FSA sets out rules on bank living wills

DETAILED plans on how banks should wind themselves up or change shape to stay afloat in a crisis were set out by the City regulator yesterday.

The Financial Services Authority is making all UK banks draw up two “living wills” by the end of 2012 to cope with future shocks, though it expects the biggest to have such plans in place by the end of next June.

Recovery plans, to stabilise banks suffering extreme shocks should include radical strategies banks would not normally consider, such as selling all or parts of the group; cancelling dividends and bonuses; and raising emergency equity or debt exchanges, the FSA said.

Plans to wind up a failing bank should make sure critical economic functions continue or are resolved, while non-critical ones fail safely.

CMS Cameron McKenna partner Simon Morris said the FSA had left the door open to forcing banks to commit to dropping risky lines of business in their recovery plans.

“We can expect it to be flexing its judgmental muscle over the coming months as it requires banks to jettison financing or trading activities that might hinder rapid recovery in troubled times,” he said.

The proposed resolution rules also means the FSA could force banks to break up in the space of a weekend should another crisis happen.

“The FSA will have the power to require a bank change the way it operates here and now to remove potential obstacles to rapid resolution,” Morris said.

The British Bankers Association said it was “crucial” the FSA got the regulation right. “We will be reviewing the FSA’s proposals closely to ensure they would be effective and they would align with international regulatory reforms,” it said.

The FSA’s rules will cover all banks holding more than £15bn in assets, and be imposed on top of Europe-wide resolution rules.