My speech this morning, therefore, provides an opportunity to signal the Bank’s support for INSOL’s mission to take a leadership role in international insolvency and credit issues and to bring about greater international co-operation among the main players. The growing interest by a number of international organisations in the design of orderly and effective corporate insolvency regimes, and in the encouragement of greater co-operation in cross-border corporate insolvencies, suggests you have been successful in that objective. I think this has been greatly assisted by the important work which the INSOL Lenders Group has been co-ordinating in developing a set of principles governing corporate workouts at the pre-insolvency stage. But corporate workouts represent just one strand in financial restructurings more generally. There are two others I want to cover; and these are, first, restructurings of financial institutions, including banks, and, second, sovereign debt workouts. Indeed, in many instances, restructurings in the corporate sector will need to proceed in tandem with those in the financial and sovereign sectors. I would argue that, in all three cases, a collective approach by the different participants in the private and public sectors, and effective co-ordination among creditors and debtors, should help to preserve value. So I would like to consider today the extent to which these differing approaches raise common themes, and also whether there are distinguishing features which could affect the interactions between the three strands.
There are two aspects to this: we recognise that life insurers can be an important source of long-term, stable financing for corporates, infrastructure and mortgages – this is an important function that we want to see maintained; but we also must consider the wider financial stability angles, avoiding undue influence on the asset allocation behaviour of insurers. Solvency II should not materially drive investment decision making except in so far as it helps to make certain that insurers fully understand the risks that they take. The Prudent Person Principle will seek to ensure that the industry understands and is capable of managing its investment risks. Specifically, insurers must be able to demonstrate that they can properly identify, measure, monitor, manage, control and report on their investment risks and not place reliance upon information provided by third parties. Investment choices should be made in the best interest of policy holders and beneficiaries. Those running a business are best placed to make business decisions. That being said, the PRA does have the benefit of perspective. The PRA has the ability to look across the industry and can also draw upon the expertise of specialists working across the different areas of the Bank of England. Whilst on the subject of the role of management, we understand that there has been some uncertainty around our expectations of the non-executive director role for firms that have internal risk models. Non-executive board members need not be technical experts in risk modelling.