31 July 2008

Paulson on resolution regime in light of a changed financial landscape

We should consider ways to ensure that costs are imposed on creditors and equity holders, Secretary Henry Paulson said. Any commitment of government support should be an extraordinary event that requires the engagement of the Executive Branch.

We should consider ways to ensure that costs are imposed on creditors and equity holders, Secretary Henry Paulson said. Any commitment of government support should be an extraordinary event that requires the engagement of the Executive Branch.”

 

“We should create a system that gives us the best chance of foreseeing a crisis”, Paulson said but also noted that future market instabilities are difficult to predict and cannot be eliminated by regulation. “However, just because the overall task is difficult, we should not stop trying to understand and mitigate instability”, he added outlining the concept of a market stability regulator ‘with the authorities to avert systemic issues’.  

 

“Two concerns underpin expectations of regulatory intervention to prevent a failure”, Paulson noted referring to the concept that an institution may be too interconnected to fail or too big to fail.

 

“Strengthening market infrastructure will reduce the expectation that an institution is too interconnected to fail”, he said and recommended strengthening the practices and financial infrastructure in the OTC derivatives market and in the tri-party repo system.

 

“To address the perception that some institutions are too big to fail, we must improve the tools at our disposal for facilitating the orderly failure of a large complex financial institution”, Paulson noted and underlined that today’s tools are limited.

 

“We need to consider broadly the resolution regime in light of a changed financial landscape where non-bank financial institutions play a significantly greater role”, he underlined.

 

Full speech

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