Solving Too Big To Fail - Just Do It

Paul Tucker, Deputy Governor of the Bank of England and Chair of the Financial Stability Board's (FSB) Resolution Steering Group gave a speech on solving Too Big To Fail (TBTF) at the Institute of International Finance 2013 Annual Membership Meeting in Washington on Saturday afternoon. It's a short, punchy and important speech which deserves to be read in full (Paul Tucker Speech – Saturday 12 October).

This was one of Paul Tucker's last public appearances before he steps down as Deputy Governor on 18 October. Although he stressed that his views did not necessarily represent those of any of the UK and international bodies of which he has been a member, in my opinion it would be wrong to regard them as amounting to little more than a personal, valedictory statement.

Here are the points that struck me as most significant:

1. The very strong, positive statements about the necessity of regulators cracking the TBTF problem, and their ability to do so. Paul Tucker noted that the US authorities have the "technology" to effect the top-down resolution of US banking groups and, in extremis, could do so today. Art Murton, Director, Office of Complex Financial Institutions at the Federal Deposit Insurance Corporation (FDIC), who was speaking at the same event, agreed.  This positive, "can do" tone contrasts with some previous statements which have emphasised just how difficult resolution is and how much more remains to be done.  The concluding paragraph of Paul Tucker's speech is worth reproducing in full: "My final point, therefore, is that the authorities will have no excuse if they don't solve the TBTF problem through resolution regimes and reforms. The necessary technology is clear. The necessary restructuring of firms is clear. The necessary degrees and forms of cross-border co-operation are clear. It is a matter of: just do it."  We will all have our own views about how aspirational this is, but there can be no doubt that Paul Tucker has laid down a very clear challenge to his successors.
2. The consequences for banking groups of the choice of the preferred resolution strategy – single point of entry (SPE) or multiple point of entry (MPE). Although for many groups this choice is said to be "fairly obvious", Paul Tucker made it clear that few major groups will escape having to make significant changes to their legal, organisational and financial structure to remove obstacles to effective resolution under the preferred strategy. The likelihood is that European, including UK, banking groups will need to undertake greater restructuring than their US counterparts which in the main are set up in a way that more easily lends itself to SPE. 
3. The capital implications of the choice between SPE and MPE as a preferred resolution strategy. Paul Tucker discusses a possible trade-off between a "SPE group" and a "MPE group". For a SPE group, a host regulator may come to regard the parent as a "source of strength through resolution" which means that "it may be possible to shade the subsidiary's capital structure from equity to subordinated debt issued to the Hold Co". Where the group isn't a source of strength in this way, which presumably includes those for which MPE is the preferred strategy, "a subsidiary may need more equity than otherwise". Paul Tucker recognises that this would be a departure from the status quo and would require a recasting of some of the key international supervisory agreements.
4. Recalling a statement which he had previously made to the effect that the Bank of England would, in principle, be prepared to step aside and allow UK subsidiaries of the major US banking groups to be resolved as part of a group-wide resolution led by the US authorities, Paul Tucker gave some further indication of what it will take to turn principle into practice. In essence , the UK will have to set out the conditions that would need to be met in practice for it to step aside and the US will need to reciprocate (i.e. be prepared to step back to facilitate a UK-led SPE). Interestingly, he seems to envisage a series of bilateral agreements between pairs of countries, indicating that work to achieve this is underway beyond the UK and US. How these bilateral arrangements work for groups which are active in tens of countries remains to be seen.
5. While the focus on the speech is banking groups, Paul Tucker makes it clear that the resolution agenda extends to CCPs, to insurers, to shadow banks and to "the world of funds and SPVs". The focus on asset management is new: "resolution is not the special preserve of the G20 jurisdictions. With many asset management vehicles dominated in offshore countries, we are going to need them to get on the resolution bandwagon." This looks like scope extension, both institutional and geographical.

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