Living Wills – More Questions than Answers?

The G20 endorsed a raft of critical papers from the Financial Stability Board (FSB) in Cannes in early November.  They included the policy for addressing the “too-big-to-fail” issues posed by Systemically Important Financial Institutions (SIFIs).

The G20 also named the first 29 Global SIFIs (G-SIFIs), all banking groups.   Rosali Pretorius of SNR Denton asks come questions about the FSB Recommendations.

The Cannes Summit and the FSB Recommendations

The FSB package of policy measures includes:

q      an international standard to be a point of reference for national resolution regimes.  The standard sets out responsibilities, instruments and powers that all national resolution regimes should have;

q      requirements for resolvability assessments, recovery and resolution plans (RRPs) and cross-border cooperation agreements specific to individual G-SIFIs.  This should prepare home and host authorities better for dealing with crises and cooperating during them;

q      requirements that all global systemically important banks (G-SIBs) hold loss-absorption capacity above Basel III standards.  This will rise from 1 to 2.5% risk-weighted assets; and

q      more intensive and effective supervision.

FSB intends to use the Basel Committee on Banking Supervision methodology to review and update a list of G-SIFIs each November. FSB and Basel will work to extend the framework to all SIFIs, and the International Association of Insurance Supervisors should complete its methodology for identifying globally systemic insurers by the June 2012 G20 Summit. The 29 groups named now must meet the requirements on resolution by the end of 2012.

Banks that are identified as G-SIFIs in 2014 will have to meet the new loss absorbency requirements and supervisory expectations by 2016. FSB also intends to put in place a peer assessment programme to ensure proper implementation. The initial list of G-SIFIs includes entities headquartered in several jurisdictions, including the US, UK, rest of Europe and Asia Pacific.

Will the Recommendations work?

Reading FSB’s Recommendations, and considering steps already taken by at least the UK and US, many questions spring to mind. Among them:

q     The initial list of 29 “institutions” begs the immediate question of what is included within an “institution”. By the nature of their designation, the names in the list represent large groups with diverse business operations, which on the face of it must all be covered. But in face of the Volcker rule and the Vickers proposals, how will this sit comfortably with businesses that should effectively operate independently from their groups?  Will the regulators signing cooperation agreements to regulate the G-SIFIs agree on a definition of “group”?

q     Might there be advantages in being a G-SIFI? Will all legal and supervisory frameworks to which a G-SIFI is subject automatically be considered “equivalent” for the purposes of the new proposals from the EU, such as the revised Markets in Financial Instruments Regulation (MiFIR)? Following on from that, surely there should be special recognition of G-SIFI status by ESMA when it creates technical standards for information sharing between regulators.

q     How do the FSB requirements sit with initiatives already taken in some jurisdictions? For example, the UK already sets high standards and restrictions on remuneration policies and procedures and restrictions on title transfer collateral. The UK’s plans for Recovery and Resolution Plans and the complementary client asset protection requirements are well advanced, and the large institutions have already participated in a pilot exercise. The US laws similarly are well advanced and will place onerous requirements on designated SIFIs. It will be interesting to see how the FSA works in the latest Recommendations in its January Policy Statement.

So there is much work to be done to ensure Recovery and Resolution Plans (generally known as Living Wills) are meaningful and consistent across jurisdictions. While Living Wills are likely to make it easier for governments to rescue or restructure failing institutions and for insolvency practitioners to deal with their winding up, regulators and politicians should not suggest that they will prevent Lehman-style collapses.  Supervisory and enforcement resources globally are finite.  Institutions may fail to comply:  witness the recent alleged client money failings at MF Global.

Rosali Pretorius is a partner in SNR Denton’s London financial markets and regulation practice.