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Bank Resolution – FDIC and Bank of England issue a joint paper

10 December 2012

To read the report, click on this link.

Key points from the paper:

•The legislative frameworks and resolution regimes at the time of the crisis in 2008 were not appropriate to deal with large and complex financial institution failures.

•A resolution strategy should assign losses to shareholders and unsecured creditors. The resolution authority could intervene at the top of the holding group and losses would be apportioned to shareholders and unsecured creditors at group level (“single point of entry strategy”). Alternatively, if not enough debt is issued at group level to absorb group losses, a “multiple points of entry strategy” could be preferred, with a contribution from operational subsidiaries (in addition to holding company level). However, the paper mostly elaborates on the “single point of entry strategy”.

•Dodd-Frank materially enhances the ability of regulators to address the problems of G-SIFIs in future crisis. In the U.K., the Banking Act provides the BoE with tools for resolving failing deposit-taking banks and building societies, but does not provide a sufficiently effective solution to deal with G-SIFIs. This should be achieved through the introduction of the U.K. Financial Services Bill and the Bank Recovery and Resolution Directive proposal (put forward by the European Commission in June).

•Several factors are taken into account, including: corporate governance during and after the entity's transition period, ensuring that critical business operations continue to be performed, minimization of cross-border coordination risk, write-down of liabilities and conversion of debt into equity, proper valuation of assets, losses and listing requirements post-resolution.