The great British banking experiment: Will the restructuring of UK banking show us how to resolve G-SIFIs?
The great British banking experiment: Will the restructuring of UK banking show us how to resolve G-SIFIs?
Charles Randell
This article discusses the Financial Stability Board (FSB)'s recent "Key Attributes of Effective Resolution Regimes for Financial Institutions" as they would apply to banks, and the extent to which, if implemented, they would make the cross-border resolution of global systemically important financial institutions (G-SIFIs) possible. It also discusses the reforms to the resolvability of UK banks which have been proposed in the Final Report of the UK's Independent Commission on Banking (ICB). It concludes that the FSB's Key Attributes represent a major step forward on the path to resolution of G-SIFIs. However, there remain significant questions about the extent to which they will be rapidly implemented, whether cross-border co-operation and mutual recognition of resolution measures will materialise under crisis conditions, whether the structure of G-SIFIs will be changed to make them resolvable, how concerns about the transmission of contagion through bail-in will be addressed, how resolution will be funded and whether (given the risks of disorderly resolution) national authorities will in practice have the appetite to resolve G-SIFIs rather than bail them out. Given this reality, the ICB's proposals for separation, by subsidiarisation, of UK/EEA retail and other essential activities, and for requiring such activities to be supported by additional primary loss-absorbing capacity that facilitates "bail-in", make sense, particularly when the vulnerability of the UK economy to its large financial sector is taken into account. While the ICB's proposals will not necessarily to make UK banks safer - in the sense of less likely to need resolution - they should make the resolution of UK/EEA retail and other essential activities substantially simpler and reduce the likelihood of taxpayer support. The UK government is right to reexamine the case for exempting the non-ring-fenced operations of UK banking groups from the additional primary loss-absorbing capacity requirements proposed by the ICB, but dilution of other aspects of the proposals (such as the leverage ratio and grandfathering of debt from bail-in) risks undermining their benefits. It is also right to pursue a broader comprehensive resolution regime that extends to investment firms. The government will need to give further consideration to the authorities' oversight of shadow banking, which the ICB's proposals will incentivise, and to the transmission of risk within the financial system through bail-in.
Law and Financial Markets Review, Vol. 6, No. 1, Mar 2012: 39-51.