential. The objective is to preserve financial stability without transferring ordinary commercial losses from bank investors to taxpayers.
What the Findings Mean for Businesses and Investors
The Financial Stability Board’s findings suggest that assessing banking risk requires more than examining individual institutions’ capital ratios and liquidity reserves. The strength of national resolution frameworks, access to emergency financing and the ability of authorities to act quickly can materially influence the consequences of a banking crisis.
For international businesses, this creates an additional dimension of jurisdictional risk. Two banks with similar financial indicators may operate under very different national arrangements for managing institutional failure, potentially affecting depositors, counterparties and corporate liquidity management.
Investors should also distinguish between the size of dedicated resolution funds and the practical availability of additional financing. A large reserve may provide limited protection if authorities cannot expand funding rapidly when market conditions deteriorate.
A Critical Test for Global Financial Stability
The Financial Stability Board’s review does not provide a comprehensive assessment of each country’s overall ability to manage banking crises. It focuses specifically on temporary public-sector liquidity arrangements during the resolution of systemically important institutions.
Nevertheless, the finding that only four of 19 jurisdictions fully meet the recommendations identifies an important gap in global financial infrastructure. Stronger capital requirements and resolution powers have improved banking resilience since 2008, but they cannot fully compensate for inadequate emergency funding arrangements.
As digital banking accelerates financial transactions and liquidity shocks, the next stage of regulatory development will increasingly depend on operational readiness. The central challenge is ensuring that authorities can mobilise sufficient funding within the first critical hours of a crisis, while maintaining safeguards against unnecessary taxpayer exposure.