Global regulators face a race against time to work out plans they hope they’ll rarely need to use: how to contain the shock waves from a crisis-hit international lender within a weekend.
Moving toward a common set of bank resolution rules is one of the key issues when the Financial Stability Board meets in London today, as the club of central bankers and regulators seeks to complete its mission of avoiding a repeat of the turmoil that followed the 2008 collapse of Lehman Brothers Holdings Inc.
Mark Carney, governor of the Bank of England and chairman of the FSB, said last month that the board aims to finish a package of measures by November’s G20 meeting of global leaders in Brisbane to prevent lenders from getting too big to fail. Without clear rules, the death throes of international banks can trigger havoc throughout the financial system, leaving taxpayers to pick up the tab for repairs.
“The FSB knows that all of the work since 2008 to ensure orderly resolution will be just talk if a credible resolution regime isn’t quickly finalized,” said Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc.
While setting a global agenda that regulators -- such as Michel Barnier, the European Union’s financial services chief -- have followed, the G20 also left the FSB with a task of coordinating the international response to the crisis.
The FSB “has to move past all the happy talk in prior releases about ‘cooperation’ and ’data-sharing’ to force home and host country regulators to agree on how to resolve a systemically important financial institution -- bank and non-bank,” Petrou said.
As Carney’s November deadline looms, today’s discussions must also cover other remaining pieces of the too-big-to-fail framework. They include rules on forms of debt that can be written down if a bank fails, and how to manage about $693 trillion of international derivatives flows.
The FSB has so far ranked banks and insurers by their potential to cause a global meltdown and demanded bigger financial cushions to avert a repeat of the 2008 credit freeze. It has also drawn up guidelines aimed at harmonizing the powers available to regulators to wind down a crisis-hit bank.
“They have made a lot of progress in working out the theory of how to dismantle a complex international bank -- of course, theory and practice are two different things,” said Nicolas Veron, a senior fellow at the Bruegel institute in Brussels.
“There are two key outstanding questions: how far are jurisdictions willing to accept more harmonization at a global level, and what degree of effective cooperation is needed among regulators to make this resolution framework credible? Both these questions remain largely unanswered at this point,” he said.
The FSB risks being overtaken by national or EU initiatives that could cause differences in rules on imposing losses on bank creditors and how regulators approach them if lenders teeter on the brink of failure.
“The U.S. and the U.K. look to be supportive of this FSB work,” Veron said. “A big question is whether the same can be said of other large EU member states, or whether they think that the task has been completed because the EU has now adopted its own rules”
Nations have sought to ensure that regulators and other agencies that tackle failing banks have the powers they need to act over a weekend when markets are closed, in a bid to perform the necessary surgery before news of the lender’s plight roils the financial system.
The Federal Deposit Insurance Corp., the U.S. agency that intervenes at failing banks, specializes in such interventions. Its actions during the financial crisis included seizing lender IndyMac Bancorp Inc. in 2008 after a run on the lender led to the third-largest bank failure in U.S. history.
European Parliament lawmakers also pushed, during negotiations this year on a planned Single Resolution Mechanism for euro-area banks, for the system to be able to take decisions and begin implementing a resolution plan for a stricken lender over a weekend.
The EU reached a deal last year on common national rules for handling failing banks.
The measures include a general rule that 8 percent of a bank’s liabilities should be wiped out before recourse is made to other measures, such as tapping bank-financed funds. The thrust of the plans is to take taxpayers as far as possible off the hook for bailouts.
An accord was reached earlier this month by EU lawmakers on the Single Resolution Mechanism, which will include a central agency for bank crisis decision-making in the 18 nation euro-area, backed by a common fund. The European Commission is also weighing options for regulating clearinghouses so that they can be safely wound down if they fail.
To contact the editors responsible for this story: Anthony Aarons at email@example.com Peter Chapman, Ben Sills