Exceptional Public Solvency Support to the Banking Sector: Pitfalls and Good Practice

Banking sector distress can be highly disruptive, with substantial implications for financial intermediation and economic growth. Given their disruptive effects, country authorities have often relied on public funds to safeguard financial stability when confronted with systemic crises. The global financial crisis, for example, prompted governments to provide substantial support to ailing banks, in the absence of other credible policy options for stabilizing their financial systems. While policymakers have subsequently sought to reduce the need for such bailouts, including through the establishment of a new international standard for resolution regimes (that is, the Key Attributes of Effective Resolution Regimes), it is understood that under exceptional circumstances, the provision of solvency support may still be needed; notably, when the initiation of resolution procedures in the midst of systemic distress could generate confidence shocks and or fuel contagion. Against this backdrop, this note provides guidance on the design and implementation of arrangements for providing exceptional public solvency support as a “last resort” option. Among others, it discusses (i) the role of solvency support in crisis management and bank restructuring programs; (ii) minimum conditions and key modalities for solvency support; and (iii) governance and shareholder management arrangements for temporary government investments in the financial sector.