London Financial Regulation Seminar The Regulatory Response to the Financial Crisis - Northern Rock “The Need for a Special Regime” Eva Hüpkes, London, 30 January 2008 L

Caution & Disclaimer

Outline Why is a special regime needed? What are its essential features? What are the challenges?

Why is a special regime needed?

Banks are special - Banks provide payment and other essential services. Need for speed - Economic value can disappear overnight. General corporate insolvency law is inappropriate - It comes too late and produces a stay on the bank’s critical function.

A special regime - what are its essential features?

Early intervention and resolution Flexibility and speed Adequate protection of depositors

Early intervention and resolution Pre-emptive action before liquidity or solvency problems become serious Resolution that maintains externalities and minimizes the disruption to the essential services provided by the bank

Flexibility and speed Need for tailor-made approaches that facilitate market solutions –No mechanical rules that hamper efficient, targeted outcomes – no automatic stays –Speedy restructuring –Rapid transfer of business lines

Adequate protection of depositors Amount – Need to cover a large share of retail depositors Speedy release of funds – Even with wide coverage, depositors will run if payouts are delayed

What are the challenges?

Legal challenges Preserving critical functions while respecting the rights of stakeholders –Different shareholder rights (Europe vs. US) Balancing the competing interests of different classes of stakeholders –Retail vs. wholesale –Shareholders vs. creditors

Economic challenges Preserving externalities without reducing efficiency Avoiding market distortions –Maintaining a level playing field –Dealing with the “too big to fail” problem

Political challenges Political imperative to act –Fighting the last war –Hasty decisions Allocation of intervention powers –Need for expertise –Concentration of power Minimizing the fiscal cost (taxpayers´ burden)

Options for meeting the challenges Predictability and powers –Provide ex ante clarity for all stakeholders about the implications of a bank becoming undercapitalised or illiquid Save functions not institutions –Identify and implement measures to ensure that critical functions can be “carved out” (e.g. by way of a P&A of retail deposits, creation of bridge bank, good bank/bad bank structures) Learn from experience elsewhere –Do not re-invent the wheel

Conclusions An effective crisis resolution framework should: –Ensure the continued performance of critical functions –Promote an efficient financial system by fostering market discipline, market integrity, competition and financial innovation –Prevent the social costs associated with financial panic and bank failures