IIF proposes approaches to bail-in and resolution planning
09 May 2011
The IIF published proposals for the resolution of financial services firms. The IIF also highlighted a set of “bail-in” actions with the potential to ensure that firms of all sizes can fail – with losses being absorbed by shareholders and creditors, and with no expectation of taxpayer bail-outs.
The Institute of International Finance (IIF) published detailed proposals for the resolution of financial services firms. It highlighted a set of “bail-in” actions that have the potential to transform the way the market in financial services operates by ensuring that firms of all shapes and sizes can fail – with losses being absorbed by shareholders and creditors, and with no expectation of taxpayer bail-outs.
The report has been developed by IIF’s Working Group on Cross-border Resolution, chaired by Mr Urs Rohner, Chairman of the Board of Directors, Credit Suisse Group AG, who stated at a press conference that: “It is important to recognise that a vibrant, competitive financial services sector, which is essential to support global economic growth, will see the failure of firms from time to time, possibly including the failure of firms that might be considered systemically relevant. Such failures need to be orderly, they should not inflict damage and instability on the financial system, and there should be no expectation that taxpayer funds will be used to prevent instability".
The IIF emphasised that the identification and preservation of critical functions in the event of a failure is a key part of resolution planning and that a sharply-focused approach is desirable, as preserving critical functions is not a cost-free exercise. Firms have a responsibility to work with regulators in drawing up such plans and to provide all necessary data and information to facilitate this. Mr Rohner said that effective resolution planning can in general be accomplished without the authorities requiring restructuring or significant organisational changes in the firm. Doing otherwise would generate significant inefficiencies and economic costs. Nonetheless the other side of this coin is that firms will need to work effectively with the authorities to do what is necessary to ensure that critical functions can be maintained and transferred in the event of the firm’s failure.
What is a critical function will depend upon a range of circumstances including the nature of the function itself, the scale upon which the service is provided by the failing bank, and the prevailing financial sector and economic circumstances. The provision of payment and settlement services is a prime example of a function which could, depending upon the particular circumstances, be considered critical. A failure to preserve such services could lead to significant disruption, both as a result of the failed settlement of items currently making their way through the system, and as a result of the disruption to real economic activity that can arise from customers being shut out of payment or settlement systems for a material period of time.
A further key theme of the new report is the importance of building an effective framework for cross-border resolution. IIF Managing Director, Charles Dallara, stated: “In an era when major global financial services firms play such vital roles in international economic growth, it is clear that national resolution approaches alone are not sufficient and that we need a robust cross-border resolution framework. The mechanisms we are suggesting will make a material contribution towards protecting the taxpayer from losses, wherever a firm operates and whatever its legal form.
The IIF report noted that an important area of focus for the FSB at the current time is the issue of institution-specific cooperation agreements between relevant home and host authorities. Industry is supportive of such firm-specific resolution agreements. These agreements need to be legally effective and to remain robust in times of crisis. To make this approach work, the report proposes establishing early warning requirements; more and better sharing of information; implementing joint plans across borders; enhancing legal mandates for international cooperation; avoiding discrimination against creditors on the basis of their location or nationality; and requiring the authorities responsible for the resolution of a cross-border group to plan jointly in the context of dedicated colleges under the leadership of the home resolution authority.
© IIF - Institute of International Finance
