US, U.K. unveil failing banks plan

 The strategy paper says shareholders should expect to be wiped out and unsecured bondholders can expect writedowns

Story highlights

  • BOE Deputy Governor Paul Tucker is leading efforts to devise emergency resolution plans for banks
  • Tuckers says this represents the first steps to end "too big to fail" problem of large banks

US and UK regulators will unveil the first cross-border plans to deal with failing global banks on Monday, outlining proposals to force shareholders and creditors on both sides of the Atlantic to take losses and to ensure sufficient capital exists in the banks' headquarters to protect taxpayers.

Writing in the Financial Times, Martin Gruenberg, chairman of the US Federal Deposit Insurance Corporation, and Paul Tucker, deputy governor of the Bank of England, say this represents the first concrete steps to end the "too big to fail" problem of large international banks.

With Mr Tucker leading international efforts to devise emergency resolution plans, the US-UK template for their 12 large international banks will be a template for the 16 systemically important banks (G-Sifis) based in other countries.

"All countries share a very strong public interest in developing the capacity to resolve global systemically important financial institutions in a credible and effective way," the two bank regulators write.

The strategy paper says shareholders should expect to be wiped out and unsecured bondholders "can expect that their claims would be written down to reflect any losses that shareholders cannot cover", which did not happen when the US and UK had to prop up their international banks in the 2008 crisis.

Senior management would be removed, but critical business functions would continue and healthy operating subsidiaries, both foreign and domestic, would be allowed to keep operating, limiting the damage to the broader economy, the regulators write.

The intervention would occur at the top-tier holding company level of the international banks. By addressing the problem at the top of international banks, the strategy document says it avoids "separate territorial and entity-focused insolvency proceedings" as happened in the Lehman Brothers bankruptcy.

The document states that since big US and UK banks do not currently hold sufficient debt and equity at the top of their group holding structures, regulators will need to take steps to address that.

US regulators will consider forcing the largest banks to hold "sufficient" debt at that level, while in the UK, the British authorities would offer the largest banks the choice between restructuring "so that more debt is issued out of the holding company" or having rules put in place to impose losses on debt held in the top operating companies of each group.

"We believe that, for many GSifis, this strategy holds the best possibility of preserving stability while removing taxpayer support. It holds shareholders, creditors and management in a failed GSifi accountable for its losses," Mr Tucker and Mr Gruenberg write.

Other countries are also working on living wills for their biggest banks, but the Financial Stability Board, which is co-ordinating the effort, recently extended the deadline into next year because many of the plans are not complete.

"Regulators are feeling they want to get their arms around these global structures," said Barney Reynolds, a partner at the international law firm Shearman & Sterling.

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