US foreign bank plans threaten bail-in system, says Finma


Proposals that would require foreign banks in the US to stand on their own two feet in capital and liquidity terms could undermine attempts to fix the too-big-to-fail problem for large, cross-border institutions, Switzerland's top bank supervisor has warned.

Proposals that would require foreign banks in the US to stand on their own two feet in capital and liquidity terms could undermine attempts to fix the too-big-to-fail problem for large, cross-border institutions, Switzerland’s top bank supervisor has warned.

The Federal Reserve Board proposed last December that foreign banks in the US should group their US subsidiaries under what it calls an intermediate holding company (IHC), which would then be subject to the same capital and leverage rules as US banks. Larger IHCs - with more than $50 billion in assets in the US - would also be required to hold a liquidity buffer and conduct liquidity stress tests. That would give US supervisors greater comfort that local operations of foreign banks would not need to rely on their parents in a crisis - or, potentially, local taxpayers - but it could also make it more difficult to resolve a stricken institution, argues Mark Branson (pictured), head of the banks division at Switzerland’s prudential regulator, Eidgenössische Finanzmarktaufsicht (Finma), in Bern.

“There are very understandable reasons for the US to move in that direction and we can have a lot of sympathy for the motivations. What regulators should obviously be very cautious about is the potential impact it could have on the ability to resolve global banking groups - we, as regulators, don’t want that to become in any way more difficult to execute. There’s no indication that is the intention, but you wouldn’t want it to be an unintended consequence,” he says.

Branson’s concern relates to the embryonic bail-in regime, in which bondholders would accept losses as part of a bank recapitalisation. The principle of this system is clear, but the details are some way from being finalised - the European Commission and the Financial Stability Board issued consultative documents on bank recovery and resolution in October and November last year, respectively, which both include bail-in as a key component.

One of the big, unanswered questions is whether bail-in would be triggered by a resolution authority in an international bank’s home country, or whether a host regulator could do so. Branson supports the former approach - and says other regulators are coming to the same conclusion. But he warns the power of a home country resolution authority would be limited in a world where regulators require banks to have localised pools of liquidity and capital wherever they operate.

“If you have an approach to resolution based on bailing-in capital, then you have a question about whether that is done using what’s known as the single-point-of-entry approach - top-down - or whether it is triggered locally in multiple jurisdictions. I think the global community is tending towards the single point of entry, which we support, so we would not want to see a fragmentation,” he says.

The danger in a so-called multiple-points-of-entry approach is that if the host resolution authority for one piece of the bank decides it needs to trigger a bail-in, then confidence in the other parts of the institutions may crumble, Branson says.

“The danger of this multiple-entry approach, where everyone looks after their own entities, is that it very quickly triggers an uncontrolled sequence of defaults on a global basis,” he argues.

A good resolution framework could help avert this danger, Branson says. If individual national supervisors believe the piece of a global bank sitting in their territory would be propped up by a single-point bail-in process - with capital flowing down through the group to fill a local hole - the argument for US-style regulation is weakened.

“The resolution framework will help determine how fragmented things become. If we don’t make progress there, then the only rational response is to ensure each local entity of importance is resilient enough on its own. So we have to make progress. And this is something industry and regulators have to work on hand-in-hand, because if the resolution regime is convincing, then the need to trap capital and liquidity reduces somewhat,” he says.


This article was first published on Risk

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