This paper has been written by Mmes. Pazarbasioglu, Erbenova, Moretti, Nedelescu and Messrs. Dobler and Verkoren (MCM) and Messrs. Leckow, Bossu, and Milford, and Mmes. Rutledge and Chew (LEG).
IMFC, Communiqué of the Twenty-Fourth Meeting of the IMFC: Collective Action for Global Recovery, at http://www.imf.org/external/np/cm/2011/092411.htm, and Communiqué of the G-20 Leaders Summit in Cannes, 2011, http://www.g20-g8.com/g8-g20/g20/english/for-the-press/news-releases/g20-leaders-summit-final-communique.1554.html.
Basel Committee, Report and Recommendations of the Cross-border Bank Resolution Group (March 2010), http://www.bis.org/publ/bcbs169.htm.
FSB (2011), Key Attributes of Effective Resolution Regimes for Financial Institutions, November 2011, http://www.financialstabilityboard.org/publications/r_111104cc.pdf.
The Final Communiqué notes: “13. We have agreed on comprehensive measures so that no financial firm can be deemed “too big to fail” and to protect taxpayers from the costs of resolution…. G-SIFIs will be submitted to strengthened supervision, a new international standard for regimes as well as, from 2016, additional capital requirements.…”
The fourth of these elements focuses on practical impediments to cross-border cooperation such as fragmented information systems, intra-group transactions, and reliance on service providers and is not discussed in detail in this paper.
Draft Directive of the European Parliament and of the Council establishing a framework for the recovery and resolution of credit institutions and investment firms to be approved by the European Council and Parliament, http://ec.europa.eu/internal_market/bank/crisis_management/index_en.htm#framework2012.
In particular, the framework is applicable to all G-SIFIs designated by the FSB: for these institutions, the Key Attributes set out an elaborate framework of institution-specific cooperation agreements, crisis management groups, resolution planning, and resolvability assessments. It is recognized that some aspects of the Key Attributes may not be appropriate for certain types of financial institutions and that the provisions of the Key Attributes would need to be applied to such institutions with appropriate modifications.
In some countries, what is meant by official administration may be referred to by terms such as temporary administration, special administration or temporary management.
This is particularly the case if there is large negative equity, because an injection of new equity without first attributing losses to creditors would represent a wealth transfer from new shareholders to the creditors.
An important aim of this operation is to preserve the viable parts of the bank’s business encompassing the creditors and functions deemed critical. While this is a tried-and-tested tool, it has been used typically so far to deal only with relatively small, domestically focused institutions. These powers have been used for many years by the FDIC in the United States for generally small deposit takers where they are called a purchase and assumption (of assets and liabilities respectively). Deposit insurance funds are required to meet any shortfall between the assets and liabilities transferred. The operational challenges faced in splitting up a balance sheet in a short period (as is typically required in a resolution) increase exponentially with the size, complexity, and international outreach of a failing bank.
Though debt restructuring has not been a common resolution tool for financial institutions, it is not a completely new idea. Numerous frameworks for general corporate insolvency include provisions for debt restructuring as a method of addressing insolvency. Even before the global financial crisis, debt restructuring for financial institutions was available in several jurisdictions. In some cases, this was because financial institutions, as corporations, were subject to the general corporate insolvency framework, which included debt restructuring as a method of addressing insolvency. In other cases, jurisdictions had on their books a special framework of debt restructuring for financial institutions.
The authorities should also be able to convert or write-down any convertible or contractual bail-in instruments.
For further details on bail-in and a discussion of its scope, and its benefits and limitations see IMF (2012), “From Bail-out to Bail-in: Mandatory Debt Restructuring of Systemic Financial Institutions,” IMF Staff Discussion Note 12/03, April 24, 2012, http://www.imf.org/external/pubs/ft/sdn/2012/sdn1203.pdf.
In a close-out, the creditor appropriates to itself property representing assets that would otherwise be returned to the debtor, and pursues the debtor for any net amount by which assets exceed liabilities.
In some countries, for example, the host resolution authorities have no power to deal with the insolvency of a branch of a foreign financial institution. Rather, the resolution of the branch will be left to the home authorities (e.g., through judicial proceeding), regardless of the potential effect of those actions on the financial stability of the host country. In other countries, the host resolution authorities may be required to liquidate the branch upon the occurrence of an external event (e.g., the initiation of resolution proceedings in the home jurisdiction). In these circumstances, the branch will be liquidated as if it were a separate legal entity and its assets will be “ring-fenced” for the benefit of creditors of the branch. Such proceedings can significantly complicate efforts to implement a cooperative and coordinated resolution between jurisdictions.
Under the Key Attributes, a jurisdiction need not have such a power where it is subject to a binding obligation to respect the resolution of financial institutions under the authority of the home jurisdiction. In the European Union, such a system exists in order to organize a coordinated resolution.
The Key Attributes specifically call on jurisdictions to ensure that there are no legal, regulatory, or policy impediments that hinder the exchange of information, both during normal times and during a crisis, at a domestic and a cross-border level.
FSF Principles for Cross-border Cooperation on Crisis Management, issued in April 2009 http://www.financialstabilityboard.org/publications/r_0904c.pdf.
The Report of the Financial Stability Board to G20 Leaders, published in June 2012, indicated that, as of the second quarter of 2012, CMGs had been established for all but four of the 28 FSB designated G-SIFIs. Where a CMG is not yet established or active, substantive action has been planned. See http://www.financialstabilityboard.org/publications/r_120619a.pdf.
The FSB’s Cross-Border Crisis Management Group is preparing guidance notes on these topics.
The FSB timeline foresees that authorities will commit to participate in a jointly agreed resolution process in the institution-specific cooperation agreements.
See also the FSB’s progress report on the Intensity and Effectiveness of SIFI Supervision, issued in November 2011, http://www.financialstabilityboard.org/publications/r_111104ee.pdf.
The Legal Advisory Panel is a panel of lawyers and bank resolution experts from the public and private sectors, and academia, who advise the FSB’s Resolution Steering Group on the legal issues arising from the Key Attributes. The draft methodology is being reviewed by the standard-setting bodies, whose representatives are also participating in the methodology drafting group to determine to what extent the methodology is suitable for different types of firms (e.g., financial market infrastructures, insurers and securities, and investment firms), and to what degree modifications may be necessary.
The thematic peer review was launched on August 3, 2012. The FSB has published the peer review questionnaire and has invited financial institutions, industry associations and other stakeholders to provide comments (compared to the Key Attributes) of national resolution regimes in different FSB member jurisdictions. Comments have been requested by September 28, 2012. The questionnaire is available at http://www.financialstabilityboard.org/publications/r_120813.pdf. Fund staff are participating in this exercise and the report of the peer review team is expected to be published by end-2012.
It would form part of a new policy area on crisis resolution and deposit insurance, with the Core Principles for Effective Deposit Insurance Systems. See: 2011 Review of the Standards and Codes Initiative http://www.imf.org/external/np/pp/eng/2011/021611.pdf.