November 09, 2010
Cross-Border Resolution Authority I: Living Wills
Posted by David Zaring

I've been thinking about resolution authority these, days, particularly its international variant (more about its domestic variant very soon).  RA, again, is the superfast bankruptcy done here by the FDIC that is meant to prevent panics and keep cases out of slow moving and uncertain bankruptcy court.  Cross-border RA is in many ways where the action is, because few financial institutions that we care about aren't cross border, and because, if anything, the problems of taking down the Lehmans and Kaupthings of the world have driven people to think about "ring-fencing" their local subsidiaries, which the banks think will slow down growth and make it difficult to realize the economies of having a multinational at any rate.  John Lipsky of the IMF has essayed some of the cross border coordination upsides.

The easy approach to cross-border insolvencies would be to trust in living wills - or wind up plans developed by the banks to plan for their own demise.  I don't really believe living wills alone could be enough, and I think they may work best for the tax authorities.  But perhaps they do concentrate the mind a little.  Why wouldn't shareholders insist on these?  Christine Cummings of the New York Fed has suggested some of the basis for the opposition, via a list of impediments:

The first is the availability of sufficient financial information by legal entity. It begins with simple housekeeping – records that accurately record the legal entities of both the firm and the customer involved in a financial transaction, an asset holding or a liability. Given the extensive consolidation of firms in the financial industry, the information systems of many firms are an accretion of systems, with issues of consistency....

A second impediment is the complexity of unwinding certain books of business, where the business is originated in one location, recorded in another and risk-managed in a third. Derivative transactions are a prime example. ...

The third impediment is the use of intragroup guarantees. Institutions sometimes use parent guarantees to support and cover particular transactions or the entire operations of separately capitalized subsidiaries in foreign countries. Guarantees of this sort allow firms to operate subsidiaries with less capital, but can distort the pricing and economics of the subsidiary’s business activities and make the subsidiary more valuable to the current owner than to a potential buyer. ...

The fourth impediment is the need to preserve global payment operations. The cash management, cash payments, securities settlement and custodial services that some firms offer to wholesale and retail clients are essential to the functioning of clients, the economy and the financial system, but such services have high switching costs for customers. These services often represent core business lines with stable profitability and thus valuable assets for financial firms....

So that's the political economy story.  Either submit to a plausible cross-border regime and incur those costs, or fight it, and risk being ring-fenced.  We may stop here are offer a sigh of pity for the poor bankers.

Administrative Law, Financial Crisis | Bookmark

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