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UK and USA outline bank insolvency plans

One national regulator to be given responsibility for overseeing insolvency

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The Bank of England (BoE) and US Federal Deposit Insurance Corporation (FDIC) have jointly outlined their respective plans for the UK and USA aimed at dealing with damage limitation and an insolvency should their banks get into difficulty.

Under the plans, published late on Monday, one national regulator would be given the responsibility for overseeing the insolvency of a big international bank instead of bodies from different countries dealing with subsidiaries.

Subsequently, shareholders would lose their holdings and creditors who had lent the bank money would end up owning it. Since, the management would be held responsible for bank collapses and replaced, the idea is also to force enough funding at the top of banking organisations to absorb losses, instead of spreading it around often complex organisational structures.

The BoE/FDIC plans would only cover the biggest international banks, referred to as globally active, systemically important, financial institutions. Both institutions are hoping to prevent a repeat of the situation following the collapse of Lehman Brothers in 2008, when regulators outside the US were left having to deal with their own collapsed subsidiary.

The British Bankers' Association (BBA) welcomed the BoE/FDIC move as "a constructive contribution".

"It is important to note that work is already well underway in the UK - our banks have already developed recovery and resolution plans and reforms are progressing," it said in a statement.

However, the ICAEW said such further stringent bank requirements may hamper banks' ability to lend.

Iain Coke, head of ICAEW's Financial Services Faculty, said, "The likelihood of taxpayers paying for failing banks should be minimised so further initiatives on how to deal with the potential future failures of large banks are much needed. However, banks’ ability to lend could be further hampered if the result of the proposals in the paper is further stringent capital or structural requirements."

"It is important regulation doesn’t prevent banks from fulfilling their key role in society," he added.


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