21 December 2017

Andrew Gracie: Making banks resolvable - the key to making resolution work

Resolution has come a long way since G20 Leaders put together the post-crisis financial reform agenda in summits in London and Pittsburgh in 2009. In some ways, it represented the most notable gap, and significant change in the pre-crisis regulatory architecture. Nearly ten years on, huge progress has been made in establishing effective resolution arrangements and the commitment to ending too-big-to-fail (TBTF) is undimmed.

The immediate priority in this effort was to put in place the necessary legal frameworks. Agreement in 2011 of Financial Stability Board (FSB) Key Attributes for Effective Resolution Regimes provided the international standards to ensure a consistent approach to the design of resolution regimes across G20 jurisdictions.

The UK now has in place a comprehensive bank resolution regime that is compliant with international standards and will remain so after Brexit. Similarly, for all advanced economies, there are now resolution regimes that are largely compliant with the Key Attributes in all the jurisdictions that are home to global systemically important banks (G-SIBs).

But the Key Attributes were about effective resolution regimes rather than resolvable firms – they defined a tool-kit but not how to use it; and a process for resolution planning for G-SIBs but not what would make a firm resolvable. Powers without resolvability leaves resolution authorities vulnerable.

Indeed, the moral for Andrew Gracie of recent failures and near-failures is not that resolution is misguided and will not work, but that it will not work if firms are not regulated and supervised in a way that makes them resolvable.

“This is the story of the last five years. We have focussed on organising firms in such a way that authorities’ resolution powers can be used without significant adverse consequences for the rest of the financial system or the wider economy. This moves us progressively to where we want to be against risk appetite. And though we are not yet where we finally need to be, what has been done has already yielded significant benefits. For example rating agencies have largely removed government support uplifts to bank’ credit ratings. Where UK firms have come under stress, our resolution arrangements have been one factor that has helped secure recovery.”

Andrew Gracie reviews where we are on the journey: what has been done and what is left to do. He focuses in particular on three topics:

• internal total loss-absorbing capacity (TLAC) or minimum requirements for eligible liabilities and own funds (MREL) and the underpinning it provides for cross-border co-operation;
• bail-in mechanics – having required banks to maintain TLAC or MREL; and
• disclosure – resolution needs to be credible as well as feasible. With credibility comes market discipline ex ante and less disruption in a resolution (lower probability of default and loss given default in other words).

All three areas build on the core work of resolvability that has already been done, illustrating the point that the process is incremental and resolvability is not binary but progressive.

Full speech

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