Regulators in the United States and United Kingdom yesterday unveiled a plan for dealing with failing global systemically important banks.
British and US banking regulators unveil safety net
The proposal will allow them to fire senior executives as well as force losses on shareholders to protect taxpayers.
"A resolution strategy for a failed or failing globally active, systemically important, financial institution should assign losses to shareholders and unsecured creditors, and hold management responsible," according to a paper jointly released by the US Federal Deposit Insurance Corporation (FDIC) and the Bank of England in London yesterday.
Global regulators are working on ways to handle the failure of large international banks to avoid another crisis such as the one inflamed by Lehman Brothers Holdings' bankruptcy in 2008 that led to taxpayer bailouts.
Paul Tucker, the Bank of England deputy governor, said the joint paper was a "significant step" towards solving the issue. The US has been developing its strategy under the Dodd-Frank legislation passed in 2010, while the UK has focused its efforts under the Banking Act of 2009, according to the paper. They each focus on dealing with the top of a financial group - the holding or parent company - to minimise disruptions to sound subsidiaries.
The UK and US plans - aimed at ensuring continuity of banks' "critical services" and reducing risks to financial stability - are based in part on recommendations published by the Financial Stability Board, while UK policies are also linked to European Union proposals presented in June.
Unsecured senior bondholders and uninsured depositors are among those who could take a financial hit, according to the paper. In the UK, funds allocated to a national guarantee programme for bank deposits could also be used to stabilise failing banks, the document said. While the regulators will coordinate their actions, there are differences in their methods, according to the paper.
In the US, the holding company would be made bankrupt and losses assigned to shareholders and unsecured creditors, with soundly operating units transferred to a new entity.
The UK plan involves either the writedown or conversion of securities held by creditors at the top of the group to return the entire firm to solvency.
"The too-big-to-fail problem must be cured," Mr Tucker and Martin Gruenberg, the FDIC chairman, told the Financial Times yesterday.
* with Bloomberg News