Transatlantic co-operation to end ‘too-big-to-fail’ bank fears

By MARTIN FLANAGAN
Published on 11/12/2012 00:00

BRITAIN and the United States have jointly unveiled plans to oversee the orderly winding down of collapsed globally important banks so that future taxpayer bail-outs can be avoided.

A key new element of the plans is that, in each collapse of a big international bank, only one national regulator would be responsible for overseeing the insolvency instead of different countries dealing with various overseas subsidiaries.

Yesterday’s joint paper from the Bank of England and US Federal Deposit Insurance Corporation (FDIC) said both nations had “developed resolution strategies that take control of the failed company at the top of the group, impose losses on shareholders and unsecured creditors – not on taxpayers – and remove top management and hold them accountable for their action”.

Paul Tucker, deputy governor for financial stability at the Bank of England, said: “The ‘too big to fail’ problem simply must be cured. We believe it can be and that this joint paper provides evidence of the serious progress that is being made.”

The strategy paper says that, in both the UK and US approaches, shareholders would probably be wiped out in any crash. In addition, unsecured lenders to the stricken banks would face writedowns and conversion of at least part of their holdings to new equity.

This would help recapitalise the institution as part of any restructuring. By contrast, in the 2008 banking crash the British taxpayer had to pump £45 billion into Royal Bank of Scotland and £11.5bn into HBOS as part of its takeover by Lloyds in order to keep the banks afloat.

The paper says shareholders should expect to lose all their money and unsecured lenders to the banks “can expect their claims would be written down”.

Both approaches would ensure continuity of all crucial services at the failing firms and minimise cross-border financial contagion.

• Standard Chartered is to pay $327 million (£203m) to reach a settlement on allegations that it violated US sanctions against Burma, Iran, Libya and Sudan, the Federal Reserve said yesterday.