In my view, this initial exercise has confirmed that we are a long way from the desired situation in which large complex firms could be allowed to go bankrupt without major disruptions to the financial system and large costs to society. Significant changes in structure and organization will ultimately be required for this to be achieved. However, the “living will” exercise is an iterative process, and we have only taken the first step in a long journey. The second way to potentially minimize the negative externalities from a firm’s failure would be to avoid a bankruptcy proceeding altogether and instead resolve the firm under the Dodd-Frank Act’s Title II orderly liquidation authority.7,8 The “single point of entry” model has much promise, but much remains to be done before it could be implemented with confidence for a globally active firm. Title II authority is U.S. law. Subsidiaries and affiliates chartered in other countries could be wound down under the bankruptcy laws of those countries, if authorities there did not have full confidence that local interests would be protected. Certain Title II measures including the one-day stay provision with respect to OTC derivatives and other qualified financial contracts may not apply through the force of law outside the United States, making orderly resolution difficult. The other essential dimension of solving TBTF is to make the financial system more robust – addressing structural vulnerabilities that tend to amplify shocks rather than absorb them.
If I am to mention a couple of examples, these would be the Bank for International Settlements, which now devotes a much larger part of its analysis capacity to stability issues, and where we are members of a couple of groups entirely focussed on stability. The most well-known work is that being done on the new capital adequacy rules - Basel II. Another example is the work the Riksbank is heading in surveying central banks’ work on oversight of the financial infrastructure. The Riksbank is also heading the work on reviewing the principles for how public authorities should work with regard to banking supervision. Within the European System of Central Banks we are taking part in the work on producing a European stability report. The Riksbank is also heading the working group that analyses issues regarding cross-border banks with a special emphasis on crisis management. This group reports to both Frankfurt and Brussels. The fact that our analysis work has developed since we published our first report in 1997 does not mean that we can rest on our laurels. We have taken outside assistance in our endeavour to focus and develop our analysis work. A few weeks ago, we presented the assessment of our work on the Financial Stability Report made by an American researcher, a manager at IMF and a manager from a Swedish commercial bank over the year. Happily, the three authors considered that we essentially devoted ourselves to the right issues and used the right approaches.