BREAKINGVIEWS-Bank crisis plans strike discordant note

Mon Dec 10, 2012 9:28pm IST

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By George Hay

LONDON, Dec 10 (Reuters Breakingviews) - Global financial regulators are playing separate, slightly discordant, tunes. One, exemplified by Federal Reserve governor Daniel Tarullo’s recent call for the U.S. arms of foreign banks to hold the same capital levels as domestic peers, implies banks will in future become more balkanised. Another, demonstrated by Monday’s document from the U.S. Federal Deposit Insurance Corporation and Britain's Bank of England on how to resolve cross-border banks, calls for a more cooperative future.

The FDIC and BoE are singing from the same hymn-sheet on how to deal with the failure of one of the biggest global lenders, many of which are based in their jurisdictions. The problem is that the so-called G-SIFIs have huge cross-border operations which would be as hard as Lehman Brothers was to unwind if they collapsed. The two regulators have set out how they think a Lehman II should be avoided.

Rather than divide and rule national operations by requiring separate dollops of capital and funding, their plan effectively validates a continuation of the status quo. The FDIC and BoE reckon each G-SIFI should have a big holding company at the top, sufficiently full of debt that can realistically not be repaid in full. Such a “bail-in” would be managed by the home regulator, leaving other operations in other countries to carry on unharmed.

It won’t be easy to make this work, even bilaterally. The UK lags the United States in the relevant legal powers, and British banks have smaller holding companies which may not yet have the required quantity of debt. Also, American and UK governments would need to persuade other states to follow their lead in general, and specifically to bail-in debt issued under foreign laws.

This isn’t impossible. The Financial Stability Board of global regulators is trying to find a universally acceptable common approach. But national regulators inside the euro zone are moving in the opposite direction. For example, Bafin, the German regulator, has sharply increased the required capital buffer at the German subsidiary of the Italian Unicredit. If the FDIC and BoE want their message to go global, they may have to shout louder.

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CONTEXT NEWS

- The Federal Deposit Insurance Corporation and the Bank of England published a joint paper on Dec. 10, advocating that large global banks should be bailed in at the level of their holding companies by a single national resolution authority.

- Reuters: US, UK bank seizure plans focus on absorbing losses - regulators [ID:nL1E8NA063] - For previous columns by the author, Reuters customers can click on [HAY/]

(Editing by Robert Cole and David Evans)

((george.hay@thomsonreuters.com))

((Reuters messaging: george.hay.thomsonreuters.com@reuters.net)) Keywords: BREAKINGVIEWS BANKS/

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