Raphael Rosenblatt | Bloomberg LawFinancial Stability Board, Joint Comment Letter (Sept. 2, 2011) In a letter jointly submitted by the Global Financial Markets Association (GFMA), The Clearing House Association, The Financial Services Roundtable, the American Bankers Association, the Institute of International Bankers, and the Institute of International Affairs (collectively, Associations)—some of the major trade groups within the global financial services industry—the Associations provided comment to the Financial Stability Board's (FSB) Consultative Document on Effective Resolution of Systemically Important Financial Institutions (SIFIs). The FSB's primary objective, as set forth in the Consultative Document, was that authorities in all relevant jurisdictions, within a reasonable timeframe, should be able to resolve SIFIs without systemic disruption and without exposing taxpayers to risk of loss.
Agreement with Overall ObjectivesThe Associations agreed with the FSB's overall objective. Worldwide initiatives to reduce systemic risk and enhance resolvability should create a "credible alternative to taxpayer-funded bailouts, a goal that each of the Associations wholeheartedly supports." Moreover, because implementation should be accelerated, the Consultative Document marks a decisive first step in assembling a single comprehensive and cohesive package of policies that will enable authorities to resolve SIFIs both within and across national borders.
— Last ResortThe Associations concurred that resolution of SIFIs should be used only as a last resort, after the failure of all other efforts to prevent the SIFI from becoming nonviable. Likewise, if a SIFI's going concern values are higher than its liquidation values, the systemically important functions should continue. Use of bridge entities could facilitate the recapitalization of systemically important and viable businesses of a failed SIFI.
— Bail-In Within ResolutionRecapitalization of a SIFI or its operations, also called a "bail-in within resolution," may be used as a resolution tool, as long as resolution measures are undertaken as a last resort. However, if appropriate safeguards are in place for creditors, "we believe that recapitalizations are likely to be a more effective resolution tool during a financial panic than a fire-sale liquidation of financial assets." Any such recapitalization should be undertaken from the bottom up in terms of the capital stack, in reverse order of priority. If this was implemented, only as a last resort would the senior debt be converted to common equity, and this would occur only when conversion of junior instruments to common equity failed to recapitalize the SIFI. In the opinion of the Associations, utilizing either the bail-in within resolution, or using a bridge entity, should both reduce the incentive for creditors to flee at the first sign of trouble, and ensure that potential losses are borne by shareholders and creditors rather than taxpayers.
— Authority to be Invoked at Point of Non-Viability and Maximizing Value for CreditorsIn order to prevent abuse of the regulation authority, the Associations advocated that the home country regulator should determine the point of non-viability for the SIFI. Likewise, while the Associations agreed with the FSB that shareholders and creditors should bear the brunt of the losses, in order to prevent a destabilization or collapse of the market a SIFI should be resolved in a manner that maximizes its value for creditors. To the extent possible, similarly situated creditors should be treated equally, and market discipline should be maximized. However, "it could be necessary in order to maximize the value of the institution for the benefit of creditors as a group, or to contain the potential systemic impact of a firm's failure, to depart from general equal treatment and absolute priority rules and to prefer some creditors over others." According to the Associations, those depositors and others that have provided crucial funding to the SIFI may need to be paid in full before other creditors are paid at all. Resolution authorities should have the ability to adjust priority as needed.
— Minimum Recovery Right and Ranking ClaimsThe Associations, in an effort to reduce creditor concerns, noted the importance of assuring creditors that they would be no worse off in a cross-border resolution than they would be if the SIFI was liquidated. With regard to the ranking of claims, the Associations agreed with the Consultative Document that differences in ranking across jurisdictions will affect the willingness of national authorities to cooperate and achieve coordinated cross-border solutions. However, the Associations disagreed with the FSB that "the claims of depositors with accounts payable in domestic offices of the institution should be paid ahead of deposits payable in other countries." As a result, the Associations suggested a non-discrimination rule for foreign creditors.
— Due Process and Temporary StayThe resolution authority should be immune from lawsuits for its good faith actions, and the staff should be protected from personal liability. However, the Associations recommended after-the-fact judicial review of resolution authority actions to ensure that its actions were not arbitrary and capricious. If a temporary stay is imposed on early termination of certain qualified financial contracts, the Associations offered several suggestions for facilitating the recapitalization of the failed firm, including that any such stay should last for not more than one business day.
Cross-Border Resolution PlansThe Associations strongly supported the development of Recovery and Resolution Planning, but made certain recommendations to make the plans more effective.
— Single Plan ApproachThe home country regulator should lead the coordination of recovery and resolution planning, and the actual resolution of a SIFI. Therefore, any efforts to address deficiencies should be left to the home country regulator. Along these lines, the Associations suggested that "the home country resolution authority should limit access to the Recovery and Resolution Plan by foreign resolution authorities to those resolution sections relevant to the particular jurisdiction." Although the home country regulator will handle primary duties of recovery and resolution planning, the Associations recommended providing assurances to other regulators that the relevant issues within their respective jurisdictions will be addressed. Private sector industry representatives should be able to provide input into cross-border cooperation and coordination arrangements.
— ConfidentialityThe Associations stressed the importance of keeping a firm's Recovery and Resolution Plan confidential. While disclosure of the existence of such a plan is appropriate, disclosure of the particulars of such a plan would pose a number of problems, including an inability to develop and refine such a plan over time. Additionally, public statements about the cooperation agreements could lead to misunderstandings within the market and the potential disclosure of confidential information.
— Managing for SuccessAccording to the Associations, it is important to recognize that a "financial business should be managed to optimize capital formation, prudent majority transformation and economic growth as a going concern, rather than for failure as a gone concern." The Associations urged the G-20 member countries to implement the actions recommended in the Consultative Document, and such actions should be included in the implementation timeline.
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