Regulators are struggling to create a global mechanism that could wind down a big financial institution without the disruption caused by Lehman Brothers’ collapse in 2008.
The US is due on Tuesday to propose its own so-called “resolution” regime that would allow officials to stabilise a big, distressed bank, sell off assets over time and force creditors to take a discount on the value of their debt, without taxpayer money or market disruption.
But policymakers attending meetings around the International Monetary Fund and Institute of International Finance criticised the US regime and cast doubt on whether anything but a modest set of principles could be agreed at the Group of 20 meeting in Seoul next month.
Paul Tucker, deputy governor of the Bank of England, said it was a “mistake” by the US to equate keeping a seized bank open with a bail-out. He questioned whether the system could work if no buyers were on hand to pick up some assets.
Mr Tucker said he thought employees would stop coming to work at an institution slated for closure. “And I suspect that even if it’s risk-free, some counterparties will move away because what’s the point of dealing and placing money with an institution that has no future?” he said.
European policymakers want to allow “open bank resolutions” that keep an institution running, but the US is opting for a system of mandatory liquidation, partly because the multibillion dollar bail-outs of AIG and Citigroupcreated immense political pressure for creditors, shareholders and executives to bear financial responsibility.
The US is also far less enthusiastic than some Europeans on the introduction of instruments such as “contingent capital” and “bail-ins”, designed to convert debtholders’ stakes in a bank into more loss-absorbent equity when it gets into trouble.
Lael Brainard, the senior Treasury official responsible for international affairs, said that “more analysis” was needed of bail-in instruments and they should serve only as “complements to effective resolution frameworks”.
But more important than US scepticism might be a lack of investor appetite, according to some bankers and investors meeting in Washington.
“I’m severely concerned,” said Raj Singh, chief risk officer at Swiss Re. “That’s not the kind of bet I’m buying into when I’m buying into bank debt: who’s really going to fund all these things that people are talking about in these resolution mechanisms? It certainly won’t be people like us.”
Phillipp Hildebrand, chairman of the Swiss central bank, said international regulators and policymakers meeting at the Basel committee and Financial Stability Board would define “core ingredients” that should be included in national resolution regimes and over time work to harmonise them.
“Cross-border resolution is very hard,” he said. “If you try to build a beautiful, global resolution regime I think we‘ll be at it for a very, very long time.”