Regulators for banks within the U.S. and U.K. recently disclosed a plan for dealing with failing international banks. This new strategy attempts to shield general taxpayers from bank losses by allowing regulators to fire senior executives, as well as force losses upon shareholders and unsecured creditors.
While the U.S. developed the Dodd-Frank legislation to address and prevent financial crises, the U.K. adopted a similar strategy under the Banking Act of 2009. Both plans were, in part, based on recommendations published by the Financial Stability Board, and the U.K. plan also incorporates European Union proposals. Both the FDIC and Bank of England are aiming to ensure financial stability of banks’ critical services through this strategy.
The U.K. legislation would allow the FDIC to reach a resolution with the American banks operating in the U.K. without U.K. governmental interference. Upon being implemented, nobody would be “off the hook” should a big bank fail, and it is expected that bondholders and other creditors will now inspect a bank’s risky behavior in much greater detail than before, creating a self-governing structure. However, it still remains undetermined whether the FDIC would conversely allow U.K. regulators to oversee the dissolving a U.K bank operating within the United States. (“Failing Banks’ Shareholders to Take Losses in U.K.-U.K. Plan,” Businessweek, December 10, 2012).