Crisis management and special resolution regimes had previously been left to national jurisdictions. However recent developments, such as the Financial Stability Board’s (FSB) task of identifying and applying a regulatory framework to global systemically important financial institution (G-SIFIs), reinforce the need for and challenges to effective international cooperation.
‘Living Wills’ and the resolution of cross-border banks were a significant part of the talks about reform of the global banking system at the G20 in October 2010.In particular, the FSB recommended that international recovery and resolution planning is mandatory for the largest and most systemically important financial institutions (G-SIFIs).
Contingent capital instruments are being considered as a potential option to reduce the need for public bail-outs. Whilst Switzerland remains to date the only country to make a formal proposal on allowing banks to use CoCos (expected to be adopted into law by early 2012), contingent capital proposals were also under discussion within the Basel Committee on Banking Supervision (BCBS), the FSB, and the EC. Following a public consultation in July 2011, the BCBS published in November 2011 the rules for global systemically important banks (G-SIBs), setting out the framework to identify G-SIBs, the magnitude of additional loss absorbency that G-SIBs should have, and the arrangements by which the requirement will be phased in. The additional loss absorbency requirement will range from 1% to 2.5% and must be held in the form of Common Equity Tier 1 capital bail-in debt and low-trigger contingent capital were ruled by BCBS to be inappropriate for meeting the requirement. The names of the initial group of 29 G-SIBs were published by the FSB at the same time. Following the November 2011 G20 Summit, the FSB also published its standards for national resolution tools and regimes for failing SIFIs. Additionally, in October 2011, the FSB published a progress report on the implementation of its recommendations on enhanced SIFI supervision. The report raised concerns that inadequate IT systems and data handling processes are hampering risk management practices and the effectiveness of supervisory oversight. The FSB called on supervisors to increase scrutiny of firms’ risk management models. The FSB also published a further consultation in October 2011, seeking views on a set of options and proposals to introduce a new common data template for G-SIBs, as well as a report assessing the macroeconomic impact of higher loss absorbency for G-SIBs. Similar work is taking place on the insurance side as well. The International Association of Insurance Supervisors (IAIS) has been tasked by the FSB with recommending whether and how insurers should be deemed globally systemically important. Progress on the work will be reported to the G20 at the November 2011 Summit. IAIS is expected publish its proposals, covering the indicators and methodology to determine G-SIFI insurer designation and specific policy recommendations, in early 2012, with work expected to be completed by mid-2012. IAIS also published a report on the resolution of cross-border insurance groups in June 2011. The report examines the adequacy of current tools available to insurance supervisors given the growing complexity and interconnectedness of cross-border insurance groups. The IAIS emphasizes that key differences in the business models of banks and insurance companies will require different approaches to cross border crisis management. Additionally, the FSB has launched a peer review of deposit insurance systems in FSB member jurisdictions, the review findings are expected to be published in early 2012.
In Europe, the European Commission (EC) is expected to publish a proposal for an EU framework on Cross Border Crisis Management (CBCM) in Q1 2012 following consultation in Q1 2011. The proposal will cover issues ranging from prevention and early intervention to bank resolution measures and financing arrangements. In November 2011 the EC announced it is constituting a High-level Expert Group on structural aspects of the EU banking sector, which will start its work in February and make final recommendations in the summer of 2012.
Additionally, the Commission has launched a series of legislative measures designed to boost consumer confidence in financial services. New EU rules on deposit guarantee schemes scheme raised the coverage level to €100 000.
In the UK the Financial Services Authority (FSA) published a consultation paper on recovery and resolution plans (RRPs) in August 2011, which sets out proposed requirements for banks and large investment firms. A policy statement with final requirements is expected in Q1 2012 and firms will have until June 2012 to prepare their preliminary RRPs. In November 2011 the FSA initiated the Special Administration Regime (SAR) – which came into effect in February 2011 and sets special objectives for the administrator including the swift return of client assets. In October 2011 the FSA announced the re-start of the Financial Services Compensation Scheme (FSCS) funding review, which it hopes to formally consult on in the first half of 2012.