Central banks issue proposals to limit bank failures

Central bankers on Thursday issued recommendations aimed at limiting the spillover impact when international banks are being wound up, in a bid to prevent a repeat of the financial crisis.

"The recommendations seek to promote more orderly resolution of cross-border banks to reduce systemic risk and help address the too-big-to-fail problem," said Nout Wellink, who heads the Basel Committee on Banking Supervision which is based at the Bank for International Settlements.

The BIS acts as a central bankers' central bank.

During the financial crisis, the collapse of international banks such as Lehman Brothers has had far-reaching impact beyond the bank's home base in the United States to several countries around the world.

Not only did it lead to a drying up of credit as wary banks stopped lending to each other, clients also lost assets linked to the failing financial institution.

Drawing lessons from the Lehman Brothers' crisis, as well as those of Belgian-Dutch group Fortis, Icelandic bank Kaupthing and Belgian-French bank Dexia, the Basel Committee said national authorities need to be given strengthened powers to intervene early in future banking crises.

Banks should also develop "practical and credible plans" to facilitate a rapid winding up if that become necessary.

Further, mechanisms aimed at reducing the spillover impact of a bank failure must be strengthened.

For example, authorities should be given the powers to transfer financial contracts to a sound party to maintain continuity in case of a bank failure.

The recommendations drawn up by central bankers from developed and developing economies are open for consultation until December 31, 2009.