UK and US regulators issue plan to cope with big bank failure

Regulators will be able to fire executives and assign losses to ensure financial stability

PUBLISHED : Tuesday, 11 December, 2012, 12:00am
UPDATED : Tuesday, 11 December, 2012, 2:55am

American and British regulators have unveiled a plan for dealing with failing global, systemically important banks that will allow them to fire senior executives and force losses on shareholders to protect taxpayers.

"A resolution strategy for a failed or failing globally active, systemically important financial institution should assign losses to shareholders and unsecured creditors, and hold management responsible," according to a paper jointly issued by the United States Federal Deposit Insurance Corp and the Bank of England in London.

Global regulators are devising ways to handle the failure of large international banks, to avoid another crisis like the one inflamed by Lehman Brothers' bankruptcy in 2008, which led to taxpayer bailouts.

BOE deputy governor Paul Tucker said the joint paper was a "significant step" towards tackling the issue.

The US has been developing its strategy under the Dodd-Frank legislation passed in 2010, while Britain has focused its efforts under the Banking Act of 2009, according to the paper. They each focus on dealing with the top of a financial group - the holding or parent company - to minimise disruptions to sound subsidiaries.

The British and US plans - aimed at ensuring continuity of banks' "critical services" and reducing risks to financial stability - are based in part on recommendations published by the Financial Stability Board, while British policies are also linked to European Union proposals presented in June.

Both the Bank of England and the FDIC foresee that a wide range of a failing bank's unsecured creditors could face losses. Unsecured senior bondholders and uninsured depositors are among those who could take a financial hit, according to the paper. In Britain, funds allocated to a national guarantee programme for bank deposits could also be used to stabilise failing banks, the document says.

While the regulators will co-ordinate their actions, there are differences in their methods, according to the paper.

In the US, the holding company would be made bankrupt and losses assigned to shareholders and unsecured creditors, with soundly operating units transferred to a new entity. The British plan involves either the writedown or conversion of securities held by creditors at the top of the group to return the entire firm to solvency.

Both regulators are continuing to work to ensure that "their respective resolution strategies will be fully operational," they said.

"The too-big-to-fail problem must be cured," Tucker and FDIC chairman Martin Gruenberg wrote in an article in the Financial Times published yesterday. "We believe it can and that serious progress is being made."