‘Resolution’ does not mean ‘resurrection’ of a fallen bank. Rather, it means stabilising the bank so that, over time as far as is necessary, it can be either split up, restructured or parts of it put into insolvency in an orderly way. These new responsibilities and powers, crucially, do not only cover what happens when a bank can no longer carry on operating; they also cover how a bank organises and finances itself when it is operating normally. A key lesson of the crisis is that the structure and financing of a bank when it is operating normally can make it impossible to deal with its failure in an orderly way. If banks are not structured and financed in a way that supports orderly resolution before they run into trouble, the authorities’ options can be very constrained when the bank fails. (iii) Bank structures This brings me to the third plank of ending too big to fail. Banks before the crisis were not organised to be resolvable. The third plank is to ensure that banks are structured in a way that supports resolution and that barriers to resolvability are removed. This can be a daunting challenge – the average number of separate legal entities at G-SIBs is around 1,000 and in some cases is much higher.9 This may seem a rather gruesome business. It is not usual for a firm to spend a huge amount of time planning for its demise. It is certainly an onerous business for all concerned.
As a result, when Northern Rock got into trouble and a buyer could not be found, the Government had no alternative but to nationalise it – shareholders were wiped out and subsequently the Government was forced to inject £ billion of capital into the bank. A year later, when faced with the much bigger challenges of RBS and HBOS, the Government likewise had to step in.8 The situation was similar in other countries. While the US had a resolution regime, this only covered the insured deposit-taking entities within a banking group and proved unable to deal with the failure of large, interconnected groups. Similarly, SEC-regulated investment banks were outside of the scope of resolution regimes. While some European countries had bank-  8  4  Existing shareholders were not fully diluted in either RBS or HBOS. In the case of RBS, for example, they retained 16% of RBS’s total share capital (30% of voting shares). BIS central bankers’ speeches  specific insolvency regimes, they too did not have regimes that satisfy modern standards for bank resolution that would have guaranteed the continuity of critical economic functions. The shortcomings in terms of public institutions and powers have now been addressed in the key jurisdictions. We have, of course, yet to see how the new resolution powers operate in practice. But we now have a crucial, far reaching capability that we lacked entirely eight years ago. We need to be clear at this point what we mean by ‘resolution’ powers and authorities.