* Not enough capital at UK holding company level-GFMA
* Banks say more tailored approach may be needed for some
* Shareholders to be wiped out, top managers
By David Lawder
WASHINGTON, Dec 10 A global banking trade group
on Monday questioned the United Kingdom's plans for a top-down
approach to seizing failing global financial institutions,
saying there may not be enough capital at the holding company
level to absorb losses.
The comments from the Global Financial Markets Association
came after the Bank of England and the U.S. Federal Deposit
Insurance Corp outlined their plans to seize control of the
parent firms of large banking groups on the brink of collapse.
The approaches are focused on assigning losses to
shareholders and subordinated debt holders throughout the group.
But in the case of UK financial companies, much of the capital
and debt is issued at the subsidiary level.
Simon Lewis, chief executive of the Global Financial Markets
Association, said single point of entry resolution may not be
appropriate where there is not enough capital held at the
holding company level.
"Resolution strategies therefore need to be tailored to the
circumstances of each institution and the development of
firm-specific cross-border cooperation agreements will be a key
component to achieve this," he said in a statement issued after
the FDIC and Bank of England paper was released on Sunday night.
The two regulators said both the U.S. and UK approaches are
viable and reduce risks to financial stability. But more work is
needed on the UK side to ensure that losses can be adequately
absorbed, regulators for both countries said on Sunday.
The plans are aimed at avoiding the kinds of cataclysmic
banking failures and massive taxpayer bailouts that marked the
2007-2009 financial crisis.
"The FDIC and the Bank of England have developed resolution
strategies that take control of the failed company at the top of
the group, impose losses on shareholders and unsecured creditors
- not on taxpayers - and remove top management and hold them
accountable for their action," they said in the paper.
The new authority to seize and resolve so-called global
systemically important financial institutions came in the United
States from the 2010 Dodd-Frank financial reform law, and in
Britain from the anticipated approval by early 2013 of the
European Union Recovery and Resolution Directive.
Both the U.S. and UK approaches ensure continuity of all
critical services of the failing firms and minimize cross-border
contagion, the regulators said.
In both approaches, equity holders would likely be wiped
out, and unsecured debt holders would face writedowns and
conversion of at least part of their holdings to new equity to
recapitalize the institutions as part of the restructuring.
In the United States, this is a relatively straightforward
process, because in most large financial institutions, the
capital structure is largely made up of equity and unsecured
debt issued at the holding company level. There is often limited
debt issued directly by operating subsidiaries that may be the
source of the financial distress that brings down the company.
In the UK, however, financial holding companies at the top
of the group do not typically issue much debt; more tends to be
issued at the subsidiary level.
"For a top-down approach to work, there must be sufficient
loss-absorbing capacity available at the top of the group to
absorb losses sustained within operational subsidiaries," the
UK companies could restructure to issue more debt at the
holding company level, they said. UK authorities also need to
find better ways of assigning subsidiary losses to unsecured
creditors throughout the group.
A statutory tool to "bail in" such losses proposed under the
EU directive would need to prevent counterparties from
terminating dealings with the failing firm as it is seized.
Banking officials said privately they would prefer
regulators from all countries working together on a common
framework rather than some countries going it alone.
Thomas Huertas, a former top UK banking supervisor and now
with Ernst & Young, said the initiative will act as a catalyst
for others as the two countries alone cannot resolve all
"The joint statement falls short of being an agreement,"
Iain Coke, head of financial services at ICAEW accounting
body in London, said a holding company approach might create a
bigger potential bill for taxpayers by relating to worldwide
operations of a bank rather than national subsidiaries.
In the 2008 crisis, the sudden pullout by Wall Street
counterparties from some large firms helped accelerate their
failure and magnified losses later borne by taxpayers.
Valuing a failed financial firm's assets is also critical to
writing down losses and determining which classes of creditors
will face conversion to new equity. Both the United States and
United Kingdom are working on ways to develop a credible
valuation process that can be applied quickly and flexibly.