In democracies, that is rightly debated thoroughly to ensure that it has  3  This serious faultline in the international financial system was highlighted to the international community by a 2001 G10/Financial Stability Forum report explaining that officials did not then have the tools to manage the orderly wind down of a large and complex global financial institution (LCFI). 4  The Basel Committee on Banking Supervision’s Core Principles for Effective Banking Supervision (2012) require ‘the operational independence, accountability and governance of the supervisor [to be] prescribed in legislation and publicly disclosed, [with] no government or industry interference that compromises the operational independence of the supervisor.’  2  BIS central bankers’ speeches  legitimacy and is subject to the right checks and balances.5 The key process is, of course, the vetting and passage of legislation. That process is well underway in the key jurisdictions. Establishing the statutory regime In November 2011, the G20 leaders endorsed the Financial Stability Board’s Key Attributes for Resolution as an ‘international standard’. That term of art means that all the jurisdictions of the G20 are committed to incorporate the Key Attributes (KAs) regime into their domestic legislation. The US has largely done so. The EU is very close to doing so, through its Recovery and Resolution Directive. Switzerland has largely done so. Between them, this will account for the home countries of 24 of the 28 globally systemic banks listed by the FSB and the Basel Supervisors Committee last year.
Following the creditor hierarchy that would apply in liquidation, the various layers – equity, subordinated debt, senior unsecured debt etc – are written down until the losses are covered. And then the last surviving layer(s) of debt are partially converted into equity to recapitalise the continuing parts of the business, which is thus under new ownership. This has given rise to nothing short of a revolution in thinking about possible resolution strategies for SIFIs. Resolution strategies Last November the FSB issued draft Guidance on resolution strategies. Big picture, there are two basic strategies – Single Point of Entry and Multiple Point of Entry. Single-Point-of-Entry Resolution Single-point-of-entry resolution involves working downwards from the top company (Topco) in the group in an exercise that resolves the group as a whole, wherever its problems began. Think of it this way. Losses in subsidiaries are first transferred within the group to the Topco. If Topco is bankrupt as a result, the group needs resolving. Bailin can then be applied to the Topco’s capital structure: writing off the equity and, most likely, subordinated debt; and writing down and partially converting into equity the senior (bonded) debt issued by Topco. Those bondholders become the new owners. If Topco is a pure holding company – its assets comprising only investments in its subsidiaries – a number of advantages follow. The creditors of the operating banks and dealers are left intact; what might be called the group’s ‘operating liabilities’ are protected relative to the ‘capital liabilities’ of Topco.