Banks, Regulators Must Make Headway on Living Wills, FSB Says

Banks (SX7P) and national regulators are too slow to draw up living wills showing how large international lenders can be wound down if they fail, a group of global regulators said yesterday.

“Significant work remains” to be done on the bank-crisis plans, the Financial Stability Board said in a statement following a meeting in Zurich, Switzerland. The board said that it would publish a review of nations’ progress in April, in a bid to identify lenders and regulators that aren’t up to speed.

“Financial markets have improved over recent months, medium-term downside risks remain,” Bank of Canada Governor Mark Carney, who is also the FSB’s chairman, told reporters after yesterday’s meeting. Bank supervisors should “continue to assess the resilience” of the banking system to shocks “through regular stress testing.”

U.S. and European Union regulators have called on large banks to prepare living wills, to be developed with their supervisors, showing how they might be safely broken up without causing market turmoil and taxpayer-funded bailouts. EU nations alone have provided as much as 4.6 trillion euros ($6.2 trillion) of capital injections and other support to lenders since 2008 to prevent a meltdown of the financial system following the collapse of Lehman Brothers Holdings Inc.

The European Banking Authority last week told 39 banks, including HSBC Holdings Plc (HSBA) and BNP Paribas SA (BNP), to draft such contingency plans by the end of this year.

Work Plan

The FSB brings together regulators, central bankers and finance ministry officials from the Group of 20 nations.

The board’s work plan for 2013 also includes reviewing rules for the setting of market benchmarks, in the wake of the scandal engulfing Libor, Euribor and other interbank lending rates, Carney said.

The board also said that it also will publish a report in April on nations’ progress in implementing rules for over-the- counter derivatives.

The U.S. Commodity Futures Trading Commission is reviewing whether energy futures contracts that are replacing swaps on the largest exchanges have enough transparency before they are traded, amid concerns traders may be turning to futures to evade regulations being put in place for OTC derivatives.

‘Futurization’ Shift

Such so-called futurization “is not necessarily a bad thing if directionally it is consistent with the FSB reforms,” Carney said. “That said, we are not trying to futurize everything -- we leave it to the market to adjust.”

The FSB rules for OTC derivatives, which nations were supposed to have in place by end 2012, require that trades in standardized contracts should pass through clearinghouses, and be logged with trade repositories. The measures also seek to push trading as much as possible onto official platforms.

Separately, Carney said that efforts by Italian lender Banca Monte dei Paschi di Siena SpA to use derivatives to obscure its losses didn’t have global implications.

“It’s an unfortunate development for that specific bank but from a global systemic perspective it’s an idiosyncratic event,” said Carney, who will take over as Bank of England Governor in July.

To contact the reporter on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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Jan. 28 (Bloomberg) -- Bank of Canada Governor Mark Carney, chairman of the Financial Stability Board, speaks at a news conference in Zurich about the latest developments in the board's work to address vulnerabilities in the global financial system. (Source: Bloomberg)