14 December 2012

GFMA Q&A on G-SIFI Resolution paper from US FDIC and Bank of England

Simon Lewis, chief executive of the Global Financial Markets Association, was interviewed on the joint paper released earlier this week by the Federal Deposit Insurance Corporation (FDIC) and Bank of England

Can you outline what proposals have been issued earlier this week by the Federal Deposit Insurance Corporation (FDIC) and Bank of England paper?

The US Federal Deposit Insurance Corporation and the Bank of England issued a joint paper entitled ‘Resolving Globally Active, Systemically Important Financial Institutions’ which discusses how UK and US regulators plan to deal with global systemically important financial institutions – or G-Sifis - that fail across the two jurisdictions.

The paper focuses on ‘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 holding company level – while keeping bank, securities and other operating subsidiaries out of resolution, insolvency or administration.

What’s the significance of these proposals?

Ever since the collapse of Lehman Brothers and the bailout of AIG and other firms four years ago, policymakers have been debating how best to develop a resolution framework that will effectively deal with a failing institution without a destabilising liquidation like Lehman or a bailout like AIG.

Do you agree with the approach taken in the paper?

Yes, we strongly agree with top-down resolution strategies, when they are appropriate. They can be effective in resolving most G-SIFIs by imposing the losses of the G-SiFi on its shareholders and debtholders, instead of taxpayers, while maximising its franchise value and preserving the systemic operations of its operating subsidiaries.

The paper provides a helpful explanation of the approaches that each of the US and UK authorities would take to resolution of G-SIFIs via a single point of entry route. Although the main focus of the paper is on a ‘single point of entry’ resolution approach, the joint paper itself acknowledges that the US and UK would apply different versions of this approach because of the differing legal structures and funding approaches of their G-SIFIs. It also points out that the top-down approach may “not necessarily be appropriate for all UK G-SiFis in all circumstances. Other strategies may be more appropriate depending on the structure of the group, the nature of its business, and the size and location of the group’s losses.”

So you think resolution authorities should have some flexibility in their approach?

Yes, although as we pointed out in our recent comment letter to the FSB, we think that pre-vetted resolution strategies are necessary to provide host-country regulators, depositors, creditors, equity holders, counterparties and financial market infrastructures, among others, with a reasonable degree of confidence of how a particular G-SIFI will be resolved in a failure scenario.

How does the joint paper fit in with the other resolution programmes in development at G20 and European level?

Importantly this joint paper is set against the framework established by the Financial Stability Board (FSB) and is consistent with the FSB’s Key Attributes of Effective Resolution Regimes for Financial Stability. GFMA views the proposals as being in line with FSB, European Union and US resolution laws.

What are next steps?

The proposals in the joint FDIC/Bank of England paper are likely to be discussed further with a view to developing cross‐border cooperation agreements. In addition, we believe policymakers in other jurisdictions will be examining the proposals contained in the paper with great interest.

Full interview

© GFMA