THE WORLD’S biggest banks face could face serious structural changes as regulators were last night given powers to rearrange their legal and business setups if it would make winding down a troubled institution easier.
Sweeping resolution powers allow the regulators to review banks’ resolution plans every year to make sure they can quickly be either rescued or wound down in a crisis, without resorting to taxpayer bailouts.
The Financial Stability Board (FSB) released its latest guidelines to global systemically important financial institutions after a lengthy consultation.
The authorities hope that by keeping an up to date plan of how to resolve the banks, either as a whole or in constituent parts, they can prevent the panic and expense of the bank failures of the financial crisis happening again.
They are writing living wills so banks and regulators know exactly how capital buffers will be used in a crisis, which parts of the lenders can be wound down and which parts are vital to the system and must be maintained.
Payments systems for instance will have to keep running so that customers and other lenders can still operate. Deposit-taking facilities may often be deemed of vital importance too, as closing them down could see a run on the institution.
And lending facilities could also be maintained, as smaller customers in particular may need to time find an alternative source of credit.
Such measures are designed to stop one lender’s trouble spreading either to other banks or through other sectors.
Under the proposals regulators and banks will also work to see how the authorities will become involved.
That includes working out whether the institution should be dealt with from the top as one entity, or split into different business lines and geographies when a crisis strikes.
“This publication marks a further important step towards making the largest, most complex financial firms resolvable without taxpayer solvency support,” said Bank of England deputy governor Paul Tucker.
■ Regulators will be able to order firms to change their legal and financial structures.
■ The aim is to make banks easier to rescue or wind down in a crisis.
■ The only obstacle is if the imposed changes could harm the bank’s own financial stability.
■ Regulators in the country where a big bank is headquartered will get the power to resolve its overseas subsidiaries if needed.
■ The banks will see their resolution plans reviewed every year.
■ Each year the size and location of its capital buffers will be assessed to see if the loss absorbing capacity is in the right locations.
■ The creditor hierarchy will be established before any crisis, making clear who can be bailed-in in a crisis and in which order.
■ But the authorities can adjust that hierarchy if they believe it will improve the stability of the bank or the system – EU authorities, for instance, want short term bank to bank loans given more protection.
■ Market infrastructure like payments systems must be protected.
■ That may extend to some deposit and loan facilities if deemed a systemic risk.
■ Banks are being urged to put in place early warning systems to alert bosses to problems long before crisis point.
■ Set trigger points should be devised to let directors – and possibly regulators – know of hints of trouble in any business unit or geography.
■ The use of lagging measures in those systems will be banned.