The Bank of England and the US FDIC have issued a joint white paper, "
Resolving Globally Active, Systemically Important, Financial Institutions," focusing on “top-down” resolution strategies that involve a single resolution authority applying its powers to the top of a globally active and systematically important financial group, that is, at the parent company level. The December 10, 2012 paper discusses how such a top-down strategy could be implemented for a U.S. or a U.K. financial group in a cross-border context.
The approaches outlined in the white paper are grounded in powers granted in the U.S. by the Dodd-Frank Act, and in the U.K. under the 2009 U.K. Banking Act. These approaches are intended to ensure:
- continuity of all critical services performed by the failing operating firm(s), thereby reducing risks to financial stability; and
- activities of the firm in the foreign jurisdictions in which it operates are unaffected, thereby minimizing risks to cross-border implementation.
Under the approaches outlined in the white paper, unsecured debt holders of such firms can expect that their claims would be written down to reflect any losses that shareholders cannot cover, with some converted partly into equity in order to provide sufficient capital to return the sound businesses of the G-SIFI to private sector operation. Sound subsidiaries (domestic and foreign) would be kept open and operating, thereby limiting contagion effects and crossborder complications. Under both the U.S. and the U.K. approaches, whether during execution of the resolution or thereafter, restructuring measures may be taken, especially in the parts of the business causing the distress, including shrinking those businesses, breaking them into smaller entities, and/or liquidating or closing certain operations. Both approaches include the replacement of culpable senior management.