‘Cross-border Cooperation in Bank Resolution: A Framework for Asia’

The increasing interconnectedness between Asian financial markets suggests the need for regulatory frameworks to support regional financial stability. This need is likely to increase with the advent of the ASEAN[1] Economic Community (“AEC”) established at the end of 2015. The AEC aims to achieve the free movement of goods, services, investment, capital, and skilled labour, and is anticipated to be among the seven largest economies in the world. In addition, economic integration among ASEAN’s ten Member States is facilitated by the harmonisation of regulatory frameworks. 

Financial integration and the growth of regional banks give rise to the risk of contagion of financial instability across national borders in times of crisis. This highlights the need for a regional resolution framework that can reduce the risk of financial contagion following banking distress. Regulatory frameworks have been developed internationally with a view to minimising the effect of financial contagion. Among these are frameworks facilitating the resolution—namely the restructuring or orderly winding-up—or recovery of distressed financial institutions.

However, international experience reveals the inherent difficulty of cross-border cooperation between authorities in home and host countries in this area, particularly in times of crisis. Such cooperation is central to the effective implementation of internationally prescribed resolution frameworks for cross-border banking groups. These frameworks aim to achieve the smooth resolution of financially distressed financial institutions without jeopardising systemic stability or burdening the public purse. The aforementioned aims are achieved through a variety of tools, including powers on the part of resolution authorities to take control of distressed financial institutions and to strengthen their capital position by converting debt into equity.

In a paper we recently co-authored (available here), we identify the features of a resolution framework that are likely to facilitate cross-border cooperation in bank resolutions in the Asian region. Our analysis draws on international models of cross-border cooperation in bank resolutions, acknowledging ASEAN’s distinct form of consensus-based cooperation and emphasis on national sovereignty.  ASEAN’s consensus-based cooperation (which prefers informal commitments over binding commitments and bilateralism over multilateralism) underpins cross-border cooperation in the broader East Asian region, as demonstrated by financial cooperation within ASEAN + 3. A resolution framework consistent with the established modes of cooperation within the region is arguably more likely to be implemented and remain resilient in times of crisis when cooperation is crucial.

Our paper proposes a regional resolution framework in the form of non-binding guidelines, consistent with established forms of cooperation within ASEAN + 3. A regional resolution framework should include internationally recommended resolution tools, and measures that facilitate the recognition and enforcement of foreign resolution actions. There are several challenges to the implementation of international recommendations in the region. Among the most significant is the acceptance of state intervention in banking crises on the part of certain stakeholders. A regional framework should be relevant to Asia and cognisant of its position on state-led intervention. Other impediments include the lack of resolution powers of regulators in a significant proportion of countries in the region, restrictions on information-sharing, differences in supervisory approaches and, at times, the lack of technical capacity.

In achieving regulatory harmonisation, ASEAN’s non-binding guidelines have often drawn on the existing regulations of ASEAN Member States in order to inform developments in the broader ASEAN region. ASEAN Member States may find the Singaporean provisions on cross-border cooperation in bank resolution of particular relevance. Singaporean legislation provides for foreign resolution actions to be implemented subject to national interests. It also facilitates information-sharing with foreign resolution authorities, addressing restrictions on information-sharing that would otherwise impede cross-border cooperation.

Cross-border cooperation may also be enhanced through bilateral arrangements and convergence-promoting initiatives. The Southeast Asian Central Banks’ research and training centre potentially provides a platform for development of guidelines or a handbook to promote convergence of supervisory and resolution approaches, and training to build capacity. Such initiatives would benefit from political consensus, funding, and technical assistance. Finally, resolution colleges may be built on existing supervisory colleges to facilitate cooperation across various stages of resolution. The establishment of a regional framework for cross-border cooperation in bank resolution will facilitate an efficacious response to distressed banks and strengthen financial stability in the region as it progresses towards increased financial integration.

Vivien Chen is a Research Associate, Andrew Godwin is a Senior Lecturer, and Ian Ramsay is a Professor of Law, all at Melbourne Law School.