The precise details of the model are not important for tonight. Many of the mechanisms and channels that I will discuss are embodied within standard pricing models. 1 More importantly, my experience of speaking to businesses since the financial crisis began suggests that this type of framework captures the key factors that have been important in determining their pricing decisions. In particular, this type of pricing model emphasises the role of four types of factors. First, the marginal cost of producing an additional unit of output, which is likely to depend on the degree of spare capacity. Spare capacity within firms – since it tends to be cheaper for a company to increase output if some of its employees and capital are not fully utilised. And spare capacity in the wider economy – as slack in the labour market will tend to limit wage growth and thus the cost pressures faced by companies. But many companies face other cost pressures that are not related to their own capacity constraints or the ease with which they can hire staff. These “other” costs are the second factor. Some of these costs relate to inputs that are imported, such as energy and other commodities, and so depend on movements in world prices and in the sterling exchange rate. Others stem from domestic factors, including – importantly in the current context – changes in indirect taxes.
For a MPE strategy, the successful implementation will require effective coordination of the different resolution actions undertaken by home and host authorities. Each key host authority needs to be open about its plans. The home authority needs to reciprocate, ensuring a joined-up, collaborative approach with no surprises. For both SPE and MPE resolutions, the FSB has stipulated that firm-specific cooperation agreements (COAGs) must be agreed amongst home and host authorities. The FDIC/Bank of England joint paper last year is by no means the only example of intensified co-operation preparing the way for those COAGs. Over recent months there has been marked convergence in how the world’s key authorities plan to approach resolution. This will become more apparent as more jurisdictions, including crucially the member states of the EU, legislate the KAs into their local statutory regimes.14 Preferred paths, and fall backs My exposition of how the resolution work programme will be taken forward has made it clear that, as I at least envisage it, for each SIFI there will be a preferred path. There are two points to make about this. First, I favour the term ‘preferred path’ over ‘presumptive path’ because I am concerned that too many people – perhaps particularly amongst asset managers – slip into thinking, and even demanding, that a ‘presumptive’ path should offer certainty, with no room for the RA to exercise any discretion in the public interest. I think that that is unrealistic.