Regulators and central bankers in the US and UK are crafting the world’s first concrete plans to protect the broader financial system in the event that any of seven leading cross-border banks were to collapse.
The “resolution plans”, being worked on by the Bank of England and the Financial Services Authority in the UK and the Federal Deposit Insurance Corporation in the US, have focused on “top-down bail-in” measures.
These would see the authorities take over a failing group and force its shareholders and bondholders to take losses while keeping critical operating companies open.
The UK and US authorities believe that if they can come up with resolution plans for their banks, it will encourage other regulators who are moving more slowly in preparing responses, into doing the same.
The aim of the top-down bail-in is to avoid a repeat of the 2008 failure of Lehman Brothers, where the overnight collapse of the US parent left the UK arm flat broke and unable to pay staff and basic costs.
Andrew Gracie, who heads the BoE special resolutions unit, said: “Top down bail-in may provide a viable strategy for the resolution of complex groups that span many markets, jurisdictions and currencies and we have been working together with other authorities in the UK and US to see how to make that strategy operational.”
The pilot project builds on “living wills” drafted by banks themselves, but goes much farther, with a step-by-step analysis of how each successive move by governments would play out legally and practically on both sides of the Atlantic.
This would help determine what changes would need to be made to bank structures, contracts and perhaps national laws.
The work focuses on at least five US-based “global systemically important financial institutions” which do between 80 per cent and 95 per cent of their overseas business through the UK, and two UK counterparts, which are similarly focused on the US.
The banks range from pure investment banks, such as Goldman Sachs, to those with substantial depositor bases, such as JPMorgan and Barclays.
The Financial Stability Board, a global regulatory body, has called for all 29 GSifis – eight from the US, four from Asia and 17 in Europe – and their regulators to write living wills by the end of this year. But some countries are behind schedule.
“The US and UK are more enthusiastic than other countries and they want to prove it will work to the sceptics in Europe and Asia,” said a global regulator who did not want to be named.
Martin Gruenberg, acting FDIC chairman, said the group had “made substantial progress . . . We’ve examined potential impediments to efficient resolutions in depth and are on a co-operative basis in the process of exploring methods of resolving them.”
Paul Tucker, BoE deputy governor, said recently that the US and UK were working “very constructively” and he hoped to make public more details in a few months.
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