The Bank for International Settlements’ Financial Stability Institute published FSI Insights No 67 on how public resources are used to support bank resolution when banks’ internal loss-absorbing capacity and industry-funded arrangements are insufficient, unavailable quickly enough, or unusable without undermining resolution objectives. It concludes that public backstops can be necessary to preserve critical functions and financial stability, but should be embedded in resolution frameworks as last-resort tools with clear governance, conditionality and effective recoupment to limit fiscal exposure and moral hazard. Drawing on legal frameworks and recent cases across Bahrain, Canada, the European Banking Union, Hong Kong SAR, Japan, Malaysia, Morocco, Switzerland, the United Kingdom and the United States, the paper distinguishes between direct support (eg recapitalisations, guarantees or public ownership by treasuries or central banks) and indirect models where public funding is channelled through loans to deposit insurance or resolution funds. It finds a trend toward the indirect model because loans can be time-limited and priced to reinforce last-resort use, and can be repaid through industry levies that mutualise residual costs, sometimes with explicit scope for deferral on financial stability grounds and risk-based allocation. Backstop access is typically tied to systemic or public-interest determinations and senior-level decision-making across agencies, while requirements to pre-exhaust fund resources, impose upfront creditor losses, or seek market funding differ materially across jurisdictions. Illustrative recent tools include FDIC loss-share arrangements used to facilitate bank transfers in the United States in 2023 and the Swiss treasury’s CHF 9 billion second-loss guarantee to UBS in the Credit Suisse transaction, alongside reforms under way such as the planned European Stability Mechanism credit line to the Single Resolution Fund subject to treaty ratification and the United Kingdom’s proposed Bank Resolution (Recapitalisation) Bill to expand the Financial Services Compensation Scheme’s funding role.
Bank for International Settlements 2025-07-30
Bank for International Settlements surveys public backstop arrangements for bank resolution and highlights a shift toward loan-based support via industry funds
The Bank for International Settlements’ Financial Stability Institute released FSI Insights No 67, examining the use of public resources in bank resolution when internal loss-absorbing capacity is insufficient. The report highlights the necessity of public backstops to maintain financial stability, advocating for their integration as last-resort tools with clear governance and conditionality. It notes a trend towards indirect support models, such as loans to deposit insurance funds, and discusses examples like the FDIC's loss-share arrangements and the Swiss treasury's guarantee to UBS.