Chart 11: Common component in asset  Chart 12: VaR vs CoVaR for a selection  prices  (a)  of major UK banks, post crisis Per cent 70 60  VaR Post Crisis 25 Median CoVaR Post Crisis 20  50 15 40 30  10  20  5  10 0 0 98 99 00 01 02 03 04 05 06 07 08  Sources: Bloomberg, Merrill Lynch, and Bank calculations. (a) Proportion of variation in global equities, emerging market equities, high-yield spreads and commodities explained by a common component over a three-month rolling window.
In some, the financial authorities might decide the scale of the haircuts/conversions; perhaps in other countries, it might be thought that a senior judge should decide on the basis of an application by the financial authorities. It is also worth saying that maintaining an LCFI in business through such means would neither preclude nor of itself require regulatory action against management or, once the crisis had passed, to wind-down parts or all of the business over time. Nor would a regime of the broad kind I have sketched exclude restructuring banking groups into functional subsidiaries, with different resolution tools applied to, say, deposittaking/payments; custody and global cash management; the business of illiquid lending to small and medium-sized enterprises and households; trading/derivatives business or wholesale banking more generally. That would not be inconsistent with reducing the number of legal entities in LCFI groups, perhaps by an order of magnitude. The current FSBsponsored work to develop “recovery and resolution plans” for the top 25 or so LCFIs is designed to identify where those kind of steps are warranted. Resolution could, therefore, take its place alongside structure and regulation as one of the key elements of a reform package to strengthen the global financial system. A super-special resolution regime along those lines would, on the face of it, go quite a long way towards reintroducing market discipline – by putting uninsured creditors at risk even in systemic situations. I am not innocent enough in the ways of the market to think that it wouldn’t affect behaviour.