Prepared by Göran Lind (Sveriges Riksbank and IMF external consultant) and Sean Kerr (IMF/LEG).
In many instances in this note the word “bank” will cover commercial banks as well as building societies.
See further discussions on this issue in the report on the assessment of U.K.’s compliance with the Basel Core Principles for Effective Banking Supervision (IMF, July 2011), notably Core Principle 23.
The desirability (or otherwise) of suspending close-out netting raises a number of complex issues, particularly in light of regulatory moves to require increased central clearing of standardized derivatives contracts. Part of the European Commission’s consultation on the brief, temporary suspension of close out netting considers whether or not certain classes of counterparty (central banks, central counter parties (CCPs), payment and securities settlement systems and others that avail of the protections afforded by the Settlement Finality Directive) ought to be excluded from any suspension.
The April 2011 Interim Report of the Independent Commission on Banking discusses depositor preference noting how subordinating the claims of other unsecured creditors to those of depositors creates a larger buffer for the absorption of losses, facilitating resolution, particularly where there is a political imperative to avoid losses for retail depositors.
6 Scope for compromises within supervisory colleges may be constrained by applicable legal frameworks. For example, if a jurisdiction has a ring-fencing law for branches of foreign banks, its resolution authority would likely be unable to agree to transfer assets of the branch to the home jurisdiction for distribution by the home jurisdiction authorities in a bank resolution proceeding.
7 See IMF Staff Discussion Note “Contingent Capital: Economic Rationale and Design Features” January 25, 2011 http://www.imf.comhttp://www.imf.org/external/pubs/ft/sdn/2011/sdn1101.pdf See also IMF Staff Discussion Note”“Bail-ins” a Statutory Approach to Bank Debt Restructuring” (forthcoming).
An interim report was published on 11th April, 2011. Among other things it proposes mandatory subsidiarization of the retail activities of a bank, allowing but limiting the exposures between the retail subsidiaries and other parts of the bank. The retail subsidiaries should maintain a core capital ratio (CET1) of at least 10 percent provided there is an increased loss absorbency of debt through the use of CoCos or bail-in instruments (if not the CET1 capital should be even higher).
Cross-Border Banking Groups as Subsidiaries or Branches: Does One Size Fit All? (IMF, forthcoming)
Changes to the Capital Requirements Directive may yet limit host countries’ ability to regulate liquidity locally.
See “Cross-Cutting Themes in Economies with Large Banking Systems”; IMF Policy Paper; April 16, 2010 http://www.imf.comhttp://www.imf.org/external/np/pp/eng/2010/041610.pdf.
Between April 2008 and January 2009, treasury bills with a face value of approximately GBP 185 billion were lent under scheme against illiquid collateral (mostly mortgage-backed securities).
Lloyds Banking Group exited the APS in late 2009 and paid £2.5 billion levy for the protection received during its participation. The RBS continue to participate, paying an annual premium for the protection afforded under the scheme, whereby beyond the first £60 billion of losses on covered assets (which RBS would bear), losses would fall on the RBS and the government at a ratio of 1:9.
Special resolution measures are legally perfected via statutory instruments. The fact that the legislature effectively endorses every resolution action makes the action extremely robust and affords the relevant supervisory decision makers strong protection.
The ‘no creditor worse off’ arrangements are established in secondary legislation. The relevant regulations require that where a resolution involving a partial transfer of property takes place, an independent valuer must be appointed. The valuer has to assess (i) what pre-transfer creditors would have received had transfer powers not been exercised; and (ii) what pre-transfer creditors actually receive. If the valuer determines there is a difference between the two sums assessed and a pre-transfer creditor is left ‘worse off the valuer may determine that compensation should be payable (and in what amount).
Transfer powers under the SRR may purport to affect overseas property. Within the EU, the EU Winding Up Directive for Banks may be of some limited assistance insofar as it ought to ensure the primacy of UK proceedings affecting the EU branches of UK banks. However, the SRR per se cannot perfect transfers of foreign property (within or outside the EU). The BA 09 addresses this issue at Section 39 by requiring transferor and transferee entities to take the necessary steps to ensure that transfers of foreign property become effective under the relevant foreign law.
For a more detailed discussion by Fund staff on this question, see “Resolution of Cross-Border Banks – A Proposed Framework for Enhanced Coordination, IMF, June 2010.”
For instance, through increased losses after the management tries to “save the bank” via assuming higher risks
It is necessary to implement penal and remedial supervisory measures swiftly and adequately. That said, when selecting specific measures and when implementing them, the FSA must take into account the risk that if /when the measures get publicly known there might be unwarranted side-effects to the bank from various counterparts. This could exacerbate the bank’s problems. This risk is not a reason for not acting, nor a reason for (in most cases) keeping measures secret. Rather, it stresses the importance of acting in a way and at a time which strengthens the bank also in the eyes of the external stakeholders.
This potentially implies additional cost to the FSCS (and, possibly, HMT in the short term) that depositor preference rules could help to mitigate.
The cost to the FSCS of exercising this option must not be higher, net of recoveries, than if the payout/liquidation option had been used.
The Banking Liaison Panel combines industry and government representatives to advise HMT on, inter alia, the impact of the SRR on financial markets.