Front Matter Page

The Key Attributes of Effective Resolution Regimes for Financial Institutions— Progress to Date and Next Steps

Prepared by the Legal Department and the Monetary and Capital Markets Department¹

Approved by José Viñals and Sean Hagan

August 27, 2012

Contents

• Glossary

• Executive Summary

• I. Introduction

• II. Overview of the Key Attributes

• III. The Resolution Toolkit

• IV. Cross-Border Cooperation

• V. Recovery and Resolution Planning

• VI. Conclusions and Next Steps

• Figures

• 1. General Resolution Powers under the Key Attributes

• 2. Improving the Trade-Off Frontier between Cost and Risk in Bank Resolution

• 3. Key Decisions Underpinning the Recovery and Resolution Planning

• 4. Key RRP Milestones

• Boxes

• 1. The 2010 Fund Paper

• 2. Key Attributes – A Summary

• 3. Bail-in Within Resolution

• 4. Stays on Early Termination Rights

Glossary

Executive Summary

The financial crisis underscored the need to develop an effective international framework to resolve cross-border financial institutions and groups. The development of such a framework has been a priority for the international community. Many important milestones have been achieved—most notably the adoption by the Financial Stability Board (FSB) of the Key Attributes of Effective Resolution Regimes for Financial Institutions (the Key Attributes) which is emerging as a new (nonbinding) international standard. Fund staff have been heavily involved in their development.

The Key Attributes specify essential features that should be part of the resolution framework at both the national and international levels, with the key objective of making resolution feasible without severe systemic disruption and without exposing taxpayers to loss. These features include a comprehensive “toolkit” of resolution powers for national authorities, including powers to: (i) assume control of a financial institution from existing managers and owners; (ii) effect a resolution of the troubled institution through the sale or merger of the entity, the transfer of assets and liabilities of the institution to third parties, or through unilateral debt restructuring or “bail-in”; and (iii) support the resolution through a temporary stay on the execution of early termination rights under financial contracts.

The Key Attributes foster effective international cooperation. They call for national resolution frameworks to be designed in a manner that enables and encourages the resolution authorities to cooperate with their foreign counterparts in a cross-border resolution. For Global-Systemically Important Financial Institutions (G-SIFIs), the Key Attributes provide for an elaborate framework of crisis management groups, resolvability assessments, and recovery and resolution plans.

While the Key Attributes represent an important step forward, gaps in the framework remain. In particular, the Key Attributes do not articulate principles that would guide burden sharing between national authorities who might have to commit public funds to support a cross-border resolution. Moreover, challenges remain with the implementation of the framework. Progress in the completion of resolvability assessments and of resolution plans for G-SIFIs is uneven, while significant political commitment will be required for many countries to amend their legal frameworks to comply with the Key Attributes.

Fund staff are participating actively in the work of the FSB to implement the Key Attributes—in particular, in the development of a methodology to be used in assessing countries’ compliance with the new standard. This methodology is planned to be completed in late 2013, and the staffs of the Fund and the Bank expect to seek appropriate authorization under their respective governance frameworks for the Key Attributes to be used as a new standard under the Standards and Codes (ROSC) program.