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Reading the New FDIC/Bank of England Resolution Paper

posted by Stephen Lubben

Which is available here.  Slow going:

OLA

Comments

"The financial crisis that began in 2007...", failure to mention that the design began decade(s) earlier.

"These strategies have been designed to enable large and complex cross-border firms to be resolved without threatening financial stability and without putting public funds at risk.", (all)tangible public funds would not nor could have provided the resources necessary to prevent a TBTF from failing. It is creation of the intangible digital dollar by idiot financial genus that is perpetuating the world deeper into financial chaos. Not if, when.

Not quite following your marginalia but it seems you may be confusing the old holding company that goes into receivership, whose assets get valued and whose shares get wiped out, with the bridge holding company that is created to take over and operate the assets of the old co that went into receivership -- its capitalization seems to be what is wellcapitalized.

Hi Stephen
Your post provoked me to read the paper.
Would be interested to hear your thoughts on the below questions (which are not fully thought through, and I'm not an expert, so please ignore stupid points.)

Section 41: is it a good idea to put the former creditors rather than the authorities in charge of the bridge company so soon? Might those creditors not be other G-SIFIs which less-than-responsible agendae and management, and in any case unlikely to be aligned with the public benefit in a crisis environment? Even if they are required to take certain actions, they can delay and water-down.

Section 31: if creditors are frozen in, might lots of these not be other G-SIFIs needing to get back overnight and other very short-term lending to finance their own operations? I suppose the central bank would have to step in to provide liquidity, effectively putting the tax-payer on the hook again. And in the meanwhile, isn't there a danger that a big whole is left in the wholesale short-term credit markets by the G-SIFI's absence/reduced activity while the valuation process is ongoing, that could endanger the funding of other companies, unless the taxpayer steps up?

Section 42: "Required changes, including divestiture, may be influenced by the failed firm’s Title I resolution plan." Does this mean that if diverstiture isn't put in the resolution plan up front, then it will in practice be very difficult to move for diverstiture once resolution is in process? If so, then need to watch those plans (generated by the G-SIFIs themselves) like a hawk!

Section 46, 49: acknowledge the need to get judicial stays to prevent counter-parties running for the hills and that "Given cross-border considerations, it is important that stays on termination apply to both domestic and foreign operations of G-SIFIs. In certain cases, authorities cannot currently extend stays on termination to foreign operations. Supporting actions by host authorities may be required". Is this essentially putting a positive spin on the reality that until some far of future date when far more countries are signed up to this, the implementation of these plans is highly vulnerable to uncooperative stakeholders overseas. How big a weakness is this in practice?

Section 47: good luck stopping a run from depositors. I doubt the authorities' communication will be persuasive enough in a crisis. Could this seriously undermine the resolution plan for G-SIFIs that get a large % of funding from retail deposits?

The valuation stage of the resolution process is going to take a while (thinking of Lehman bankruptcy!) especially it the firm failure is bought on my some new-fangled complex instrument.

Section 37, cites the importance of ring-fencing. So is this plan only as good as the ring fence (which no doubt the banks will find a way to game)?

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