BIS: Cross-border crisis simulation exercise in South America - results

Abstract


In March 2021, the Financial Stability Institute (FSI) of the BIS, with the support of a consultant, coordinated a cross-border crisis simulation exercise (CSE) involving 11 authorities with responsibilities for crisis response and bank failure management from six countries in South America: Argentina, Brazil, Chile, Colombia, Paraguay and Uruguay.


During the CSE, participants responded to an invented scenario that modelled the increasing financial stress and failure of a fictional regionally systemic cross-border banking group. The CSE’s objective was to enable the authorities to assess the effectiveness of their crisis management frameworks and cross-border cooperative arrangements in a controlled environment, and identify areas for improvement.


This report was prepared by the FSI and consultants following the CSE and sets out general findings and recommendations on a range of topics, including crisis management tools; recovery and resolution planning; liquidity and resolution funding; domestic decision-making procedures; and cross-border cooperation and information-sharing.


Conclusion


The crisis simulation exercise was effective in testing policies and capabilities, and prompted participants to consider adjustments to their resolution frameworks. Participants managed the simulated crisis well and were immersed in the exercise. The exercise revealed certain shortfalls across the region, in particular related to available resolution tools and cross-border cooperation.


The exercise highlighted that planning should be carried out during peacetime to ensure preparedness and limit impact on financial stability. The simulation sought to illustrate how rapidly crises escalate and convey to participants the importance of being well prepared. Recovery plans, prepared both at group level and for subsidiaries, should set the basis for discussion with management and serve to evaluate effectiveness of containment measures. Such plans are the responsibility of the bank’s management, but should be reviewed by authorities to assess their credibility and frequently updated.


Resolution plans should be developed in advance and take full account of legal, funding and operational Cross-border crisis simulation exercise in South America17considerations.

Resolution planning should include discussion with home and host supervisors of the

preferred resolution strategy. Authorities should regularly review the feasibility of implementing the resolution strategy and plan, and monitor institutions’ ability to support that implementation. Furthermore, an effective early intervention regime can complement the resolution framework. Enriching the crisis toolkit with a playbook of early intervention measures in accordance with crisis severity would help ensure a clear pathway for crisis escalation. Early intervention measures should be assessed as part of a holistic crisis management strategy for the bank, given the possible implications they could have

for an eventual resolution. The exercise confirmed that crisis management toolkits across the region would benefit from further alignment with the FSB Key Attributes. In the event of resolution, tools such as bridge banks or a power to restructure liabilities could be useful. Such tools can facilitate the continuation of critical functions and services, rather than focusing primarily on closure and liquidation of failing banks.


Cross-border cooperation was the focus of the exercise and, while there was fluid communication between participants, there is room to formalise cross-border cooperation. A cross-border cooperation framework would encourage authorities to exchange information, consider implications of resolution decisions on other jurisdictions and, where consistent with national financial stability and their institutional mandates, tailor their actions to those that are least disruptive for the region. Authorities would also

benefit from establishing forums, such as crisis management colleges or groups, for coordination on crisis preparedness and management, and agreeing the basic operational principles. Authorities are encouraged to review their experience and the outcome of the simulation and consider steps to further strengthen the crisis management framework and related capabilities. We encourage participating authorities to discuss their experience and the findings and recommendations both internally and with domestic and cross-border peers and develop a roadmap to address any issues for improvement identified. The roadmap would reflect the fact that many of these changes will take time and require extensive deliberation and consensus-building



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