Progress Report on Resolution Planning

On 3 May 2012, Paul Tucker, Deputy Governor of the Bank of England and Chair of the FSB’s Resolution Steering Group gave a progress report on Resolution Planning at the Institute for Law and Finance Conference in Frankfurt.  Mr Tucker discussed a number of issues which will be of interest to those involved in recovery and resolution planning.

The appropriate trigger for resolution

Mr Tucker stated that a firm should go into resolution “when its time is up”, which he described as being the point at which its recovery strategies have been exhausted and it has been unable to reverse its decline.  Specifically, this should occur when the bank no longer meets the criteria for being authorised and when there is no reasonable prospect of it doing so again.

 Resolving Systemically Important Financial Institutions

Mr Tucker noted that the traditional approach to resolution, involving the separation of good assets from bad assets, faces a number of problems with respect to SIFIs doing business in multiple markets and jurisdictions.  As such, resolution authorities are exploring how to execute ‘top-down’ resolutions of complex groups, employing bail-in of debt issued by the holding company or top-level operating company.

The resolution of deposit-funded international commercial banking groups

Bail-in does not work particularly well in the case of commercial banks that are funded entirely or largely from insured deposits rather than debt issuances due to the absence of bond-holders to bail in.  In addition, the usual approach of separating good assets from bad may not be suitable for complex cross-border commercial banking groups and may result in the excess destruction of value, particularly to a deposit insurer.  One possible solution proposed by Mr Tucker was to bail in the deposit insurer.  In doing so, the deposit insurer would know ex-ante how much it stood to lose, rather than having to wait until the end of an insolvency process.  This particular suggestion is also advocated within the recent EU Commission discussion paper on Bail-in, and would seem to be a sensible proposal.

Creditor Waterfalls

Thankfully, Mr Tucker gave his support to the proposition that, whatever the resolution tool employed, creditors should be affected in the same was as in a standard insolvency situation.  It may be that he is not a fan of the “sequential bail-in model” described in the EU Commission’s discussion paper.  Under this option, “long-term” liabilities are subject to bail-in before “short-term liabilities”, the dividing line being drawn with respect to instruments which have an original maturity of one year.  It would seem that this option does little more than layer additional complexity and scope for arbitrage on a situation which is already likely to be prove incredibly difficult to administer in ways that nobody can quite yet imagine.  Simplicity is definitely the order of the day here.

The full text of the speech can be found here:

http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech568.pdf

 

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European Update on RRP

On 4 May 2012, the EU Commission published an updated document setting out its regulatory agenda and timetable for the period between 30 April 2012 and 31 December 2012.

The document confirms that June 2012 is the anticipated month for both the legislative initiative on a framework for bank recovery and resolution, and for the publication of a consultation document on possible initiatives to strengthen recovery and resolution arrangements applicable to financial institutions other than banks and large investment firms e.g. hedge funds.

The document can be found here: http://ec.europa.eu/atwork/programmes/

Mervyn King: Taking Away the Punchbowl

Last night Sir Mervyn King gave the 2012 BBC Today Programme Lecture on current issues facing the global economy.  The speech gave an interesting insight into the relative importance of RRP with respect to the Bank’s future plans.

Sir Mervyn detailed the priorities for the Bank of England in making the banking system safer, dubbed the “three R’s”:

  • Regulation: forcing banks to be better capitalised
  • Resolution: making sure that badly run banks can fail safely
  • Restructuring: implementing the findings of the ICB

Unfortunately, there was bad news for anyone hoping that banking would become an easier environment in which to operate in future.  Next year, responsibility for regulating banks in the UK returns to the Bank of England and Sir Mervyn sees an important aspect of the Bank’s job as being “to take away the punchbowl just as the next party is getting going”.  Moreover, he fully accepts that his pre-emptive strikes on the punchbowl will affect the man on the street as well as bankers.  Does that make him a partypooper?  Probably not.  More like a parent with a genuine right to be concerned.  Let’s just hope that, in requiring us all to be abstemious, the Bank recognises that everyone stands to benefit from a good party.

Read the full speech at:

http://news.bbc.co.uk/today/hi/today/newsid_9718000/9718062.stm