Bailey and bailouts

Andrew Bailey, the Bank of England’s head of banking services, has just made some interesting remarks at a conference in Spain. Much is standard Bank stuff in relation to the “too important to fail” issue. He wants tougher regulation to make banks less vulnerable to failure. He suggests a look at the structure of banks but is unspecific about forced reorganisations. But he talks a lot about “living wills” – or as the Bank now likes to call them, Recovery and Resolution Plans (RRPs – recovery for the banks, resolution for the authorities).

He works through what an RRP would have looked like for Lehmans Europe, the implication being that the bank was a basket case:

Starting with the useful content of a resolution plan: a detailed balance sheet for all relevant corporate entities in the group at the most recent month end; a clear mapping of financial and operational interdependencies between affiliates; wind-down plans for all business areas linked to a comprehensive information data room; and a contact plan for major stakeholders.

Now, listing the changes to Lehmans’ organisation and operations that should have resulted from drawing up robust RRPs: corporate entity based accounts and management information to supplement the business-line version (because corporate entities fail); clear segregation of handling client asset activities; controls over depositing client money with affiliates; employees hired by the entity for whom they work; a clear record of each entity’s title to business and associated intellectual property; robust risk systems that allow ready provenance of the balance sheet; contracts for the provision of key business services (eg banking systems) that allow continuity of provision of services in the event of a resolution; and arrangements for continuity of access to payment and settlement systems.”

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