US, UK plan to cure big bank failures

Russell Ward and Jim Brunsden Tokyo and Brussels

US and UK regulators have unveiled a plan for dealing with failing global banks that will allow them to fire senior executives as well as 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 released by the US Federal Deposit Insurance Corporation (FDIC) and the Bank of England (BoE) in London on Monday.

Global regulators are working on ways to handle the failure of large international banks to avoid another crisis like the one inflamed by Lehman Brothers’ bankruptcy in 2008 that led to taxpayer bailouts. BoE deputy governor Paul Tucker said the joint paper was a “significant step” toward solving the issue.

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

The UK and US plans are aimed at ensuring continuity of banks’ “critical services” and reducing risks to financial stability. They are based in part on recommendations published by the Financial Stability Board set up by the Group of 20, while UK policies are also linked to EU proposals presented in June.

The FDIC and BoE 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 hit.

In the UK, funds allocated to a national guarantee programme for bank deposits could also be used to stabilise failing banks, the report says.

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

In the US, the holding company would be made bankrupt and losses assigned to shareholders and unsecured creditors, with sound units transferred to a new entity. The British plan involves either the write-down or conversion of securities held by creditors at the top of the group to return the entire institution to solvency. – Bloomberg


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