LONDON — Regulators in the United States and Britain introduced a plan on Monday for averting threats to financial stability when large, cross-border financial institutions fail.
The plan, devised by the U.S. Federal Deposit Insurance Corporation and the Bank of England, would allow the regulators to fire executives, force shareholders to take losses and move a company’s operations into full private ownership without taxpayer support.
The steps are intended to minimize costs for taxpayers and limit the risk that the troubles would spread, the regulators said.
“These strategies have been designed to enable large, complex cross-border firms to be resolved without threatening financial stability and without putting public funds at risk,” the F.D.I.C. and the Bank of England said in a joint paper published on the British central bank’s Web site. “To be successful, such an approach will require close cooperation between home and foreign authorities.”
Ever since the financial crisis that began in 2007, national regulators have been working together to find ways to allow large financial institutions to fail in an orderly manner rather than forcing the respective governments to bail them out at huge costs.
At a time when the business of large financial institutions reach across borders, one of the central questions considered by the regulators was how to avoid the failure of a bank in one country spreading to another. Another question centered on how best to limit the disruption to healthy subsidiaries of a failing institution.
The strategy for large financial firms that are failing “should assign losses to shareholders and unsecured creditors, and hold management responsible for the failure of the firm,” the two regulators said in the paper.
“The unsecured debt holders can expect that their claims would be written down to reflect any losses that shareholders cannot cover, with some converted partly into equity in order to provide sufficient capital” for the sound parts of the firm, according to the paper.
The paper affects the world’s 28 so-called systematically important financial institutions, 12 of them based in the United States or Britain, Martin Gruenberg, the F.D.I.C. chairman, and Paul Tucker, deputy governor for financial stability at the Bank of England, wrote in The Financial Times on Monday.
“Because many of these institutions have operations that are concentrated in our two jurisdictions, we have a shared interest in ensuring that, when such a business fails, it can be resolved at no cost to taxpayers and without placing the financial system at risk,” they wrote.
The United States and Britain had to bail out some of their financial institutions as a result of the financial crisis. The countries have since worked on separate but similar new rules for their banking sectors.
“Developing an effective strategy for the orderly failure of a systemic financial institution could hardly be more important,” Mr. Gruenberg and Mr. Tucker wrote in The Financial Times. “The joint paper marks a significant step in that endeavor.”
U.S. and U.K. Propose Plan to Deal With Bank Failures
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