BoE Report: Resolving Globally Active, Systemically Important, Financial Institutions
by Federal Deposit Insurance Corporation and the Bank of England
The 15-page FDIC-BOE document is called “Resolving Globally Active, Systemically Important, Financial Institutions.” It begins by explaining that the 2008 banking crisis has made it clear that some other way besides taxpayer bailouts is needed to maintain “financial stability.” Evidently anticipating that the next financial collapse will be on a grander scale than either the taxpayers or Congress is willing to underwrite, the authors state:
An efficient path for returning the sound operations of the G-SIFI to the private sector would be provided by exchanging or converting a sufficient amount of the unsecured debt from the original creditors of the failed company [meaning the depositors] into equity [or stock]. In the U.S., the new equity would become capital in one or more newly formed operating entities. In the U.K., the same approach could be used, or the equity could be used to recapitalize the failing financial company itself—thus, the highest layer of surviving bailed-in creditors would become the owners of the resolved firm. In either country, the new equity holders would take on the corresponding risk of being shareholders in a financial institution.
New Zealand has a similar directive, indicating that this isn’t just an emergency measure for troubled Eurozone countries. New Zealand’s Voxy reported on March 19th:
The National Government [is] pushing a Cyprus-style solution to bank failure in New Zealand which will see small depositors lose some of their savings to fund big bank bailouts . . . .
Open Bank Resolution (OBR) is Finance Minister Bill English’s favoured option dealing with a major bank failure. If a bank fails under OBR, all depositors will have their savings reduced overnight to fund the bank’s bail out.
Resolving Globally Active, Systemically Important, Financial Institutions
A joint paper by the Federal Deposit Insurance Corporation and the Bank of England
Full Report (pdf): Resolving Globally Active, Systemically Important, Financial Institutions
The financial crisis that began in 2007 has driven home the importance of an orderly
resolution process for globally active, systemically important, financial institutions (G-SIFIs).
Given that challenge, the authorities in the United States (U.S.) and the United Kingdom
(U.K.) have been working together to develop resolution strategies that could be applied to
their largest financial institutions. These strategies have been designed to enable large and
complex cross-border firms to be resolved without threatening financial stability and without
putting public funds at risk. This work has taken place in connection with the implementation
of the G20 Financial Stability Board’s Key Attributes of Effective Resolution Regimes for
Financial Institutions. The joint planning has been productive and effective. It has enhanced
the resolution planning process in both jurisdictions, tackled key issues in relation to crossborder coordination, and identified potential challenges that will be addressed through further
This paper focuses on the application of “top-down” resolution strategies that involve a single
resolution authority applying its powers to the top of a financial group, that is, at the parent
company level. The paper discusses how such a top-down strategy could be implemented for
a U.S. or a U.K. financial group in a cross-border context.
In the U.S., the strategy has been developed in the context of the powers provided by the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Such a strategy
would apply a single receivership at the top-tier holding company, assign losses to
shareholders and unsecured creditors of the holding company, and transfer sound operating
subsidiaries to a new solvent entity or entities.
In the U.K., the strategy has been developed on the basis of the powers provided by the U.K.
Banking Act 2009 and in anticipation of the further powers that will be provided by the
European Union Recovery and Resolution Directive and the domestic reforms that implement
the recommendations of the U.K. Independent Commission on Banking. Such a strategy
would involve the bail-in (write-down or conversion) of creditors at the top of the group in
order to restore the whole group to solvency.
Both the U.S. and U.K. approaches ensure continuity of all critical services performed by the
operating firm(s), thereby reducing risks to financial stability. Both approaches ensure
activities of the firm in the foreign jurisdictions in which it operates are unaffected, thereby
minimizing risks to cross-border implementation. The unsecured debt holders can expect that
their claims would be written down to reflect any losses that shareholders cannot cover, with
some converted partly into equity in order to provide sufficient capital to return the sound
businesses of the G-SIFI to private sector operation. Sound subsidiaries (domestic and
foreign) would be kept open and operating, thereby limiting contagion effects and crossborder complications. In both countries, whether during execution of the resolution or
thereafter, restructuring measures may be taken, especially in the parts of the business
causing the distress, including shrinking those businesses, breaking them into smaller entities,
and/or liquidating or closing certain operations. Both approaches would be accompanied by
the replacement of culpable senior management.10 December 2012
This paper outlines several common considerations that affect these particular approaches to
resolution in the U.S. and the U.K., including the need to ensure sufficient loss absorbency at
the top of the group. The Federal Deposit Insurance Corporation and the Bank of England
will continue to work together on these resolution strategies.