Emily Vogl, Frank Vogl
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IIF Proposes Key Steps to Strengthen Cross-border Resolution of Major Multinational Banks
Recommendations build on Financial Stability Board’s template for national standards
Copenhagen, Denmark, June 7, 2012 — “One of the most important lessons of the financial crisis was that banks must be able to take risks, must be able to fail, and therefore must be capable of being resolved upon failure. With the determination of national authorities and the cooperation of private financial institutions, we believe that an effective resolution system can be put in place,” said Mr. Douglas Flint, Chairman of the Board of Directors of the Institute of International Finance and Group Chairman, HSBC. The IIF today released a report on the effective cross-border resolution of financial institutions.
Mr. Flint stressed, “Confidence and stability in the financial system will be enhanced when the public is convinced of two key conditions: first, that major banks that get into difficulties can be put through an orderly, internationally co-ordinated process to resolve their insolvency or illiquidity without creating destabilizing systemic shocks, as happened when Lehman Brothers failed; second, that resolution does not require cash from taxpayers – that there will be no taxpayer financed bail-outs. We believe that we are now moving towards a situation where these two conditions can be met.”
Speaking at a press conference at the IIF’s Spring Membership Meeting in Copenhagen, Mr. Flint said, “We are releasing a report today that provides substantial detail on resolution approaches – this is our third IIF report on this topic. We conclude that the work in this area that has been pursued by a number of national authorities and by the Financial Stability Board is constructive and should be implemented as rapidly as possible.”
The IIF is the global association of leading financial services firms with more than 450 member institutions. In its report today, the IIF called on the FSB to ensure that each major jurisdiction’s own national legal framework fully complies with the FSB’s Key Attributes of Effective Resolution Regimes for Financial Institution.
“We believe that the FSB should strengthen its approach to secure effective cross-border resolution of major firms,” said Mr. Urs Rohner, Chairman of the IIF Working Group on Cross-Border Resolution and Chairman of Credit Suisse AG. He added, “We are calling on the FSB to take the next step – having set out a strong design for speedy and effective resolution of significant financial institutions within each jurisdiction, it should mandate – not just urge – effective cooperation among jurisdictions on cross-border resolution. Our report stresses the need to preserve as much value as possible in any form of resolution, including by respecting group structures.”
Mr. Rohner noted, “While the institution-specific agreements among regulators that are contemplated by the Key Attributes are a good interim measure, especially given that, for many groups, only two to four major jurisdictions can cover the bulk of group assets, in the long run a more comprehensive and substantial solution is needed. Similarly, the Crisis Management Groups of regulators and resolution authorities being organized for specific groups can create a good deal of trust and confidence among those likely to be directly involved in resolution. However, they will not necessarily be able to resolve all the ambiguities and questions arising in a cross-border context. It is of the utmost importance that the processes and decisions of the Crisis Management Groups will be well coordinated to ensure that the resolution process is rapid and effective.”
Mr. Peter Sands, Chairman of the IIF Special Committee on Effective Regulation and Group Chief Executive, Standard Chartered PLC., stated “This report shows clearly that the development of coordinated bail in is a useful and powerful resolution strategy that can align the incentives of national regulators and support the effective resolution of cross border groups.”
Mr. Sands noted, “This report proposes a Convention that could set guidelines and create well-understood expectations for how to handle resolution. The proposed Convention would create a clearer mandate for cooperation between national regulators – which is central to achieving effective cross border resolution, and to avoiding more fragmented approaches, which could have damaging consequences both to business as usual and in resolution.”
The IIF report emphasized the need for the regulatory and supervisory authorities to recognize the economic value added of financial groups in the global economy. It stated that resolution should leverage the nature of each group to extract the greatest value possible in case it falters. Rather than financial groups being structured for a potential failure, the business economics of each group should be considered and resolution structures built on this. The IIF supported the FSB’s call for a suite of resolution tools for all national authorities, including bail-in and other techniques to spread losses appropriately and salvage as much as possible.
IIF Managing Director Charles Dallara said, “We underscore in our report that it is necessary to assure fair and equal treatment for all creditors of a failing firm, without the ringfencing of assets in specific jurisdictions that causes uneven outcomes. Treating all creditors fairly means respecting the traditional hierarchy of claims. But it also means recovering as much value as possible for creditors – especially those who get bailed-in. It is vital to minimize disruption of derivatives and repos, what we call “financial contracts,” by means of a brief “stay” and transfer to a bailed-in successor or a bridge bank. We believe that fairness, and the best possible outcome, can be assured based on a ‘no creditor worse off than in liquidation’ standard. Our report makes technical suggestions on these important issues that largely dovetail with the FSB’s views.”
Mr. Sands underscored that, “Effective cross border resolution plans, backed up with whole bank resolution techniques and a robust mandate for international cooperation, represent a compelling way to address the ‘too big to fail’ issue.”
The report includes a discussion of investors’ perspectives, stressing the need for fair, transparent and predictable resolution, especially across borders. If this can be achieved, then institutional investors, including pension funds and insurance companies, should be willing to purchase capital markets instruments of financial institutions at reasonable prices.
Emily Vogl, Frank Vogl