05 December 2016

Bank of England: Ending too-big-to fail: How best to deal with failed large banks

In the last crisis, the answer to the question of “who pays?” when a large bank fails was the taxpayer.  Reflecting the ensuing understandable public anger at this outcome, policy makers have undertaken a huge amount of work post-crisis to change this answer. Many jurisdictions have adopted special resolution regimes which give them powers to deal with failed banks that were not available in the crisis. 

Authorities in the main jurisdictions have reached agreement on how those powers would be used to resolve each major bank in future, in a manner that imposes the costs on the shareholders and unsecured creditors of the bank.

Following the publication of the FSB’s TLAC standard, those jurisdictions are now making proposals to ensure sufficient loss-absorbing capacity is available at each bank to achieve that outcome. And authorities are identifying barriers to the implementation of the preferred resolution strategies and moving on to consider how best those barriers may be removed.  

The biggest challenge is how best to ensure international cooperation in dealing with the failure of large cross-border banks. Here too impressive progress has been made since the crisis. Crisis management groups for each G-SIB have been established, resolution strategies based on SPE or MPE negotiated, and cooperation agreements are now being agreed to ensure the necessary coordination takes place to implement these strategies in the event of failure. And incentives to cooperate have been hard-wired into the system to address the time-inconsistency problem of resolution.

There is much greater awareness that it is in the interests of both home and host authorities to cooperate to effect an orderly resolution rather than engage in grab-races for assets that merely succeed in destroying value.

Brexit is unlikely to change the UK’s approach to resolution. Regardless of its future relationship with the EU, the UK will seek to continue to cooperate with partners in the EU and in other jurisdictions to ensure that global standards on resolution are respected and to promote robust arrangements that govern how to deal with the failure of large and complex banks. 

Full speech

© Bank of England