Rescue plan for financial firms in choppy waters

With white knights likely scarce, HK's proposed legislation still leaves taxpayers on the hook

PUBLISHED : Tuesday, 14 January, 2014, 1:37am
UPDATED : Tuesday, 14 January, 2014, 1:37am

A government-proposed change in the law to empower regulators to compel troubled financial firms to transfer their shares to another company would be hard to apply in practice.

The controversial proposal, unveiled in a consultation paper last week, comes as the government joins an international trend of reforms aimed at finding a better way to deal with giant financial firms at risk of failure.

In the aftermath of the 2008 financial crisis, many Western countries used taxpayers' money to rescue banks or financial firms. The new proposal intends to avoid the need for the Hong Kong government to bail out troubled firms, giving financial regulators instead more power to solve the problem at an earlier stage.

Many legislators support the proposed change. This is not surprising, as many of their constituents are taxpayers.

But the big question is how the new law would work.

If lawmakers pass the bill next year, it would allow the Hong Kong Monetary Authority, the Securities and Futures Commission and the Insurance Authority to compulsorily transfer ownership of a failing financial institution to another financial firm so as to allow the bank, insurance company, broker or fund management company to continue operating.

The key issue here is whether there will be a buyer for the failing financial firm

The bill would give the three financial regulators the power to make such a transfer without having to first get the consent of the existing shareholders or creditors.

The key issue here is whether there will be a buyer for the failing firm. The new law would allow regulators to force a firm in trouble to sell itself, but the regulators would have no power to force anyone to buy it.

The government says it would only use this power in extreme cases, which means the regulators would only intervene when such a firm was in serious trouble. By that time, it would be hard to find a white knight. Even if the sale price was cheap, other firms would need to worry about taking up the liabilities of the troubled firm.

In addition, the government proposal expects the new buyer to continue to operate the business of the troubled firm, which means they need to be in the same business. This will further restrict the potential buyers' pool.

Under the proposed law, another option is for the regulators to transfer the assets or operations of the failing institution to a new "bridge institution" controlled by the government or the regulators. As a last resort, the government would assume temporary ownership of the firm.

These scenarios involve using public funds to keep the troubled firm running before it gets a new buyer. This means taxpayers would still be on the hook for the bill.