U.K. Lawmakers Ask for Evidence That Too-Big-to-Fail Is Solvedby
Call for evidence first stage of committee’s capital inquiry
Inquiry follows Vickers’s criticism of BOE’s approach
A U.K. Parliament committee plans to examine whether the nation’s regulators have done enough to end the concept of too-big-to-fail banks, asking for written evidence on recovery and resolution plans as the first stage of an inquiry into capital rules.
“It is vital this problem be solved,” Andrew Tyrie, chairman of the Treasury Select Committee, said in a statement. “The assumption that failing banks would receive public support was part of a toxic cocktail of misaligned incentives which contributed to the financial crisis.”
The committee said in April that it would look into bank capital after Sir John Vickers, the chief architect of reforms that are remaking the U.K. banking industry, raised concern that the Bank of England’s proposals for the systemic risk buffer were inadequate. The BOE has opted for a tiered approach to that buffer, a layer of capital of between zero and three percent that’s designed to ensure domestic lenders can keep credit flowing under duress.
The BOE defends its approach to setting capital requirements by citing new bank-resolution rules known as total loss-absorbing capacity adopted last year by the Group of 20 nations and brought into European law as the minimum requirement for own funds and eligible liabilities, or MREL. These rules force banks to have debt that can be converted into equity or written off to wind down or revive a collapsed firm.
BOE Governor Mark Carney has said that effective resolution arrangements means regulators can require a lower level of capital than otherwise would be needed. Vickers has criticized the whole approach, likening the loss-absorption rules to fire extinguishers that can reduce the damage caused by a blaze and accusing regulators of economizing on fire prevention.
The committee is asking for evidence on matters including the progress of resolution and recovery plans in the U.K. and other countries; areas of potential conflict between different national approaches; the impact of Brexit; and the assumptions made by the BOE’s Financial Policy Committee in its judgments of resolution plans. It also wants to know about the likelihood of contagion stemming from markets for loss-absorbing bonds and whether more transparency about the resolution plans of the major banks is desirable.
Interested parties have until March 5 to respond.