Banking regulators of US, Britain taking joint stance

Banking regulators of US, Britain taking joint stance

Banking regulators of US, Britain taking joint stance

View of a Bank of America in New York’s Times Square in this file photo. The US Federal Deposit Insurance Corp (FDIC) and The Bank of England have developed resolution strategies for banking. AFP photo

Both the United States and United Kingdom have developed viable approaches to seizing and unwinding failing global financial institutions, but more work is needed on the U.K. side to ensure that losses can be adequately absorbed, American and British regulators said over the weekend.

The Bank of England and the U.S. Federal Deposit Insurance Corp (FDIC) said in a joint paper that each country’s plans for dealing with the types of cataclysmic financial failures that marked the 2007-2009 financial crisis would reduce risks to financial stability.

‘No futher burden on taxpayers’

“The FDIC and the Bank of England have 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,” they said in the paper.

The new authorities to seize and resolve so-called global systemically important financial institutions came in the United States from the 2010 Dodd-Frank financial reform law, and in Britain from the anticipated approval by early 2013 of the European Union Recovery and Resolution Directive.

Both the U.S. and U.K. approaches ensure continuity of all critical services of the failing firms and minimize cross-border contagion, the regulators said.

 In both approaches, equity holders would likely be wiped out, and unsecured debt holders would face writedowns and conversion of at least part of their holdings to new equity to recapitalize the institutions as part of the restructuring.

 In the United States, this is a relatively straightforward process, because in most large financial institutions, the capital structure is largely made up of equity and unsecured debt issued at the holding company level. There is often limited debt issued directly by operating subsidiaries that may be the source of the financial distress that brings down the company.

 In the U.K., however, financial holding companies at the top of the group do not typically issue much debt - more tends to be issued at the subsidiary level. “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,” the regulators said.