|
|
Some Highlights of the Bank of England/FDIC paper
31 March 2013
"Resolving Globally Active, Systemically Important, Financial Institutions" (G-SIFIs) a joint paper by the Federal Deposit Insurance Corporation and the Bank of England, was published on Dec. 10, 2012. The following are quotes on the four relevant policy topics identified in the lead of this briefing: 1) ``The unsecured debt holders can expect that their claims would be written down to reflect any losses that shareholders cannot cover, with some converted partly into equity in order to provide sufficient capital to return the sound business of the G-SIFI to private sector operations.... In all likelihood, shareholders would lose all value and unsecured creditors should thus expect that their claims would be written down to reflect any losses that shareholders did not cover... The new equity holders would take on the corresponding risk of being shareholders in a financial institution. "Under a top-down resolution, shareholders and certain creditors at the top of the group absorb losses and recapitalize the group as a whole. For a top-down approach to work, there must be sufficient loss-absorbing capacity available at the top of the group to absorb losses sustained within operational subsidiaries.’’ Paragraph 47 is particularly ambiguous as to whether or not depositors are to be considered ``unsecured creditors’’: "Retail or corporate depositors should not have an incentive to `run’ from the firm under resolution insofar as their banking arrangements, transacted at the operating company level, remain unaffected.’’ 2) ``The resulting new private sector operations would be smaller, more manageable—and perhaps more profitable... Ring-fencing of a banking group’s retail banking activities from the group’s investment banking activities would prove particularly valuable in facilitating such a restructuring... The newly resolved group would be solvent and viable, and should be in a position therefore to access market funding or, if necessary, funding from the authorities as discussed above... The contingency plans are designed to minimize the triggering of cross-defaults or closeout of netting arrangements at the operating companies.’’ 3) ``Once the Financial Services Bill comes into force in 2013, the Financial Services Authority will be replaced by two new regulatory bodies, the PRA and the Financial Conduct Authority. The PRA, a subsidiary of the Bank of England, will ``In both the U.S. and the U.K., legislative reforms already made [i.e., Dodd-Frank] or planned in response to the financial crisis provide new powers for resolving failed or failing G-SIFIs .... to impose losses on shareholders and unsecured creditors — not on taxpayers.’’ 4) ``The strategies will be translated into detailed resolution plans for each firm during the first half of 2013... Subsequently, firm-specific resolvability assessments will be developed by the end of 2013.’’ The list of G-SIBs (Global Systemically Important Banks) provided by the BOE-FDIC document are: Citigroup [dns] |