The Bank of England is 100% behind proposals allowing authorities in one country to vet other nations' plans to close down banks big enough to potentially cause financial chaos or spark taxpayer bailouts, policy maker Paul Tucker said Thursday.
The plans were drawn up by the Financial Stability Board, the regulatory taskforce of the Group of 20 leading industrialized and developing nations. Tucker is chairman of the FSB's steering group on resolution regimes that are used to manage the failure of a global, systemically-important financial institution, known as a SIFI.
"[We would] like an opportunity to vet the existence of viable resolution plans for the current SIFIs from the U.S., Germany, France, Switzerland and, no doubt other countries down the road," Tucker told the Institute for Law and Finance Conference in Frankfurt, according to a text of his speech. "We also really want other countries to be able to confront us with harsh reality if we don't deliver on having viable resolution plans for U.K. SIFIs over the next few years."
Tucker's remarks focused on proposals to solve some trickier aspects of getting resolution regimes to work, especially in relation to giant global banks operating across borders.
One bone of contention is when to activate resolution procedures and Tucker suggested it could be when a bank no longer meets criteria to hold a banking license in its home jurisdiction and is unlikely to do so again.
Another problem is how to avoid conflicts in different countries' insolvency laws when dealing with a big bank that has global subsidiaries. Tucker said contracts could be amended to ensure foreign units won't necessarily face bankruptcy if the parent enters a resolution regime.
Proposals for resolution regimes often include a "bail-in", or recapitalizing a struggling lender by requiring its creditors swap debt for equity. Tucker said the prospect of suffering losses this way should incentivize bondholders to better monitor the risks taken by banks.
-By Jason Douglas, Dow Jones Newswires; 44-20-7842-9272; firstname.lastname@example.org