Paul Tucker: Resolution – a progress report Speech by Mr Paul Tucker, Deputy Governor for Financial Stability at the Bank of England, at the Institute for Law and Finance Conference, Frankfurt, 3 May 2012. All speeches are available online at www.bankofengland.co.uk/publications/speeches. *  *  *  Thank you very much for inviting me to join this important conference. The EU have made a massive contribution to global planning for resolution regimes to address the fundamental problem of Too Big To Fail, inputting very significantly to the G20 Financial Stability Board’s Key Attributes for Resolution Regimes. It comes as no surprise, therefore, that the EU is committed to implementing that International Standard, via a Directive. As Chair of the FSB’s Resolution Steering Group, I thought the most useful thing I could do this morning is to give a brief progress report, and also to air some emerging thoughts on how to operationalise the FSB’s high policy. Preliminaries: what this is about For those who hesitate to grasp the nettle of implementing resolution regimes, I want to stress that the genie is out of the bottle. While myopia gripped the financial markets in the years leading up to the crisis, they are now seized of the risks on bank balance sheets. That will be reflected in the prices of the debt of those who bear that risk. If the risk in banking is not incorporated into the yields of bonds issued by banks themselves, then it will be reflected in higher sovereign borrowing costs.
The remedy would be a negotiated reconstruction of the firm’s capital structure, writing off the equity and partially converting debt claims into new equity. In the US, that goes by the name of Chapter XI. In banking, which is subject to depositor and counterparty runs, there is not time for a process involving negotiations between the different classes of creditors and shareholders under the jurisdiction of the courts. And the public policy priority is the stability of the system, not only the welfare of creditors. An administrative agency needs to make and execute some rapid judgments. That is precisely what so-called bail-in via resolution is about. The essential difference from other resolution tools is, as I have said, that losses are applied ex ante, up front rather than at the end of a process of running down the assets associated with “non-critical” functions. I have been making a simplifying assumption: one legal entity. Now imagine a cross-border group with subsidiaries in many jurisdictions and with a holding company. Under the provisions of the FSB Resolution Standard, recapitalisation through reconstruction of liabilities can also prospectively cut through a number of the long-standing impediments to resolution stemming from conflicts between home and host country insolvency laws; in other words, the cross-border problem. If the bail-in I have described were executed at the level of such a banking group’s holding company, there should in principle be no need to trigger default clauses in subsidiaries around the world that are not themselves affected by the problem causing the group’s losses.