THE UK

1

• THE UKS SPECIAL RESOLUTION REGIME
• APPLICATION TO CROSS-BORDER BANKS
• Mark Adams
• Bank of England

2
THE SRR KEY FEATURES

• Pre-insolvency threshold
• Objectives specified in statute
• Tools full/partial transfer to PSP full/partial
  transfer to BB TPO liquidation/payout to
  eligible depositors
• Applies to deposit-taking institutions but
  includes provisions for holding and other group
  companies
• Creditor safeguards, especially in partial
  property transfers

3
MOTIVATION FOR AND APPLICATION OF SRR

• Northern Rock Crisis 2007-2008
• Lack of SRR meant only two options for NR
  insolvency or nationalisation
• Banking Special Provisions Act (BSPA) 2008
• Fear of consequences of insolvency for UK
  financial stability necessitated nationalisation,
  followed by good bank/bad bank resolution
• BSPA used also to resolve
• - Bradford and Bingley
• - UK entities of Icelandic banks
• RBS and HBOS/LBG resolutions pre-date SRR both
  recapitalised outside BSPA given holding company
  structure and cross-border operations
• Dunfermline Building Society only institution
  resolved under SRR so far

4
KEY MESSAGE

• SRR NOT YET TESTED AGAINST FAILURE OF UK BANK
  WITH CROSS-BORDER OPERATIONS

5
INTERNATIONAL REACH OF SRRTHE THEORY

• Applies to UK-incorporated banks and building
  societies
• This extends to foreign branches of UK banks
• It does not extend to foreign subsidiaries of UK
  banks
• It includes UK subsidiaries but not branches of
  foreign banks

6
INTERNATIONAL REACH OF SRRTHE PRACTICE

• UK authorities have no powers to prevent non-UK
  authorities ring-fencing local assets of branches
  of UK banks
• Such action could undermine UK resolution under
  SRR
• Assuming SRR resolution recognised as proceeding
  covered by CIRWUD 2001, then it would apply to
  all EEA branches of UK bank
• BUT that does not of course address possibility
  of separate resolutions/proceedings for branches
  of UK banks outside EEA
• This raises complex issues to do with
  international insolvency law

7
INTERNATIONAL INSOLVENCY LAWIMPLICATIONS FOR
CROSS-BORDER BANK RESOLUTIONS3 BROAD PARADIGMS

• 1 PURE UNIVERSALISM
• Home country controls resolution of bank and
  all its entities abroad host countries have no
  rights to bring local resolution or ring-fence
  assets within their jurisdictions
• 2 MODIFIED UNIVERSALISM
• Home country controls resolution of bank and
  all its branches abroad host country has rights
  to bring local resolution and ring-fence local
  assets, but can remit assets immediately to home
  country authorities if deemed appropriate
• 3 TERRITORIALITY
• Home country only controls resolution of parent
  bank and its domestic branches host countries
  mandated or able to bring local resolution and
  ring- fence local assets for use in local
  resolution

8
THE PARADIGMS IN PRACTICE

• Until last decade, territoriality dominant
• But recent signs of trend towards universalism,
  eg
• - EU Credit Institutions Reorganisation and
  Winding-Up Directive (CIRWUD) 2001 (pure)
• - European Insolvency Regulation (EIR) 2000
  (modified)
• - UNCITRAL MODEL LAW (UML) (modified)
• - Chapter 15 of US Bankruptcy Code adopted in
  2005 (modified)
• SRR in UK broadly consistent with universal
  principles
• BUT IN PRACTICE IN THE CRISIS
• - TERRITORIALITY RIDING HIGH AGAIN

9
WHY TERRITORIALITY?

• Consistent with fiscal independence of nation
  states
• Lack of ex ante burden sharing agreements between
  home and host authorities
• Host authorities may lack confidence in home
  authorities supervisory and resolution regimes
• Encourages early intervention by and
  accountability of host authorities
• Conflicts of interest between home and host
  authorities
• Its quicker and in a crisis you need to move
  quickly

10
PROBLEMS WITH TERRITORIALITY

• Undermines cooperative solutions
• Likely to encourage races for assets by both
  creditors and authorities, in which the strong
  win at the expense of the weak
• Undermines home country resolutions based on
  equitable treatment of worldwide creditors (eg
  under UK SRR)
• Individual authorities may not take into account
  global financial stability or preservation of
  going concern value
• Could undermine application of carve-outs/exemptio
  ns across borders, eg set-off rights, enforcement
  of collateral
• May destroy value (preservation of which is
  objective of SRR-type regimes)

11
DO NOT LOSE ALL HOPE

• Countries with territorial approaches to the
  resolution of others cross-border banks may
  prefer to apply universal principles to the
  resolution of their own cross-border banks
• From this simple fact, could there be scope to
  make progress?
• But need to be realistic any shift from
  territoriality only likely to embrace modified
  not pure universalism

12
WHY NOT PURE UNIVERSALISM?

• Implies surrender of national sovereignty in
  relation to predefined rules that determine
  respective roles of different authorities
• Requires ex ante burden sharing agreements across
  jurisdictions
• Different views of home and host countries on
  whether financial stability or public interest
  endangered
• Vulnerable to forum shopping
• If extended to subsidiaries, requires group
  interest resolution and piercing of corporate
  veil
• Possibly a long-term objective
• - like a World Government!

13
BUT WHAT ABOUT MODIFIED UNIVERSALISM?

• An acceptable compromise for countries with
  territorial approaches?
• UML involves similar compromise for corporates
  and has been implemented by territiorial
  countries (eg US)
• Modified universalism would give host countries
  the right, but not the obligation, to bring local
  resolutions
• Subject to certain conditions, any host country
  could remit all local assets to home country
  resolution authority
• Akin in insolvency law to ancillary proceeding
  being subservient to main proceeding

14
WHAT CONDITIONS WOULD BE NECESSARY?

• Equitable treatment of worldwide creditors of
  home bank and all its branches at home and abroad
• Burden-sharing principles governing contributions
  by each country, with amounts determined and
  negotiated on case by case basis
• Application of DGS and resolution funds on
  cross-border basis
• Sharing of information and cooperation between
  supervisory and resolution authorities, eg
  through CMGs, RRPs
• Mutual recognition of supervisory and resolution
  regimes
• Linked to that, or as a pre-condition, broad
  harmonisation of supervisory and resolution
  regimes (see EC Communication)
• Practicalities eg key players trust each other,
  common systemic risk assessments, secure
  communications, need to overcome time pressures

15
OBSTACLES

• Some countries laws mandate preferential
  treatment of creditors and/or depositors of local
  entities of bank (eg US national depositor
  preference laws)
• These countries may be able to treat creditors of
  domestic entities and creditors of non-domestic
  entities equitably in a non-liquidation
  resolution option but not in an insolvency

16
SPOTLIGHT ON THE US

• US territorial approach to supervision and
  resolution of non-US banks
• BUT EU needs to acknowledge that US has good
  reasons for territorial approach (remember BCCI)
• AND EU and other countries can adopt territorial
  approach to resolution of non-EEA foreign banks
• In UK, SRR cannot be applied to UK branches of US
  banks, but UK-based creditors can still petition
  UK Court for insolvency
• UK court would grant local proceeding if it took
  view that creditors of UK branch likely to be
  penalised in US proceeding
• Application of US national depositor preference
  laws could cause depositors and creditors of UK
  entities of US banks to run

17
THE WAY FORWARD

• Assuming conditions are met, countries sign up to
  modified universal approach to resolution of both
  their own and others cross-border banks
• US agree to repeal national element of
  depositor preference laws
• Countries agree principles for sharing cost of
  such resolutions among home and host countries
• Progress is made through
• - CMGs under aegis of FSB
• - preparation and agreement of RRPs for all
  cross-border banks
• - within EEA through ECs consultation
• May also need a new Concordat (perhaps by
  FSB/G20) for resolution along similar lines as
  Basel Core Principles for supervision
• Aim is to ensure SRRs such as that in UK could be
  used effectively to resolve cross-border banks

18
IF WE DONT GET IT RIGHT

• Balkanisation of international finance
• Forced subsidiarisation of branches (undermining
  EU single market)
• Ring-fencing along national lines
• Increased costs and inefficiencies of
  cross-border provision of financial services
• Loss of gains from increased competition in
  global finance
• AND/OR countries SRRs will only be effective in
  resolving purely domestic banks so too big to
  fail still not nailed