Regulators Lack Power to Shut Down Failing Banks, Basel Says

Wednesday, 06 Jul 2011 01:02 PM

 

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Bank regulators need greater powers to close failing banks in an orderly fashion so that taxpayers don’t have to bear the costs of rescuing lenders during a crisis, global regulators said.

Governments need to “accelerate” changes to national rules to prevent banks from becoming too big to fail, ensure that lenders essential operations can continue in a crisis, and require that bank creditors contribute to shoring up firms’ finances before public money is used, the Basel Committee on Banking Supervision said today on its website.

“Complications continue to arise from discrepancies among national regimes,” the Basel group said. Some regulators continue to lack “important legal powers,” it said.

Banks are warning that plans by regulators for new rules to end the need for bailouts during a crisis may harm the economic recovery. Michel Barnier, the EU’s financial services chief, published plans in January to impose losses on failed banks’ senior bondholders -- a step that lenders including Citigroup Inc. and Goldman Sachs Group Inc. have said may make it more expensive for banks to attract funding.

Barnier, who leads work on financial regulation for the European Commission, has also proposed that regulators should be empowered to impose “structural changes” on firms to ensure they can be closed down in a crisis.

Bailing in a banks’ senior bondholders is likely to have a “negative impact both on pricing and market depth for bank debt” Citigroup said in a note to the commission that was published on the regulator’s website. Debt writedowns “will have implications for the funding markets,” Goldman said in its written response to the commission’s plans.

Legal Powers

Regulators’ arrangements for dealing with bank failures continue to differ in terms of “legal powers, the ranking of depositor and other creditor claims, and the capacity of national authorities to share information,” the Basel committee said. Such differences may undermine efforts for an orderly shut-down of a failing bank, it said.

Lobby groups representing some of the world’s biggest financial companies last month called on U.S. regulators to delay introducing rules that would govern resolutions of systemically risky firms.

The Federal Reserve and the Federal Deposit Insurance Corp. should clarify what constitutes a “credible” plan for unwinding a complex firm before requiring companies to file so- called living wills that would set out how they could be closed in a crisis, six groups including the Securities Industry and Financial Markets Association and the Institute of International Bankers said in a letter to the regulators.

“National authorities appear to be at different stages of developing recovery and resolution plans for systemically important financial institutions,” the Basel committee said. “In view of the importance of these plans for systemic stability, national authorities will need to move forward quickly in this area.”

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