AIMA

Resolution of Financial Institutions

Following the collapse of Lehman Brothers in September 2008 and the impact of other business failures on national economies globally, policy-makers have worked on measures to prevent financial institutions from becoming ‘too big to fail’. Measures proposed include:

• having institutions prepare recovery and resolution plans;
• giving regulators powers to intervene in an institution's activities prior to failure;
• giving regulators powers to 'wind-up' failed institutions in an orderly manner; and
• requiring institutions to issue new ‘bail-in’ debt and capital instruments.

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Europe

On 6 January 2011, the European Commission published a consultation on a proposed new framework for bank recovery and resolution that is designed to reduce the impact of the failure of cross border banks on the financial system. The regime proposed in the consultation would apply to credit institutions and certain investment firms. The EC consulted on aspects of a proposed regime ahead of the expected publication of a legislative proposal in Q2 2012.

Relevant consultations

EC Consultation on technical details of a possible European crisis management framework (January 2011)

AIMA documents

Response to Discussion paper on the debt write-down tool – bail-in (May 2012)

Response to EC crisis management consultation (March 2011)

 

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UK

On 9 August 2011, the UK’s Financial Services Authority (FSA) published a consultation on proposals for Recovery and Resolution Plans (RRPs). The consultation looks at issues, including: (i) removing barriers to resolution of covered financial institutions (credit institutions and certain large investment firms but not FSA-regulated hedge fund managers); (ii) enhancing resolvability of covered financial institutions; and (iii) possible approaches to resolution, including the use of ‘bail-in’.

Relevant consultations

FSA CP11/16: Recovery and Resolution Plans (August 2011)

AIMA documents

Response to FSA Consultation on Recovery and Resolution Plans (November 2011)

 

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USA

Title II of the Dodd-Frank Act introduces a new Orderly Liquidation Authority (OLA) regime, which will be operated by the Federal Deposit Insurance Corporation (FDIC). The OLA comprises a new set of insolvency rules that will apply to certain financial institutions whose failure may impact the financial stability of the United States. The OLA is designed with the goals of (a) improving on the provisions of the US Bankruptcy Code by allowing a targeted and control method of resolving financial institutions and thus minimising disruptions to the market, and (b) ensuring that taxpayer funds are not used to bail out these institutions. The OLA is relevant to systemically important financial institutions, as well as those market participants who are creditors, shareholders, bondholders or have other relations with the institutions.

Key legislative documents

Dodd-Frank Wall Street Reform and Consumer Protection Act 2010

Relevant consultations

FDIC consultation on Proposed Rulemaking Implementing Certain Orderly Liquidation Authority Provisions (October 2010)

AIMA documents

Response to FDIC consultation on Proposed Rulemaking Implementing Certain Orderly Liquidation Authority Provisions (January 2011)

 

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Supranational

On 19 July 2011, the Financial Stability Board (FSB) published a consultation entitled: “Effective resolution of systemically important financial institutions”. In the consultation, the FSB proposes a comprehensive package of policy measures to improve the capacity of national authorities to resolve systemically important financial institutions (SIFIs). The proposals include a wide range of powers and tools to resolve failed SIFIs, ‘bail-in’ regimes and requirements for the preparation of recovery and resolution plans.

Relevant consultations

FSB consultation on Effective Resolution of Systemically Important Financial Institutions (19 July 2011)

AIMA documents

Response to FSB consultation on Effective Resolution of Systemically Important Financial Institutions (September 2011)