Comment: Resolving GSIBs is evolving
Discussion and activity towards the implementation of bank resolution schemes in various jurisdictions around the world has intensified in recent months. This may, in part, be because progress in this area with respect to Global Systemically Important Banks (GSIBs) and other SIBs will be a major topic of discussion at November's G20 Financial Stability Board meeting in Brisbane. It will also be due to regulators coming under pressure to be seen to be acting six years after the GFC. In Australia's case the need for a bank resolution scheme - or not - featured in comments made in the FSI's interim report. The window for responses to the interim report closed on Tuesday. The UK has largely followed the recommendations of the Vickers Commission, established after the GFC to determine how bank failures could be resolved in future without incurring a systemic catastrophe and without using taxpayers' funds. Implementation of the Commission's ring-fencing recommendations is now being finalised.The US is making slow progress with implementing the Dodd-Frank Act. The FDIC has just told a number of major US banks to redo their living wills, as the ones submitted are either vague, impractical or both.In Europe agreement has been reached on the Bank Recovery and Resolution Directive. Combined with the Single Resolution Mechanism, the Single Resolution Fund and the Directive on Deposit Guarantee Schemes, a framework now exists for the resolution of systemically important banks across the euro zone, and hopefully a framework that will effectively apply to national banks too. Under the framework, banks must prepare living wills and regulators must prepare their own plans for resolution of failing banks, without the use of taxpayer funds. The Single Resolution Authority will allocate losses to shareholders and creditors according to a clear pecking order. The resolution of banks will be funded through the Single Resolution Fund, which over the next eight years will raise €55 billion from the banking system. The banking system will also pre-fund deposit guarantees up to €100,000.The unknowns in Europe are whether there will be sufficient suitable liabilities to bail-in at the time of resolution and whether all this can be achieved over the space of a weekend, allowing the bank to reopen for business on the Monday but under statutory administration. The question of whether there are sufficient liabilities to bail-in when needed points to the enduring concern that some banks are 'too big to fail' - the bank cannot fail and must be recapitalised to ensure its continuation.If there are insufficient liabilities to bail-in a taxpayer funded rescue may still be required.The Open Resolution Scheme favoured by the Reserve Bank of New Zealand also has the objective of resolving a bank over a weekend and re-opening on the Monday. Only, it won't quite be business as usual, because depositors will only get access to some of their funds. No minimum has been set and their deposits will not be ultimately guaranteed.Canada recently released its own resolution proposals, which include the bailing-in of senior unsecured debt holders.