The report stresses that ambitious solutions are needed that recognize that losses resulting from a firm’s failure should be shouldered by its shareholders, its unsecured, uninsured creditors, and, in the event of remaining costs, then by the financial industry.
A new international resolution regime is essential to address the critical issue of financial institutions that are seen as “too big to fail” and which, as a result, may currently require taxpayer funds, states the Institute of International Finance (IIF) in a report to international regulatory authorities today. It said ambitious solutions are needed that recognize that losses resulting from a firm’s failure should be shouldered by its shareholders, its unsecured, uninsured creditors, and, in the event of remaining costs, then by the financial industry.
IIF Managing Director Charles Dallara underscored that, “We are proposing approaches to ensure that any financial services firm, irrespective of its size or business activities, to be wound-up in the future without the need for taxpayer support. We need a global resolution framework and our report today provides a meaningful contribution to this objective. The time has now come for the G20 to establish a high-level taskforce to directly address the very complex resolution issues, which we are convinced are surmountable if the appropriate political will is mobilized and a determined effort is mounted.”
In order to establish an effective cross-border resolution framework, all major national jurisdictions should have in place special resolution regimes with key common features which:
· allow losses to be borne by shareholders and unsecured, unprotected creditors
· avoid moral hazard;
· give the authorities the appropriate range of powers of early intervention;
· include well-designed recovery and resolution planning;
· operate effectively in the context of an international resolution framework; and,
· help to minimize the need for taxpayers’ money to be used to forestall failures or pay for the consequences.
Mr. Rohner noted, “Experience shows us that a source of significant losses, which can turn a failure into a potentially systemic event, is the rapid evaporation of value that can occur in the face of the likely sudden cessation of a business, particularly in the context of complex trading activities. We believe that risks here can be mitigated by strengthening the powers of regulatory authorities to intervene early.”
The IIF proposes that authorities need powers to:
· replace the senior management of the firm;
· order an increase in capital and order financial restructuring with instruments such as forced debt-equity swaps or “bail-ins” of unsecured, uninsured debt-holders of the firm;
· identify any parts of the firm which remain systemically vital (such as payments operations) and transfer those to third party acquirers or, if necessary to a bridge bank;
· delay the operation of termination clauses in favor of counterparties for a short period;
· require the maintenance of outsourced services; and,
· coordinate strongly and effectively with resolution authorities of other jurisdictions in which the group is active.
© IIF - Institute of International Finance
Documents associated with this article
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IIFCrossBorderResolution_0510[1].pdf
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