Bank resolution and recovery planning – an Asian perspective
Looking further into 2015 from an Asian perspective, there are a number of significant risks which institutions will need to factor into their structures, policies, governance and administration.
High on that ‘risk list’ is bank resolution and recovery planning/plans (RRP), designed to combat the risk of “too big to fail” (TBTF).
There have been concerted international efforts in recent times to present a global united front at the political level regarding regulatory infrastructure issues such as RRP. The underpinning international environment to support RRP has been agreed to be put in place by the end of 2015. As Bob Penn observes in this edition of the Risk Note in relation to Europe, this is a highly ambitious timetable which developed jurisdictions, including international financial centres such as Hong Kong, will find challenging to achieve. Having said that, there is significant international pressure to meet this deadline, or at least to be seen to have done enough to avoid censure from peer jurisdictions.
However, in November 2014, the FSB reported that “few jurisdictions have in place resolution regimes that are fully compliant with the Key Attributes and that also provide adequate powers for resolving failures in the non-bank financial sectors”.
Ultimately, RRP relies upon legislative change (failing which there could be imposition of “law-like” solutions at a jurisdictional level to achieve resolution – on a potentially arbitrary and protectionist basis – of troubled firms in a jurisdiction). The underpinning purpose of RRP is to head off, as far as possible, painful and damaging global meltdowns in the financial sector by ensuring structural and operational planning by institutions to cope with major stresses in their ongoing business. If the institution flounders despite that forward planning, and cannot be safely wound up, then where it is systemically important for the jurisdiction, the resolution regime is designed to kick in and secure critical functions and [as needed] allow the institution to fail without requiring an injection of public money.
What does this mean in terms of risk for Asian jurisdictions?
Essentially, Asian jurisdictions are “net importers” of RRP measures. In financial centres such as Hong Kong, 28 out of the 29 G-SIBs operate wholly or primarily through branches as part of their global organisation. This means that the lead authorities in relation to any global problem are usually located outside the relevant Asian jurisdiction. Depending on the particular institution, the local host authority may be granted a seat at the table to discuss strategies and any fallout, where an institution has a strong presence in Asia.
However, many smaller financial centres in Asia will not have that ability to participate meaningfully in the creation of the overall infrastructure, and that has prompted the Financial Stability Board to launch a consultation concerning how RRP issues need to be addressed domestically where an institution is of systemic importance locally but not internationally. If not handled correctly, Asian jurisdictions could find themselves in a position where their local interests are at odds with the “global programme” and this could have serious adverse implications for a harmonious cross-border RRP process. The need for a collective Asian voice – seen to be developing more and more in the past year or so on a number of fronts – has never been greater.
How far have Asian jurisdictions developed their RRP infrastructure?
In recent times, Singapore has introduced powers for the Monetary Authority of Singapore (MAS) to issue directions to a non-regulated entity that is incorporated or established in Singapore, where the entity belongs to a group of companies of which a financial institution regulated by MAS is a part and it is significant to the business of such a group. The MAS also now has the right to apply to the court to claw back the salary, remuneration or benefits given to a director or executive officer under certain circumstances (for example, when the director or executive officer has failed to discharge his or her duties).
Japan, in the first quarter of 2014, introduced measures including the ability for the Deposit Insurance Corporation of Japan to transfer systemically important assets and liabilities to a bridge institution and write down or convert debt or capital instruments. Jurisdictions such as Indonesia, Korea and Malaysia – which has large and increasingly important, financial centres, have been less active. Hong Kong has gone through a first round of public consultation launched in January 2014, followed by a second stage consultation just released in Hong Kong and a third round scheduled later in the year. Many substantial issues remain unresolved.
Some promising international steps recently taken in relation to RRP have included:
- G20 and FSB statements reiterating the international goal;
- the big banks having cooperated in relation to OTC derivatives to sign up for a contractual-based ISDA protocol to provide for counterparties to submit to the resolution regimes of relevant jurisdictions and head off a domino effect on transactions; and
- Total Loss Absorbing Capacity (TLAC) having been put forward as a concept that is designed to bolster the capital of institutions by requiring capital to be held and to be readily available to enable the institution to withstand shocks – that involves allowing for financial support to be sent within a multi-national group to where it is needed.
There remains doubt, however, as to whether the overall exercise can be put in place in the time available this year. Principles still need to be universally agreed, and legislative timetables need to be crammed with complex draft legislation, which will need to be pushed through to avoid over-reliance on contractual frameworks.
The spectre therefore arises of piecemeal stop-gap arrangements and unintended consequences, and a consequent lack of ability for financial institutions to plan for the future in a suitable way creating legal, regulatory and operational risk which is difficult to assess and manage.
Ultimately, in practice, there will be a huge reliance on collective action by financial centres to support the TBTF measures (and the complexities created by handling cross-border insolvencies). International trust and cooperation is therefore key, and there could be a tendency for jurisdictions in which there is a considerable presence of the bigger institutions to require subsidiarisation and local pools of capital to protect local markets. Any feathering of local nests could complicate the position significantly for international financial groups as and when a crisis strikes.