Authorities agree plan to shut big banks

Tim Wallace
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THE NEXT time a major UK bank fails the British authorities will transfer debt and equity to a trustee over a weekend to stabilise the institution, allowing it to seamlessly continue to operate vital functions across the globe while protecting taxpayers, according to a report from the Bank of England.

It and the US authorities hope to sign deals with other regulators agreeing to stand back instead of getting involved in a troubled bank’s operations in their country.

Under the proposals put together by the Bank and the US Federal Deposit Insurance Corporation, the regulator where the bank is based should be the sole point of entry for the authorities, no matter how many countries it operates in.

The idea is that the bank’s healthy units in any country should be able to keep on operating, while those that got the parent into trouble can be dealt with centrally.

But the report did note some areas which need more work. It is not yet known who will value the losses on a bank’s assets, and the Bank of England has not yet decided how to make sure holding groups, rather than business units, account for a large enough share of the group’s unsecured debt for bail-in purposes.

■ When a major bank – a globally systemically important financial institution (G-SIFI) – gets into trouble, the US and UK regulators want a single authority to be involved

■ The aim is to streamline the process, with the regulator in the country where the G-SIFI is based to run a smooth, quick changeover when the bank is in trouble

■ They hope that gives the biggest chance of the bank’s vital services, like deposit taking and payments processing, continuing despite the crisis in another part of the bank

■ It is all part of a larger plan to end the “too big to fail” problem and eliminate taxpayer bailouts

■ Shareholders and creditors would lose out, hopefully stopping the need for the taxpayer to step in

■ At the point of a crisis in one or more arms of a G-SIFI threatening the whole institution, the regulator will step in

■ They will suspend stock market trading in the bank and transfer debt and equity securities to a trustee

■ That should end the immediate panic and let the bank continue to operate

■ Over time first the shareholders and then the creditors will be wiped out or take haircuts until the black hole is filled

■ The management responsible for the failure will be cleared out and the failed units will be closed if need be

■ Ultimately the last remaining creditors will take control, becoming shareholders of a healthier bank