And a number of other cases, from the failure of the Icelandic banks to Fortis, Dexia and IKB, have shown how difficult it is to manage failures of international banks . Yet the fact is that most of the key players in the world’s financial markets have developed into large and complex multinational firms. Their business is not separated into national units. Some core functions – such as risk-management and liquidity management – will be centralised, and performed at the head-office. Activity at each hub cannot be viewed in isolation: a multinational may raise deposits in one country to fund loans in another. And the ultimate buffer against unexpected losses – capital – is fluid across borders in pursuit of profit. One response is to call for global regulators to deal with global institutions. That of course means pooling national sovereignty over a key issue of economic policy. And it could also require a global fiscal authority with deep pockets to whom the regulator could turn should one of these institutions fall into distress. The task of persuading the US and China to hand  6  BIS Review 21/2009  over the regulation of their largest banks to a supranational regulator would make even the greatest diplomat quail. Another conclusion is that such multinationals pose too great a risk to stability and should be subject to greater control by host authorities in each jurisdiction with the creation of separate pools of capital and liquidity in each country.
As with bank deposits prior to deposit insurance, this created an incentive for investors to be the first to get out whenever there was any uncertainty over the underlying value of the assets in the fund. By being first in line, they could exit while the fund could still repay at par, leaving others to bear any losses. The longer the investor waited, the greater the risk that the fund would be forced into the fire sale of assets to meet redemptions and end up breaking the buck. As the crisis unfolded, the Federal Reserve, the U.S. Treasury and others took a series of actions to contain the spiral of funding runs and asset fire sales. First, the traditional lender of last resort function was strengthened through the introduction of the Term Auction Facility (TAF) and foreign exchange swaps with foreign central banks. Then, as the crisis intensified, the lender of last resort liquidity provision was extended to directly backstop key wholesale funding markets and made available to certain nonbank firms. The Federal Reserve created a direct backstop to the tri-party repo system through the Primary Dealer Credit Facility (PDCF). When the Reserve Fund broke the buck after the failure of Lehman Brothers, precipitating a run on money market mutual funds, the Treasury guaranteed money market fund assets and the Fed introduced the Asset-Backed Commercial Paper Money Market Fund Liquidation Facility (AMLF).