In a crisis, sovereign countries care about the international distribution of losses. Standard setters should look into this. They should do so in the light of the principles and policies that have been agreed on how to improve the resolvability of banks – at both the consolidated and solo level. Because, quite simply, it is legal entities that fail. 5  For the most recent version see BIS (2012), ‘Core principles for effective banking supervision’, available online at: http://www.bis.org/publ/bcbs230.htm. 6  Paragraph 33 of the foreword to the Core Principles states that “countries undergoing assessments by the IMF and/or the World Bank can elect to be graded against the essential and additional criteria. It is anticipated that this will provide incentives to jurisdictions, particularly those that are important financial centres, to lead the way in the adoption of the highest supervisory standards. As with the essential criteria, any assessment against additional criteria should recognise the concept of proportionality.”  7  See BCBS (2013), ‘Basel III: A global regulatory framework for more resilient banks and banking systems’, available online at: http://www.bis.org/publ/bcbs189.pdf. 8  To understand the difference of applying capital requirements on a solo basis relative to a sub-consolidated basis, imagine Bank A owns Bank B which in turn owns Bank C. Under both approaches, capital requirements apply to the group on a consolidated basis.
In principle, legal entities within the group can be lightly capitalised so long there is adequate capital in the group as a whole. 2  3  See Tucker (2013), ‘Banking reform and macroprudential regulation: implications for banks’ capital structure and credit conditions.’ See Financial Stability Board (2013), ‘Recovery and Resolution Planning for Systemically Important Financial Institutions: Guidance on Developing Effective Resolution Strategies’; and Tucker (2013), ‘Resolution and the future of finance’. 4  For the most recent version see BIS (1996), ‘The Supervision of Cross-Border Banking’, available online at: http://www.bis.org/publ/bcbs27.htm  2  BIS central bankers’ speeches  Meanwhile, the (1997/2006/2012) Core Principles for Effective Banking Supervision5 set out minimum standards for prudential supervision. Supervisors are required to look at a bank on a solo basis; on a consolidated basis covering all related banking entities in a group; and on a group-wide basis, ie taking into account non-banking related entities as well. Under Principle 12, a home supervisor should supervise a bank on a consolidated basis, but “in addition ... the responsible supervisor supervises individual banks in the group. The responsible supervisor supervises each bank on a stand-alone basis and understands its relationship with other members of the group.” Under Principle 16, jurisdictions may – I stress, may – also opt to be assessed by the IMF for compliance with the Principles against the “additional” criterion6 that a supervisor should ensure an adequate distribution of capital within a banking group. But, to repeat, that is not an obligation.