Cross-border regulation and too-big-to-fail banks

Practical Law UK Legal Update 7-500-7347 (Approx. 2 pages)

Cross-border regulation and too-big-to-fail banks

by Simon Lovegrove, Norton Rose LLP

Published on 12 Nov 2009

This article is part of the PLC Global Finance October e-mail update for the United Kingdom.

Adair Turner, Chairman of the FSA recently made a speech in which he discussed the regulation of large systemically important banks (banks that governments deem are 'too-big-to-fail'). This article summarises some of his key views.

On 2 November 2009, the FSA published a speech from its chairman, Adair Turner, in which he discussed the regulation of large systemically important banks (banks that governments deem are 'too-big-to-fail').

In summary, Lord Turner's view was that there is no silver bullet solution to the regulation of such banks and that the overall policy response to be developed by regulators will involve trade-offs between multiple policy instruments.

He also said that:

There is a strong case for tighter capital and perhaps liquidity standards for systemically important banks.
The interconnectedness in wholesale traded markets needs to be dramatically reduced, via the use of central counterparties and better capital and margin arrangements for bilateral contracts.
A fundamental review is needed of the trading book capital regime and a bias to conservatism for riskier and purely proprietary activities.
Resolution and recovery plans need to drive internal structure simplification, which could lead to something close to an internal Glass Steagall divide, and with a potential trade off between the implications of the living will for the feasibility of orderly wind down and the capital surcharge required at whole group level.

Near the end of his speech Lord Turner made some interesting observations regarding the treatment of large cross-border banking groups. When large cross-border banking groups get into difficulties the current practice is for the bank's home country government to assume responsibility for rescuing the entire group using capital support and guarantees.

In Lord Tuner's view, for some cross-border banking groups part of the way forward should be a greater focus on standalone national subsidiaries. He also believes that there may well be some necessary trade offs:

With predominantly wholesale banks, the approach based primarily on a standalone subsidiary model may be impractical. It may be that regulators have to demand more capital at the group level, and resolution and recovery plans which allow differentiation as much by type of business as by location.
With cross-border banks which do organise themselves as constellations of standalone subsidiaries, regulators may have less need to demand very high capital levels at global group level, focusing instead on national positions.

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