IFR Editor-at-large Keith Mullin
On the pace of the EU legislation, the consultation paper is clear: “The draft Recovery and Resolution Directive (RRD) published by the European Commission in June proposes resolution regimes for investment firms and financial holding companies, as well as banks. This is highly complex legislation and it is uncertain when it will be adopted in Europe …
“… The timetable for the RRD is highly uncertain, given its complexity. Given the risk to stability presented by the failure of a systemic firm, the Government intends to prepare to legislate domestically on a more accelerated timetable, to provide a resolution regime for systemic investment firms,”
As well as the RRD, the paper lists a host of additional initiatives in train at the Financial Stability Board (‘Key Attributes for Effective Resolution Regimes’); IOSCO’s Committee on Payment and Settlement Systems; the International Association of Insurance Supervisors; as well as Dodd-Frank discussions in the US. I guess UK policymakers figured it’d take years for these discussions to wend their way to conclusion and beyond that to implementation.
The Treasury’s proposals on non-bank resolution expand on the Investment Bank Special Administration Regulations and the work done on the special administration regime (SAR) for investment firms, introduced in February 2011 (and which captured the wind-up of MF Global last October). The SARs in essence complement the UK Insolvency Act 1986, and were enacted both to add robustness and thereby greater confidence to the process; and to provide better clarity and direction to administrators without the need for constant application to the courts.
Other types of institutions
The latest consultation paper backgrounder notes that banks are only part of the financial system and that other types of financial institution can also pose a risk to financial stability if there is no way for them to fail safely. “The disorderly failure of ‘financial market infrastructures could also severely disrupt both financial markets and the normal functioning of the wider economy,” the Treasury noted.
I’ve been arguing for a considerable amount of time that keeping the plumbing of the financial system functional in the event of a bank insolvency – particularly that of a systemically important bank – is fundamentally important. In fact, assuming UK regulators can move quickly in securing transparent and workable resolution regimes for those parts of the financial architecture that keep the system flowing and connected, there’s nothing then standing in the way of allowing banks to fail and disrupting the integrity of the entire system.
Banks need to be allowed to fail and governments need to allow them to do so. Bank insolvency strikes fear into the hearts of policymakers and regulators. Why? It’s not just because taxpayers might be on the hook for bailing them out, it’s the quest to prevent TV footage of depositors queueing outside branches to withdraw funds; it’s to prevent ATMs standing empty or salaries not being paid because of payment flow blockages or interruptions. The point is these issues should be resolvable in short order.
While the case for creating resolution regimes for central counterparties (CCPs) and non-CCP financial market infrastructure companies (non-CCP FMIs) is clear, the case for insurance company resolution is less obvious as insolvencies of companies writing insurance tend not to lead to systemic instability – although that of course depends on how big they are, the nature of their business and their market share (witness AIG).
The public comment deadline for the latest proposals is September 24.
