Paul Tucker: Solving too big to fail – where do things stand on resolution? Speech by Mr Paul Tucker, Deputy Governor for Financial Stability at the Bank of England, Member of the Monetary Policy Committee, Member of the Financial Policy Committee and Member of the Prudential Regulation Authority Board, at the Institute of International Finance 2013 Annual Membership meeting, Washington DC, 12 October 2013. *  *  *  By way of setting the scene for this morning’s discussion, I shall make five broad and big points about where the international community has got to on addressing the Too Big To Fail problem through planning for orderly resolution. Before continuing, I should stress that these are my views and do not necessarily represent the views of any of the UK and international bodies of which I have been a member. (1)  The US authorities could resolve most US SIFIs right now  First, I repeat what I said in London recently. I cannot see how the US Administration could persuade Congress to provide taxpayer solvency support to – ie bailout – some of the biggest US banks and dealers. In short, the US authorities have the technology – via Title II of Dodd Frank; and, just as important, most US bank and dealer groups are, through an accident of history,1 organised in way that lends them to top-down resolution on a group-wide basis.
In the case of insured deposits, that means Deposit Guarantee Schemes (DGS) suffering losses, as they would in Purchase & Assumption-style resolutions of an operating bank. But, due to less destruction of value, those losses under bailin would be smaller (and never greater) than the losses the DGS would have suffered in a liquidation. Insured deposits themselves do not get haircut under any resolution techniques; the losses of the DGS get picked up by the rest of the industry standing behind it. Bailin is no different from other resolution tools in that respect. The point I have been labouring about all creditors being exposed to loss needs to be distinguished from the quite separate issue of whether the authorities should mandate a specified amount of bonded debt to act as required layer of gone-concern loss-absorbing capacity (GCLAC). That may be issued from a holding company, or it might be subordinated debt issued by an operating company. through such requirements, the authorities would in effect be determining part of the creditor hierarchy – the order in which creditor classes take losses – in order to reduce spillovers into the wider financial system when a distressed financial group is resolved. The G20 Leaders’ Summit have asked the FSB to develop such a regime over the coming year. (4)  Some impediments to smooth cross-border resolution need to be removed  I said earlier that the resolution process will become smoother over time. A range of impediments have been identified.6 Some of them require steps by policymakers.