RRP: PRA Gently Turns the Screw (but to what end?)

Introduction

On 19 December 2013, the Prudential Regulation Authority (PRA) issued Policy Statement PS8/13 together with two Supervisory Statements, SS18/13 on recovery planning, and SS19/13 on resolution planning.  Together, this guidance details the PRA’s final RRP rules for UK banks, building societies and UK designated investment firms. Their publication follows on from the FSA’s original consultation paper (CP11/16) and Feedback Statement (FS12/1).  The final rules are set out in the PRA Rulebook Recovery and Resolution Instrument 2013 (PRA 2013/37), which is annexed to PS8/13 and come into force 1 January 2014. Continue reading

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Single Resolution System- closer to being resolved

MEP’s voted on the 17th to establish their position on critical details of the single resolution system. During yesterday’s Parliamentary hearing, ECB President Mario Draghi said, Continue reading

IOSCO Publishes Responses to CPSS/IOSCO Consultative Report on RRP for FMI

On 8 November 2013, the International Organization of Securities Commissions (IOSCO) published links to the public responses it has received to the consultative report published jointly with the Committee on Payment and Settlement Services (CPSS) in August 2013.

Responses include:

  • The Alternative Investment Management Association (AIMA) and Managed Funds Association (AIM).
  • The European Banking Federation (EBF).

DB Experience Highlights RRP Challenge

Risk Magazine has published an article in which Deutsche Bank highlights the issues it has experienced in complying with global recovery and resolution plan (RRP) requirements.

This is an all too common story.  The lack of guidance from regulators, absence of globally coordinated regulatory requirements and the move towards subsidiarisation combine to pose a significant challenge to firms which are subject to RRP rules.  From experience, the only real solution lies in the creation of a robust yet flexible data architecture, capable of serving up only that view of information which is necessary for the particular audience and with the capacity to adapt to meet future regulatory developments.

SPE and MPE – which are you?

Introduction

On 14 October, the Bank of England published a speech given by Paul Tucker, Deputy Governor Financial Stability, at the Institute of International Finance 2013 Annual Membership meeting on 12 October 2013 on the subject of ‘too big to fail’.

Mr Tucker made five general points:

  1. The US authorities could resolve most US SIFIs right now on a ‘top-down’ basis pursuant to the powers granted under Title II of the Dodd Frank Act;
  2. Single Point of Entry (SPE) versus Multiple Point of Entry (MPE) may be the most important innovation in banking policy in decades;
  3. There is no such thing as a “bail-in bond”.  Bail in is a resolution tool.  All creditors can face having to absorb losses.  What matters is the creditor hierarchy;
  4. Some impediments to smooth cross-border resolution need to be removed; and
  5. The resolution agenda is not just about banks and dealers.  It is about central counterparties too, for example.

Reorganisation

Mr Tucker noted that Europe is not far behind the US in its enactment of resolution powers.  However, of more interest to the industry will be his belief that most banking groups will have to undergo some kind of reorganisation, irrespective of the camp into which they fall.  SPE groups will need to establish holding companies from which loss-absorbing bonds can be issued.  In addition, key subsidiaries will need to issue debt to their holding companies that can be written down in times of distress.  MPE groups will need to do more to organise themselves into well-defined regional and functional subgroups.  In addition common services, such as IT will need to be provided by stand-alone entities that can survive the break-up of an MPE group.  Capital requirements for regional subsidiaries forming part of an MPE group may also be higher due to the absence of a parent/holding company that can act as a source of strength through a resolution process.

Bail-in

On the subject to bail-in, creditors of SPE groups will be interested to read Mr Tucker’s comments about how, within the context of a top-down resolution, bonds issued by a holding company will absorb losses before debt issued by an operating subsidiary.  In effect, the holding company’s creditors are structurally subordinated to the operating company’s creditors.

Impediments to Resolution

On the subject to impediments to cross-border resolution, Mr Tucker noted that, in order to provide clarity on its previous ‘in principle’ commitment, the Bank of England needs to set down detailed conditions under which it would step aside and allow US authorities to resolve the UK subsidiaries of a US banking group.  In turn, other resolution authorities, and particularly the US, need to make the same ‘in principle’ commitment as the Bank of England.

Extension of the Resolution Regime

Finally, on the subject of the resolution agenda, Mr Tucker confirmed that CCPs are the most important example of where resolution regimes need to apply.  However, he did not rule out resolution regimes being extended to cover shadow banking, funds and SPVs.

Single Point of Entry or Multiple Point of Entry: the Choice is Yours?

Here is a link to an article in today’s FT explaining that, following the FSB guidance issued on 16 July 2013 (see this blog post for more detail), banks seem likely to be given more ‘choice’ between single point of entry and multiple point of entry.  This seems to represent a subtle shift away from the previous consensus that had been developing within regulatory circles regarding the benefits of single point of entry over multiple point of entry.  However, the quid pro quo is that banks will have to implement potentially wide-ranging changes in order to make their business models more consistent with their chosen resolution mechanism.