FSB to Make Proposals for Too-Big-To-Fail Banks, Insurers

Global regulators will unveil proposals “in the next few weeks” for handling the failure of large international banks, while also extending too-big-to-fail measures to insurers and clearinghouses, said Bank of England Deputy Governor Paul Tucker.

The guidance, prepared by the Financial Stability Board, will help regulators identify which parts of a bank must be kept operational in a crisis and decide when to take emergency measures, Tucker, who chairs an FSB working group on bank failure, said in a speech in London today.

Regulators need broad powers to impose losses on bondholders at crisis-hit lenders, Tucker said in prepared remarks. “It’s about giving the authorities the tools, the powers, to effect a restructuring of the capital and the liabilities of a bank that isn’t toxic all the way through,” he said. It “isn’t about identifying a special type of bond that can be written down or converted” into ordinary shares.

The FSB’s initiative adds impetus to global efforts to protect the financial system from a repeat of the turmoil that followed the 2008 collapse of Lehman Brothers Holdings Inc. The European Union is grappling with how far its nations should join forces to stabilize lenders on the brink of insolvency.

Member states are split over proposals made earlier this year by Michel Barnier, the EU’s financial services chief, asking governments to have standing funds to recapitalize banks, and that these funds should lend to ones in other EU countries as a last resort.

FSB Guidance

Barnier’s draft law, presented in June, is in line with guidance adopted by the FSB, Tucker said.

Still, Tucker’s comments on bailing in bondholders run counter to recommendations made by an EU-mandated working group led by Erkki Liikanen, a member of the European Central Bank governing council.

In a report published this month, the so-called Liikanen group called for lenders to issue a specific type of debt that could be targeted for writedowns.

The upcoming FSB paper on bank crises was drafted by a group of regulators led by Federal Reserve Bank of New York First Vice President Christine Cumming, Tucker said.

The FSB is also preparing proposals on regulating clearinghouses and insurers that are too big to fail, he said.

Today’s speech is Tucker’s third since applications for the job of Bank of England Governor closed last month. He remains the favorite to replace Mervyn King when he steps down in June, with the Treasury expected to make an announcement by the end of the year.

Potential Rivals

Tucker’s potential rivals for the position include Financial Services Authority Chairman Adair Turner and John Vickers, who leads the Independent Commission on Banking.

Tucker said that he expects pressure to grow for nations to put in place pre-financed funds that would compensate government-insured depositors at failed banks.

Banks would pay “risk-based levies” into these funds, Tucker said.

“That avoids defaulting banks getting off scot-free, and has banks contributing to the deposit insurance system when times are good rather than only when under pressure.”

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