In a sign that the political tide may be turning, the FT is reporting that the Federal Reserve and the Federal Deposit Insurance Corporation have raised the prospect of taking severe action against banks that submit deficient living wills, including increased capital requirements or even forced break-ups.
Whereas previously, it was accepted that RRP was an iterative process that may take a number of years to get fully up to speed, it seems that truly credible plans will now be required when the next round of RRP are submitted in July 2013. This is due, at least in part, to the regulators’ disappointment at the lack of detail and clear proposals for resolution in the 2012 submissions.
The FT is reporting that the Federal Reserve and the Federal Deposit Insurance Corporation have warned banks which are required to produce Recovery and Resolution Plans (RRP) not to assume that regulators will co-operate to avoid the failure of a financial group. In contrast, they are being required to detail the types of legal filings, notices and applications they would need to submit in each jurisdiction to ensure co-operation among regulators and are being expected to describe the legislation in force within specific countries that would facilitate co-ordination.
establishment of Crisis Management Groups (CMGs) between home and key host authorities with the objective of facilitating the management and resolution of a failing cross-border G-SIFI; and
creation of institution-specific cooperation agreements between home and host authorities to govern the development of RRPs and detail procedures concerning notification and consultation prior to an authority taking action against a failing firm.
Unfortunately, if authorities choose not to work together during a crisis, CMGs and cooperation agreements will count for nothing. Without regulatory co-operation, RRP has some residual value as a data-gathering exercise but will fail to meet its primary objective of facilitating the orderly resolution of a globally significant financial institution in a way that ensures continuity of critical economic functions and minimises taxpayer exposure. Will anyone tell the G20 that they risk being measured up for the Emperor’s new clothes before it’s too late?