The Code of Practice provides guidance on a number of areas, including how the SRR objectives are to be achieved, factors guiding the choice between different tools, how to determine that it is not reasonably likely that action can be taken by or in respect of a bank to bring it into compliance with the FSA’s threshold conditions – ie how to determine that the SRR should be triggered, how to determine the basis for calculating compensation where applicable, and the principles by which the Bank of England should run a bridge bank. Beyond all of these provisions, the Banking Liaison Panel, whose members include industry bodies, lawyers and insolvency practitioners, in addition to HMT, the Bank and FSA is responsible for providing advice on the wider effects of the resolution regime. The resolution of the Dunfermline Building Society The first, and so far only, use of the resolution regime was for the Dunfermline Building Society at the end of March. Our tally of one is in sharp contrast to the US, where to date this year the FDIC has carried out 124 resolutions of failing banks. The US does, of course, have a much less concentrated banking industry. Dunfermline was, almost needless to say, a very instructive first case to handle. We achieved the key objective of a weekend transfer of depositors, branches and the head  4  BIS Review 157/2009  office, on this occasion to Nationwide Building Society.
During the crisis, some examples of bad incentives that sustained the boom included: 2/7  BIS central bankers' speeches  1. Compensation practices at financial firms that rewarded volume and short-term performance over longer-term, sustainable returns; 2. The conflict of interest inherent in the willingness of the credit rating agencies to designate tranches of subprime mortgages triple-A in exchange for fees; 3. The ability of Fannie Mae and Freddie Mac to use their implicit government support to take on large amounts of mortgage risk with very little capital backing; and, 4. The ability of AIG to use its triple-A rating to provide credit protection to banks and securities firms against complex mortgage obligations with little direct capital support or an adequate liquidity backstop. Culmination of the crisis Once the housing bust got underway, stress on the financial system increased sharply as asset prices fell and bank earnings plunged. In the spring of 2008, such pressures led to a forced sale of Bear Stearns to JPMorgan Chase. Later in the year, the government placed Fannie Mae and Freddie Mac into conservatorship. In September, Lehman Brothers failed. And, a day later, AIG was rescued in order to protect the rest of the financial system against further losses and even broader contagion. With confidence in financial markets and financial intermediaries badly frayed, the Federal Reserve and the U.S. government intervened and provided a range of liquidity backstops, debt guarantees, and capital infusions to forestall a complete collapse of the financial system and the economy.