US and UK agree failed banks plan
It is hoped the approach would allow sound parts of banks to continue trading
10 December 2012 Last updated at 14:10
Banking authorities in the UK and US have outlined their plans for limiting the damage if banks get into trouble.
Under the plans, one national regulator would be responsible for overseeing the insolvency of a big international bank instead of bodies from different countries dealing with subsidiaries.
Shareholders would lose their money and people who had lent the bank money would end up owning it.
It is hoped it would stop governments having to step in to support banks.
The approach would also allow any remaining sound parts of the business to continue trading.
But BBC business editor Robert Peston pointed out that there was a danger if the proposals were successful.
“If banks are no longer considered too big to fail, the costs for banks of raising money would rise,” he said.
“That means they would feel obliged to charge their customers rather more for loans and for keeping money safe.”
The common approach came from the Bank of England and the Federal Deposit Insurance Corporation (FDIC), which is the US institution that would compensate savers if a bank went under and also tries to limit the effects of bank failures on the economy.
Another idea is that big banks are forced to have enough funding at the top of their organisations to absorb losses, instead of spreading it around complicated organisational structures.
Management would be held responsible for bank collapses and replaced.
The plans would only cover the biggest international banks, referred to as globally active, systemically important, financial institutions, or GSIFI.
The British Bankers’ Association welcomed the plans as “a constructive contribution”.
“It is important to note that work is already well underway in the UK: our banks have already developed recovery and resolution plans and reforms are progressing.”
At the moment, most big US financial institutions already borrow most of their money through the top-level holding company, but in the UK bonds are more likely to be issued by subsidiaries.
The Bank of England and FDIC are hoping to prevent a repeat of the situation following the collapse of Lehman Brothers, when regulators outside the US were left having to deal with their own collapsed subsidiary.
There have also been attempts since the financial crisis to deal with the “too big to fail” problem, which meant that governments had to bail out banks because not doing so would cause greater problems for their economies.
“Had we had this in place before we went through the last financial crisis we wouldn’t be in the position where we were actually having to bail out RBS ourselves as taxpayers, you’d be making sure the shareholders and creditors were taking responsibility,” said Justin Urquhart Stewart from Seven Investment Management.
“That’s what they’re paid to do as shareholders – you take risk.”
These cross-border discussions are taking place alongside other measures, including the 2010 Dodd-Frank financial reform law in the US and the EU recovery and resolution directive, which is expected to be approved in 2013.