Cross-border Resolution Compromised by US capital and liquidity plans?

This is a link to an article in Risk Magazine regarding proposed US capital and liquidity rules for foreign banks that may undermine attempts to address the issue of “too-big-to-fail” with respect to international banking institutions.

In December 2012, the Federal Reserve Board published proposals designed to provide greater comfort that US operations of foreign banks would not be required to rely on foreign parents, or the US taxpayer, in the event of their collapse.  Specifically, the proposals would require foreign banks in the US to group their US subsidiaries under an “intermediate holding company” (IHC).  The IHC would then be subject to the same capital and leverage rules as US banks. In addition, IHCs with more than USD 50 billion in assets in the US would be required to hold a liquidity buffer and conduct liquidity stress tests.

However, there are concerns that these proposals could actually make it more difficult to resolve a failing institution.  The article notes the developing international consensus amongst regulators regarding “single-point-of-entry” or “top down” resolution, whereby resolution actions (including bail-in) are triggered by home state resolution authorities.  This contrasts with “multiple-point-of-entry” resolution, whereby resolution action can also be triggered by one or more host regulators.  In imposing its own capital and liquidity rules, the Federal Reserve Board does not assume the operation of a single-point bail-in process through which capital would flow down from the foreign parent company to the local entity.  In contrast, in trapping capital and liquidity at a local level the US rules assume an “every man for himself” model.  This, it is believed, may compromise the ultimate resolvability of a banking group due to the fact that:

  • in practice, the power of a home state resolution authority would be limited by virtue of the fact that localised pools of capital and liquidity (which would assist in resolving the institution) exist but remain beyond reach; and
  • if a host resolution authority for one part of a banking group triggered bail-in, then confidence in the remaining parts of the institution might be damaged, risking a domino effect under which multiple defaults are triggered as local regulators all strive to limit damage in their own jurisdictions.

 

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