FSB Warns of Bank Funding Gaps

Authorities remain inadequately prepared to supply emergency funding to failing banks, the Financial Stability Board warned on Friday, exposing a weakness in safeguards developed after the global financial crisis. Its peer review found that fewer than half of assessed jurisdictions had funding arrangements with sufficient clarity, capacity and speed. The findings highlight a practical problem: plans to restructure a troubled lender can unravel if cash cannot reach it quickly enough.

Only Hong Kong, Japan, the United States and the United Kingdom fully met the watchdog’s requirements. India and Argentina were classified as non-compliant, while Switzerland and the EU banking union were among jurisdictions with material shortcomings. The assessment examined public funding backstops for banks undergoing resolution, rather than authorities’ overall ability to manage financial crises. These facilities provide temporary liquidity as a last resort when a bank’s resources and market funding are insufficient.

The review follows the banking turmoil of 2023, when rapid funding pressures helped bring down Credit Suisse. UBS acquired the Swiss lender in a government-arranged rescue supported by emergency liquidity, a state liquidity backstop and losses imposed on Additional Tier 1 bondholders. That episode demonstrated how quickly confidence can disappear and funding needs escalate. Resolution frameworks aim to preserve essential banking services while allocating losses without leaving taxpayers to absorb the cost of failure.

The FSB called for governments and regulators to identify available funding before a crisis, establish firm legal authority to deploy it and secure powers to recover any losses. Soledad Núñez, deputy governor of the Bank of Spain and chair of the review, described credible public backstops as essential. For banks and their customers, the stakes extend beyond regulatory compliance: even a restructuring that restores capital needs liquidity to keep payments and other critical operations functioning. Uncertainty over that funding can undermine confidence precisely when authorities need to contain contagion.