THE UK’S SPECIAL RESOLUTION REGIME: APPLICATION TO CROSS-BORDER BANKS Mark Adams Bank of England

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 2007-2008 • 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 SRRTHE 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 SRRTHE 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 RESOLUTIONS3 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 • 2 MODIFIED 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 • 3 TERRITORIALITY 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