The Basel Committee on Banking Supervision has issued a set of recommendations for dealing with the failure of financial institutions that operate in multiple countries, including the imposition of extra capital charges to encourage firms with complex corporate structures to simplify.

The final version of the committee’s report, released Thursday, sets out 10 recommendations that fall into three categories: strengthening national resolution powers and their cross-border implementation; firm-specific contingency planning; and reducing contagion.

“The financial crisis illustrates the importance of effective cross-border crisis management. The scope, scale and complexity of international financial transactions expanded at an unprecedented pace in the years preceding the crisis, while the tools and techniques for handling cross-border bank crisis resolution have not evolved at the same pace,” the committee says.

As a result, “Actions taken to resolve cross-border institutions during the crisis tended to be ad hoc, severely limited by time constraints, and to involve a significant amount of public support.”

The committee’s recommendations also aim to reduce contagion by advocating the use of risk mitigation mechanisms such as netting arrangements, collateralization practices and the use of regulated central counterparties. Strengthening the use of these and other measures would help limit the market impact of a bank failure, it says.

The report recommends that systemically important cross-border banks and groups provide a plan to preserve their firms as a going concern, promote the resiliency of key functions, or facilitate a rapid resolution or wind-down, in the event of failure. Both banks, and regulators should “develop practical and credible plans to promote resiliency in periods of severe financial distress and to facilitate a rapid resolution”, it recommends, adding that such plans should ensure access to relevant information in a crisis and assist the authorities’ evaluation of resolution options.

“One of the main lessons from the crisis was that the enormous complexity of corporate structure makes resolutions difficult, costly and unpredictable,” it notes. For example, the report points out that failed investment bank, Lehman Brothers, was comprised of almost 3,000 legal entities, operating in 50 countries.

The committee also recommends that supervisors work closely with their foreign counterparts and relevant resolution authorities to understand how complex group structures and operations could be resolved in a crisis. If an institution’s group structures are too complex to permit an orderly and cost-effective resolution, national authorities should consider imposing regulatory incentives, through capital or other prudential requirements, to encourage simplification of the structures, it says.

And, it recommends that national authorities seek convergence of national resolution tools and measures to promote the coordinated resolution of banks active in multiple jurisdictions.

Nout Wellink, chairman of the Basel Committee and president of the Netherlands Bank, noted that, “the resolution of a cross-border bank is a complex and multidimensional process and the financial crisis exposed gaps in intervention techniques and tools needed for an orderly resolution. Based on the lessons of the crisis and our analysis of national resolution frameworks, I believe that implementation of the committee’s recommendations will help make meaningful progress toward addressing systemic risk and the too-big-to-fail problem.”