Writing for the FT, the FDIC's Gruenberg and the BoE's Tucker believe that the 'too big to fail' problem can be cured, and that serious progress is being made.
Evidence can be seen in the joint paper released by the organisations on Monday, which outlines a resolution strategy for large and complex financial companies.
Alongside higher capital and liquidity requirements, the best chance of a durable solution will come from a process for resolving the largest international banks – so-called global systemically important financial institutions (G-SIFIs) – in an orderly way when they fail.
The paper outlines a strategy the authors believe can accomplish their objectives. Under the plan, the resolution authority will take control of the parent of the G-SIFI group, apportion losses to the company’s shareholders and unsecured debtholders and remove senior management. In all likelihood, the organisation’s shareholders would lose all value.
The unsecured debtholders can expect that their claims would be written down to reflect any losses that shareholders could not cover. Sound subsidiaries (domestic and foreign) would be kept open and operating, thereby limiting contagion effects and cross-border complications. In both countries, whether during execution of the resolution or thereafter, restructuring measures may be taken, especially in the parts of the business responsible for the group’s distress. Those businesses could be shrunk, broken into smaller entities, or certain operations could be liquidated or closed. A portion of the surviving unsecured debt would be converted into equity, where needed, to provide capital to support the process.
All countries share a very strong public interest in developing the capacity to resolve G-SIFIs in a credible and effective way. A framework for applying a multilateral approach through crisis-management groups comprising relevant supervisors and resolution authorities is already in place for nearly all such businesses. The authors believe that, for many G-SIFIs, this strategy holds the best possibility of preserving stability while removing taxpayer support. It holds shareholders, creditors and management in a failed GSifi accountable for its losses.
© Financial Times
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article