1 THE UK’S 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 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 SRR THE 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 SRR THE 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 LAW: IMPLICATIONS FOR CROSS-BORDER BANK RESOLUTIONS 3 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 2MODIFIED 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 3TERRITORIALITY 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 It’s 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/exemptions 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 EC’s 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 DON’T 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