Speaking on solving the "too big to fail" problem at the annual membership meeting of the Institute of International Finance (IIF), Paul Tucker of BoE discussed the following points on planning for orderly resolution:
- although most US banks could already be resolved using a top-down, group-wide approach through their holding companies, European banks will need reorganisation to make themselves susceptible to either a Single Point of Entry (SPE) or a Multiple Points of Entry (MPE) resolution strategy;
- few major groups will escape having to remove obstacles to effective resolution under their preferred strategy. For example, an SPE strategy means groups will need to have in place intra-group debt, issued by key subsidiaries around the world to the holding company, that can be written down when a distressed subsidiary would otherwise need to be resolved;
- for "MPE groups‟, many will need to reorganise their structures to create regional and functional sub-groups which could be subjected to SPE resolution;
- the bail in tool, which can be applied to any debt obligation, must be distinguished from mandated issuance of an extra layer of loss-absorbent bonds. He stressed that "bail in" is a verb and not a noun, so it cannot describe a particular instrument;
- the US must confirm that it will facilitate a UK-led top-down whole-group resolution of UK groups with US subsidiaries. The UK is prepared to agree a reciprocal arrangement;
- derivatives and repo documentation must be amended to exclude from the events of default clause the fact that a firm enters resolution. If necessary, he said, regulation must require this; and
- resolution regimes should also cover central counterparties, insurers and asset management vehicles.
(Source: Solving Too Big To Fail: Where Do Things Stand on Resolution)
