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Regulators Lack Power to Shut Down Failing Banks, Basel Says

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EU Financial Services Chief Michel Barnier. Photographer: Jock Fistick/Bloomberg
EU Financial Services Chief Michel Barnier. Photographer: Jock Fistick/Bloomberg

July 6 (Bloomberg) -- Bank regulators need greater powers to close failing banks in an orderly fashion so that taxpayers don’t have to bear the costs of rescuing lenders during a crisis, global regulators said.

Governments need to “accelerate” changes to national rules to prevent banks from becoming too big to fail, ensure that lenders’ essential operations can continue in a crisis, and require that bank creditors contribute to shoring up firms’ finances before public money is used, the Basel Committee on Banking Supervision said today on its website.

“Putting in place mechanisms that will allow financial institutions to be shut down will necessitate a significant restructuring of the banking landscape as we know it,” Sony Kapoor, managing director of policy group Re-Define Europe, said in an e-mail.

Banks are warning that plans by regulators for new rules to end the need for bailouts during a crisis may harm the economic recovery. Michel Barnier, the EU’s financial services chief, published plans in January to impose losses on failed banks’ senior bondholders -- a step that lenders including Citigroup Inc. and Goldman Sachs Group Inc. have said may make it more expensive for banks to attract funding.

Barnier, who leads work on financial regulation for the European Commission, has also proposed that regulators should be empowered to impose “structural changes” on firms to ensure they can be closed down in a crisis.

‘Negative Impact’

Bailing in a banks’ senior bondholders is likely to have a “negative impact both on pricing and market depth for bank debt” Citigroup said in a note to the commission that was published on the regulator’s website. Debt writedowns “will have implications for the funding markets,” Goldman said in its written response to the commission’s plans.

Regulators’ arrangements for dealing with bank failures continue to differ in terms of “legal powers, the ranking of depositor and other creditor claims, and the capacity of national authorities to share information,” the Basel committee said. Such differences may undermine efforts for an orderly shut-down of a failing bank, it said.

“Cross-border resolution will be complicated until we have an internationally binding resolution regime,” said Monika Mars, a PricewaterhouseCoopers AG director in Zurich.

“The Basel committee has realized that that is nirvana, and so it is trying instead to get as close as possible to that through national cooperation -- so that national laws at least do not directly contradict each other,” Mars said.

Systemic Firms

Lobby groups representing some of the world’s biggest financial companies last month called on U.S. regulators to delay introducing rules that would govern resolutions of systemically risky firms.

The Federal Reserve and the Federal Deposit Insurance Corp. should clarify what constitutes a “credible” plan for unwinding a complex firm before requiring companies to file so-called living wills that would set out how they could be closed in a crisis, six groups including the Securities Industry and Financial Markets Association and the Institute of International Bankers said in a letter to the regulators.

“Any credible living will need to be actionable over a weekend and for this to be possible banks will need to downsize and simplify their legal structures enormously,” Kapoor said.

Living Wills

Regulators “appear to be at different stages of developing recovery and resolution plans for systemically important financial institutions,” the Basel committee said. “In view of the importance of these plans for systemic stability, national authorities will need to move forward quickly in this area.”

Global watchdogs are seeking ways to prevent any repeat of the government rescues of lenders that were judged necessary following the September 2008 bankruptcy filing of Lehman Brothers Holdings Inc.

“The U.K has had a first exercise of requiring its banks to draw up living wills, other big banks in other countries have not yet done it to the same extent,” Mars said. “These requirements are not yet uniform and the usefulness of some of this remains to be tested, hopefully not in the near future,” she said.

The Financial Stability Board, which brings together finance ministry officials, central bank governors and regulators from the Group of 20 countries, will this month publish its own draft proposals on bank resolution, Bank of England Deputy Governor Paul Tucker said in a speech on June 29. Tucker chairs an FSB working group that is examining how bank bondholders should contribute to shoring up lenders in crisis.

Today’s report assesses how well nations have implemented recommendations that the Basel committee made in March last year on how to ensure that bank failures can be handled in an orderly way.

To contact the reporters on this story: Jim Brunsden in Brussels at

To contact the editor responsible for this story: Anthony Aarons at

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