LONDON May 4 A failing bank should be wound up when it no longer meets rules that allow it to operate, and bondholders should be told clearly in advance that this point could trigger losses for them, Bank of England Deputy Governor Paul Tucker said.
Tucker is leading global efforts at the Financial Stability Board (FSB) to require supervisors in the world's top 20 economies to have recovery and resolution plans for major banks by the end of this year.
Recovery plans or "living wills" map out how a bank would bounce back from a major shock. Resolution plans are for winding up banks that cannot be kept going and are set to include measures such as bail-ins or imposing losses on the bank's bondholders.
The aim is to prevent another taxpayer-funded rescue of the banking sector and to stop banks from becoming too big to fail. But there is debate over how resolution would work in practice.
"A sensible trigger for resolution would be when a bank no longer meets the criteria for being authorised and, crucially, when there is no reasonable prospect of its doing so again," Tucker told a Frankfurt conference on Thursday in a speech made available on Friday.
"We shall need the documentation of bond issues by banks and by their holding companies to make clear in terms that they may be bailed in or subjected to another type of resolution operation by the firm's home authorities," Tucker said.
"That should not be a high hurdle. It is equivalent to incorporating Collective Action Clauses (CACs) in sovereign bond documentation," Tucker added.
Tucker said it was "misthink" that only bail-ins entail losses on bondholders. Bail-ins are where a bank's bonds would convert to equity.
"All resolution tools put losses on to debt holders and creditors. Because that is the only place they can go. Bail-in is just one technique for delivering that," Tucker said.
Several countries are exploring "top-down" resolutions of complex groups, employing bail-in of debt issued by the holding company.
"The U.S. and UK have been working together very constructively in planning how to operationalise that strategy; and if we continue to make progress I hope that we will be able to say more about it over the next few months," Tucker said.
The European Union has delayed its draft law to introduce pan-EU mechanisms for winding up failing cross-border banks.
Some countries fear bail-ins will put off investors in bank debt when markets are already jittery because of the euro zone debt crisis.
"For those who hesitate to grasp the nettle of implementing resolution regimes, I want to stress that the genie is out of the bottle," Tucker said.
"There is nowhere to hide. Quietly maintaining a policy of bailing out banks is not a free option for governments and their taxpayers," he added.