Home' Trinidad and Tobago Guardian : March 29th 2015 Contents SBG16 STOCKS
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt MARCH 29 • 2015
Only 51 hours separate the closing of the
New York Stock Exchange on Friday
afternoon from the opening of the
Tokyo bourse the following Monday.
How bankers wish it were longer.
Regulators want it to be possible for any bank to fail without
causing chaos or taking a bailout from taxpayers. To that end,
they are demanding that big financial firms draw up plans
that would make it easier to dismember them or start winding
them down during the brief weekly hiatus in trading.
That is proving tricky. This week the Federal Deposit Insurance
Corporation, the American regulator that takes charge of failing
banks, rejected the "living wills" of the local subsidiaries of
three of the world s biggest banks: BNP Paribas, HSBC and
Royal Bank of Scotland. Last year it declared inadequate the
plans of all 11 of the banks with more than US$250 billion in
assets in America, including Bank of America, Barclays, Cit-
igroup, Credit Suisse, Goldman Sachs, J.P. Morgan Chase,
Morgan Stanley and UBS. The first three have until the end
of the year to revise their submissions, the second lot only
until July 1. If any of the revised plans are rejected, regulators
will gain extraordinary powers to stem the growth of the banks
in question or to break them up.
The basic problem is that big banks operations are too
complicated for a quick and easy dismemberment. The FDIC
and other "resolution authorities"---Europe s new one held its
first meeting this week---are forcing them to become much
simpler. The aim is to make a bank failure akin to that of any
other company in the economy: painful for investors, potentially
troubling for staff and suppliers, but far less noteworthy for
customers and the wider world.
Regulators want choices they didn t have during the financial
crisis, when nudging a financial firm into bankruptcy was
thought likely to unleash pandemonium; a conjecture confirmed
when Lehman Brothers foundered in 2008. Since then many
governments have given resolution authorities the power to
take over a faltering bank well before the cash runs out. They
will be allowed to run their charges much as an administrator
does an insolvent company.
Regulators also intend to impose losses from a bank failure
not only on shareholders, but also on bondholders. That would
be an improvement on the financial crisis, in which bondholders
were largely spared for fear of exacerbating the credit crunch.
Under the new conditions a large part of the money banks
use to fund themselves has to be in the form of "bail-inable"
debt, some of which is intended to be written off if a bank
is close to failure, not only if it is bust. In theory a regulator
would be able to impose enough losses on shareholders and
creditors to stabilise a bank during that brief first weekend
without troubling depositors or taxpayers. The resolution
authority would then have a few months to make decisions
on whether to wind down the bank or to allow parts of it to
For all this to work, regulators think, banks need to change.
Ideally they would like each operating unit to be able to function
independently, with its own dedicated funding and capital.
The watchdogs also want banks to be simpler. They are not
keen on rococo corporate structures---cross-shareholdings
between units based in assorted offshore jurisdictions, say---
which mere mortals can scarcely understand, let alone dis-
entangle in a crisis.
"Too complex to resolve" is the new "too big to fail."
Banks must codify what were once informal relationships
between different units. Critical-but-dull support services---
the IT help desk, say, or the property-management division
that holds the lease on the bank s head office---must have clear
service contracts with other parts of the bank, in case they
get sundered in a breakup. Another form of simplification is
the agreement, struck last October, whereby 18 global banks
promised not to pull out of derivative contracts abruptly if
one them hits the skids.
American regulators also want banks to be able to go through
full-blown bankruptcy without needing to borrow from the
Federal Reserve---a Herculean task, given depositors and cred-
itors tendency to flee troubled banks. So far Wells Fargo is
the only big American bank that the FDIC judges capable of
that. It is helped by a comparatively simple corporate structure:
Its foreign operations are small and it does hardly any investment
Some bankers concede that drafting living wills has helped
them rationalise their businesses by weeding out "junk DNA"
in the form of defunct subsidiaries tied to forgotten deals.
Others dismiss the exercise, which for many has involved sub-
mitting more than 10,000 pages of documents, as another
pointless regulatory burden.
"Our plan says: Fire anyone who knows anything about
running the firm, sell everything, get smaller," one griped.
Asking for each unit to be self-sufficient is pushing toward
a less-streamlined financial system, bankers complain.
"What used to be informal lending between two subsidiaries
is now a strict revolving facility," the boss of a global bank
This not only adds to administrative costs, but also makes
it hard to put capital to the most profitable use.
"It stops the easy flow of money across operations," the
head of regulation at another banking giant said.
All this eventually will translate into higher costs for cus-
"If banks cannot die in the market, the pressure on regulators
will be to make them simpler and smaller," said Thomas
Huertas, a former regulator now at EY, an advisory firm.
However, if regulators can be made confident that their
charges are safe to fail, they might ease up on the red tape.
One senior official spoke of a "pivot" away from ever more
regulation once resolution is a credible option for banks.
In the meantime the regulators themselves have work to
do. In Britain and America, both global financial hubs, super-
visors have run "war games" to simulate their resolution strate-
gies in a crisis. Winding down a bank in practice is bound to
be much tougher, however.
One pressing question is how much international co-oper-
ation there would be. During the crisis national regulators
scrambled to protect "their" part of global banks, to the detri-
ment of others. Watchdogs have agreed to work together next
time, but few expect that they will.
@2015 The Economist Newspaper Ltd. Distributed by
the New York Times Syndicate
Pre-empting the next crisis
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