IMF/ World Bank meetings: lack of resolution regimes a key concern

Currency wars may have hogged the headlines. But another issue oft voiced at the IMF/ World Bank meetings this weekend has been the continuing lack of an adequate resolution regime for cross-border banks.

More than two years after the collapse of Lehman Brothers threatened to bring the global financial system to a standstill, officials and bankers agree that devising a resolution regime for cross-border banks is pivotal in ensuring financial firms are no longer too big or interconnected to fail.

Randall Kroszner, a former governor of the Federal Reserve who is now a professor at the University of Chicago, echoed the words of many at the gathering when he said on Saturday: "One problem is the lack of resolution mechanisms. Fixing this is really crucial. There's still a lot of uncertainty about what happens when a cross-border bank fails. People don't know how contracts are going to be treated. And so people pull back, which is very dangerous for the system. You can go a long way to address this [through a] better resolution mechanism."

Josef Ackermann, the chairman of Deutsche Bank and of the Institute of International Finance (IIF), a trade body for the banking industry, on Sunday highlighted an "urgent need for progress in constructing a resolution system where no firm is too big to fail, and where in the event of failures, there is no significant recourse to taxpayers."

The only conceivable alternative to a cross-border resolution regime - to regulate subsidiaries as separate entities and ringfence the assets if the parent company failed - would raise the cost of capital for the industry. Sir Nigel Wicks, the chairman of Euroclear, a settlement provider, said on Saturday: "It may not impact the United States much as it has big capital markets, but it would be a considerable disadvantage in Europe if regulators were to insist that subsidiaries in each of the 27 member states had to be fully capitalised. It will add to the cost of capital and affect every citizen of the world."

However, Bill Dudley, the president of the New York Federal Reserve, noted that though the Dodd-Frank Act did partly address this by allowing the Federal Deposit Insurance Corporation to establish a bridge bank for the non-bank operations of systemically important firms, this would prove insufficient in resolving those with large cross-border interests. "The resolution regime in Dodd-Frank could be very difficult to implement for complex, globally active firms. These banks operate in diverse legal regimes worldwide and it is very doubtful that the act will apply to these banks' operations outside the United States." The divergence between regulatory regimes was seen by many as the key barrier to progress.

However, others believed an improvement to the current situation was possible. Peter Sands, the chief executive of Standard Chartered and a member of the IIF's board, said on Sunday: "It's perfectly possible to make some progress on the issue without getting to perfection. There's a lot of room for us to be working together with officials on this."

Vítor Constâncio, the vice president of the European Central Bank, shared some of Sands' optimism, noting that the Financial Stability Board was working "intensively" on preparing the outline of a framework for the G20's Seoul meeting in November. "A totally harmonised resolution regime is very difficult to achieve. Laws are laws, and ultimately any country can pass a rule ringfencing financial assets if they want to. But there will be guidelines and a peer review council," Constâncio said.