11 November 2009

Fed Tarullo on supervising and resolving large financial institutions

US authorities propose a resolution authority to enable the government to wind down a systemically important firm in an orderly way, as part of sweeping legislation to overhaul financial regulation.

US authorities propose a resolution authority, which would enable the government to wind down a systemically important firm in an orderly way, as part of sweeping legislation to overhaul financial regulation.

 

In addition, firm-specific proposals known as ‘living wills’ have been put forward to address the problem of institutions that are considered too big to fail.

 

These company-generated documents are supposed to identify how a firm would wind itself down in the event of considerable stress or failure. It's hoped the creation of the living will would help firms come to grips with the risks they have taken.

 

"The information requirements of living wills and the need to measure and manage risks at the legal entity level can help create the right incentives for firms to simplify their structures without necessarily requiring a supervisor to delve into the details of a banking group's structure," he said.

 

“The desirability of a third alternative is obvious--a special resolution process that would allow the government to wind down a systemically important firm in an orderly way.”

 

Given the complexity of internationally active banks, often motivated by tax or regulatory factors, effective management of these problems will … require regulatory coordination and supervisory cooperation before a large firm's failure becomes a real possibility, Tarullo underlined.

 

Fed Governor Daniel Tarullo said there was no guarantee that future resolutions of systemically important firms would be smooth or predictable.

 

"It is imperative that governments convince markets that they can and will put large financial firms into a resolution process rather than bail out creditors and shareholders," Tarullo said in a speech at the Institute of International Bankers Conference on Cross-Border Insolvency Issues.

 

Full speech

 

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