The Bank of England (BoE) has published a speech given by Paul Tucker (Deputy Governor for Financial Stability and chair of the Financial Stability Board’s Working Group on Cross Border Crisis Management) entitled Resolution of large and complex financial institutions: the big issues. The BoE has also published a press release summarising Mr Tucker’s speech.
In his speech Mr Tucker discusses issues around resolving large, complex financial institutions in an orderly way without injecting public money. He supports the increased adoption by national authorities of special resolution regimes (SRR). However, he also stresses that each country having its own SRR does not address the resolution of cross-border banking groups or investment banks with complex trading books.
On the international debate Mr Tucker discusses:
- Whether authorities should consider making adjustments to creditors' claims in the form of haircuts or equity conversions in a going concern rather than as creditors of a bank entering an insolvency process as a gone concern.
- The obstacles to handling the resolution of internationally active institutions. He states that "…. policymakers need to face up to, and decide whether or not to fix, the really big issues about how insolvency and resolution laws are applied to internationally active financial companies."
Mr Tucker then looks at the differences between 'territorial' and 'universal' principles governing resolution, both of which have material drawbacks. He explains the features of what could be described as ‘modified universalism’. This would be based on a principle of equitable treatment of worldwide creditors which would be consistent with the imposition of losses on unsecured creditors.
In his conclusion Mr Tucker states that to cope with distress in global banking, authorities need to make a decision as to whether or not they want international collaboration in the resolution of cross-border banking groups. Once they have answered that question some of the issues regarding structure and regulation might become clearer.
View Resolution of large and complex financial institutions: the big issues, 19 March 2010