Basel 3 December 2012

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Basel iii Compliance ProfessionalsAssociation (BiiiCPA)
1200 G Street NW Suite 800 Washington, DC 20005-6705 USA
Tel: 202-449-9750 Web: www.basel-iii-association.com
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Basel iii ComplianceProfessionalsAssociation (BiiiCPA)
www.basel-iii-association.com

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Basel III SalaryHistogram in UK

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Basel 3 –
TheTimingDilemma
Last month the United States(US) regulatory authorities announced that
they did not expect their rulesimplementing Basel 3 would become
effective on 1January 2013, although theyare working as ―expeditiously
as possible‖ to complete their rulemaking process.
Similarly in the European Union (EU), the trilogue between the
European Commission, the European Parliament and the Council of
Ministers to agree the text of Capital RequirementsDirective IV (CRD
IV, the EU version of Basel 3 is still ongoing and, even if a political
agreement can be reached by year-end (which still appearsto bethe
intention), it isrecognised in the EU that there will not be sufficient time
for CRD IV to be codified as legislation and put into effect on 1January
2013.
So, doesit necessarilyfollowthat weshould delayBasel 3implementation
in H ong Kong because theUS and the EU cannot meet the
internationally agreed timeline?
Or should we followthe timeline set by the Basel Committee on Banking
Supervision and begin the first phaseof Basel 3 implementation from 1
January 2013?
Our Basel 3rules(the Banking (Capital) (Amendment) Rules2012) are
currently tabled at LegCo and notwithstanding the expected delaysin the
USand the EU, the Basel Committee‘s timeline remains unchanged.
Itsgradual phase-in of the new capital standardsover six years begins
from January2013 and extendsuntil 2019.
In resolvingthe timing dilemma, it might first beinstructive to remind
ourselvesthat Basel 3 isbeing introduced to rectify weaknessesmade all
too starkly apparent in the recent global financial crisis.

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Or, put another way, Basel 3 isconsidered good for financial stability. The
Basel 3capital standardsaredesigned tostrengthen banks‘resilience
by requiring more and better quality capital and by addressing and
capturing risksnot adequatelyrecognised previously.
The aim is to ensure that bankscan weather future financial storms
without disruption to their lending.
Thisshould in turn make them lesslikely tocreateor amplify problemsin
other areas of the economy and facilitate their contribution to long-term
sustainableeconomic growth.
The roller-coasterof excessiveleveragepre-crisisand excessive
deleveraging post-crisisis not conducive to sustainablegrowth.
Regulation isall about balance.
If regulation is too lax, excessiverisk-taking may resultwith devastating
effects.
If regulation is too tight, it may suppressbeneficial financial activity and
reducegrowth.
In our view, Basel 3 representsan appropriate balancein bolstering
resilience whilst at the same time (with itsextended phase-in) not unduly
hamperinglendingtobusinessand householdstodayand ensuringbanks
can continue to lend in any downturn tomorrow.
For thisreason we propose to begin implementing Basel 3 from 1January
2013.
We are not alonein this.
Our regional peers, Mainland China, Japan, Singapore and Australia have
all published their final rulesfor Basel 3 implementation next year.

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As hasSwitzerland, another important financial centre.
But notwithstanding the intrinsic benefitsof Basel 3, shouldwe
neverthelessbe swayed by the argument put to usthat Asia istaking the
―medicine‖ designed for the countries worst affected by the crisis, whilst
the intended ―patients‖ defer and thereby give their bankssignificant
―competitive advantages‖ over our own?
This competitive advantage argument would seem to be based on two
assumptions.
First that USand EU global banks(i.e. those banksthat could realistically
compete with our own) are currently holding much lower levels of capital
than required by Basel 3 (and hencewill have a genuine cost advantage);
and second that our bankswill, come 1January 2013, have to hold more
capital than they currentlyhold(and hence will incur additional cost).
Are these assumptionscorrect?
Well even though adoption of Basel 3 is delayed in the US and the
EU, this certainly does not mean that banks in these regions remain at
their pre-crisiscapital levels.
There hasbeen significant re-capitalisation.
The Dodd Frank Wall Street Reform and Consumer Protection Act in the
USalreadyrequiresthe regulatory agencies to conduct stress-testing
programmes to ensurebanksand other systemicallyimportant financial
institutions have enough capital to weather severe financial conditions
and, even before the passage of the Dodd Frank Act, the USFederal
ReserveBoard put some of the largest US bank holding companies
through stress-tests, the resultsof which have led to significant increases
in capital.

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By 2012, the 19 bank holding companies subject to the Fed‘s
Comprehensive Capital Analysisand Review had increased their
aggregatetier 1commoncapital toUS$803billion in thesecond quarter of
the year from US$420 billion in the first quarter of 2009, with their tier 1
common capital ratio (which compareshigh quality capital to assets
weighted according to their riskiness) doubling to a weighted average of
10.9% from 5.4%.
In the EU, under a recapitalisation exercise in 2011 that covered 71 of the
EU‘smajor banks, the European Banking Authority (EBA) required most
to attain a ―core tier 1ratio‖ of not lessthan 9% by the end of June 2012.
In October 2012, the EBA indicated that it will focuson capital
conservation to ―support a smooth convergence to the CRD IV…..
regulatory requirements‖ and require the banksto maintain an absolute
amount of core tier 1capital corresponding to the level of the 9% core tier
1ratio.
So even absent formal adoption of Basel 3, the capital levelsof thelargest
banksin the US and the EU have increased significantly post-crisisto
levels comparable with, or even in excessof, those required under Basel 3
and sothe prospect of such banks―competing‖ by being allowed to
maintain much lower capital levelsthan Basel 3 bankswould seem more
apparent than real.
Turning to the second ―competitive‖ assumption, will the first phase of
Basel 3, which startsnext year, require local banksto hold significantly
more capital than theydo at present, to the extent that they may become
constrained in their ability to lend and compelledto passon the costsof
the extra capital to borrowers?
Well,the resultsof the H KMA‘s quantitative impact studiestell usthat
our local banksare alreadyvery well-placedto meet the new Basel 3
capital ratios.

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Their capital levelsare alreadyin excessof the standard taking effect on 1
January 2013 and the issuance of ordinary shares(common equity)
alreadyaccountsfor a very significant proportion of their capital
base, positioning them well for Basel 3‘snew focuson common equity as
thehighest qualitycapital for the purpose of lossabsorption.
In summary then, irrespective of any delay in formal implementation of
Basel 3, major banks in the US and EU are inexorably moving to higher
levelsof capital.
This, together with the benefitsoffered by Basel 3 and the relative ease
with which local bankscan comply, servesto underpin our view that we
shouldproceed to implement the first phase of Basel 3 in line with the
Basel Committee‘s timeline.
Generallyspeaking, jurisdictions in Asia have in the past tended to adopt
regulationsthat are in some respectshigher than the Basel Committee‘s
minimum standards.
This may have helpedAsia weather the global financial crisisrelatively
unscathed when compared with the jurisdictions worst affected.
There would, therefore, seem littleto be gained from seeking to engage
in, or indeed prompt, a ―race-to-the-bottom‖ in regulatory terms by
deliberatelydelaying the introduction of Basel 3 at this point in time.
In implementing on 1January2013, we will be fulfillingour commitment
both as an international financial centre which customarily adoptsbest
international standardsand as a member of the Basel Committee on
Banking Supervision.
Karen Kemp
Executive Director (Banking Policy)

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Governor Daniel K. Tarullo
At the Yale School of Management LeadersForum,
New H aven, Connecticut
Regulationof ForeignBankingOrganizations
In the aftermath of the financial crisis, regulators
around the world continue to implement reformsdesigned to limit the
incidence and severity of future crises.
My subject today pertainsto an area in which reforms have yet to be
made--the regulation of the U.S. operations of large foreign banks.
Applicableregulation has changed relativelylittlein the last
decade, despite a significant and rapid transformation of those
operations, asforeign banksmoved beyond their traditional lending
activities to engage in substantial, and often complex, capital market
activities.
The crisisrevealed the resulting risks to U.S. financial stability.
In taking afresh look at regulation of foreign banksin theUnited States, I
by no meanswant to imply that the United Statesshould revoke its
welcome to foreign banks.
On the contrary, this reconsideration reflectsthe important role foreign
bankshave played.
The presenceof foreign bankscan bring particular competitive and
countercyclical benefits becauseforeign banksoften expand lending in
the United Stateswhen U.S. banking firms laborunder common
domestic strains.
But just aswe are adapting our regulatory approach to U.S. banks, so we
need to incorporate important lessonslearned from the crisis into our
oversight program for foreign banks.
The question of how best to regulate foreign banksis hardly a new
one, either here or in other countries.

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Debatesover the relative merits of territorial versusglobal or mutual
recognition approaches, the difficulties in achieving strictly equal terms
of competition between bankswith different home regulatory
systems, and the degree to which harmonization of international
standardsand supervisory consultationscan mitigate the resulting
inconsistencies and frictions are all familiar topics to
academics, banking lawyers, and supervisoryauthorities.
WhileI do not aim to resolvethisafternoon the complicated interaction
among these perspectivesand considerations, I will try to outline a
practical and reasonableway forward.
Tobe effective, a new approach must addressthevulnerabilitiesthat have
been created by the shift in foreign bank activities, in keeping with sound
prudential policy and congressional mandates in the Dodd-Frank Wall
Street Reform and Consumer Protection Act.
At the same time, a modified regulatory system shouldmaintain the
principle of national treatment and allowforeign banksto continue to
operate here on an equal competitive footing, to the benefit of the U.S.
banking system and the U.S. economy generally.
ForeignBank Regulationin the UnitedStates
Regulating the U.S. operationsof foreign bankspresentsunique
challenges.
Although U.S. supervisorshave full authority over the local operationsof
foreign banks, we see onlya portion of a foreign bank's worldwide
activities, and regular accessto information on itsglobal activitiescan be
limited.
Foreign banksoperate under a wide variety of businessmodelsand
structuresthat reflect the legal, regulatory, and businessclimatesin the
home and host jurisdictions in which they operate.
Despite these difficulties, the United States hastraditionally accorded
foreign banksthe same national treatment asdomestic banks, and U.S.
regulatorsgenerallyhave allowedforeign banksto chooseamong

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structuresthat they believe promote maximum efficiency at the
consolidated level.
Under the statutory scheme established by Congress, permissible U.S.
structuresinclude cross-border branching and direct and indirect
subsidiaries, provided that they operate in a safe and sound manner.
U.S. lawalsoallowswell-managed and well-capitalizedforeign banksto
conduct a wide range of bank and nonbank activities in the United States
under conditions comparable to those applied to U.S. banking
organizations.
Still, it isworth noting that even as there hasbeen continuity in thisbasic
policy, U.S. regulation of foreign bankshas evolvedover the yearsin
responseto changesin the extent and nature of foreign bank activities.
Let me mention two examples.
Before1978, foreign bank branchesin the United Stateswerelicensed and
regulated byindividual states, with littlein the way of federal regulation
or restrictions.
They were not subject to the full panoplyof limitations on interstate
banking, equity investments, or affiliations with securitiesfirmsthat were
applicableto domestic banks.
The rapid growth of foreign banking in the 1970s, particularly
branching, prompted an end to this lighter regulatory regime.
The International Banking Act of 1978gave the Federal ReserveBoard
regulatory authority over the domestic operationsof foreign banksand
significantly equalized regulatory treatment of foreign and domestic
firms.
Congressmaintained thisapproach of basic competitive equalityin the
1999 Gramm-Leach-BlileyAct.
That law substantiallyremoved restrictions on affiliations between
commercial banksand other kindsof financial firms for both domestic
and foreign institutions operating in the United States.

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Moreover, in light of provisions in Gramm-Leach-Blileythat permitted a
foreign bank to be a financial holding company (FH C), the Federal
Reserveannounced in 2001that a bank holdingcompany (BH C) in the
United Statesthat was owned and controlledby a well-capitalizedand
well-managed foreign bank generallywould not berequired to meet the
Board'scapital requirements normallyapplicableto BH Cs.
My second example relatesto the massive fraud uncovered at the Bank of
Credit and Commerce International (BCCI) and its subsequentcollapse
in 1991, which highlighted the need for more effective supervision of
banksoperating in multiple countries.
The Foreign Bank Supervision Enhancement Act of 1991(FBSEA)
required foreign banksto receive approval from the Board before
establishing a branch or agency in the United States.
The lawrequired the Federal Reserve, in turn, to determine that the
foreign bank issubject to "comprehensive supervision or regulation on a
consolidated basis" in its home country before approving an application
either to open a branch or to acquire a U.S. subsidiary bank.
It is further worth noting that changesin U.S. law and regulatory practice
affecting foreign banking organizations have often corresponded to
changesin international regulatory agreements.
For example, FBSEA was enacted at the same time as the Basel
Committee on Banking Supervision was working to addresstheproblems
revealed by BCCI--an effort that bore fruit the next year in changesto the
so-called Basel Concordat, which established minimum standardsfor the
supervision of international banking groups.
Another instance was the substantial reduction or removal of remaining
asset-pledge and asset-maintenance requirementsfor most U.S. branches
of foreign banks, prompted in part by implementation of the new
international capital standardsincluded in the 1988 Basel Accord.

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TheShift in ForeignBank Activities
Although foreign banksexpanded steadily in the United Statesduring the
1970s, 1980s, and 1990s, their activities hereposed limited risksto overall
U.S. financial stability.
Throughout thisperiod, the U.S. operationsof foreign bankswere largely
net recipientsof funding from their parentsand generallyengaged in
traditional lending to home-country and U.S. clients.
U.S. branchesand agenciesof foreign banksheld large amounts of cash
during the 1980sand '90s, in part to meet asset-maintenance and
asset-pledgerequirementsput in placeby regulators.
Their cash-to-third-party liability ratio from the mid-1980s through the
late1990sgenerallyranged between 25 percent and 30 percent.
The U.S. branchesand agencies of foreign banksthat borrowed from
their parentsand lent those fundsin the United States ("lending
branches") held roughly 60percent of all foreign bank branch and agency
assetsin the United Statesduring the 1980sand '90s.
Commercial and industrial lending continued to account for a large part
of foreign bank branch and agency balance sheetsthrough the 1990s.
This profile of foreign bank operationsin the United Stateschanged in
the run-up to the financial crisis.
Reliance on lessstable, short-term wholesalefunding increased
significantly.
Many foreign banksshifted from the "lendingbranch" model to a
"funding branch" model, in which U.S. branchesof foreign bankswere
borrowing large amounts of U.S. dollarsto upstream to their parents.
These "funding branches" went from holding 40 percent of foreign bank
branch assetsin the mid-1990s to holding 75 percent of foreign bank
branch assetsby 2009.

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Foreign banksas a group moved from a position of receiving funding
from their parentson a net basisin 1999 to providing significant funding
to non-U.S. affiliatesby the mid-2000s--more than $700 billion on a net
basisby 2008.
A good bit of thisshort-term funding wasused to finance long-term, U.S.
dollar-denominated project and trade finance around the world.
There isalsoevidence that a significant portion of the dollarsraised by
European banksin the pre-crisisperiod ultimately returned to the United
Statesin the form of investments in U.S. securities.
Indeed, the amount of U.S. dollar-denominated asset-backed securities
and other securitiesheld by Europeansincreased significantly between
2003 and 2007, much of it financed by the short-term, dollar-denominated
liabilitiesof European banks.
Meanwhile, commercial and industrial lending originated by U.S.
branches and agencies as a share of their third-party liabilities fell
significantly after 2003.
In contrast, U.S. broker-dealer assetsof the top-10 foreign banks
increased rapidlyduring the past 15 years, rising from 13 percent of all
foreign bank third-party assetsin 1995 to 50percent in 2011.
Lessonsfrom the RecentFinancialCrisis
The 2007–2008financial crisis and the continuing financial stressin
Europe have revealedfinancial stability risksassociated with the foreign
banking model asit has evolvedin the United States.
To some extent the concernsassociated with foreign banking operations
track the more general shortcomings of pre-crisisfinancial regulation.
Internationallyagreed minimum capital levelswere too low, the quality
standardsfor required capital were too weak, the risk weightsassigned to
certain asset classesdid not reflect their actual risk, and the potential for
liquidity strains was seriouslyunderappreciated.

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But some risksare more closelytied to the specificallyinternational
character of certain global banks, both here and in some other partsof the
world.
The location of capital and liquidity proved critical in the resolution of
some firms that failed during the financial crisis.
Capital and liquidity were in some cases trapped at the home entity, as in
the case of the Icelandic banksand, in our own country, Lehman
Brothers.
Actionsbyhome-countryauthoritiesduring thisperiod showed that while
a foreign bank regulatory regime designed to accommodate centralized
management of capital and liquidity can promote efficiency during good
times, it alsoincreasesthe chancesof ring-fencing by home and host
jurisdictions at the moment of a crisis, as local operations come under
severestrain and repayment of local creditors is calledinto question.
Resolution regimes and powersremain nationallybased, complicating
the resolution of firms with large cross-border operations.
The large intra-firm, cross-border flowsthat grew rapidlyin the years
leading up to the crisis alsocreated vulnerabilities.
To be fair, the ability to move liquidity freelythroughout a banking group
may have provided some financial stability benefitsduring the crisis by
enabling banksto respond to localizedbalance-sheetshocksand
dysfunctional markets in some areas (such as the interbank and foreign
exchange swap markets) and by transferring resourcesfrom healthier
partsof the group.
Nevertheless, thismodel alsocreated a degree of cross-currencyfunding
risk and heavy relianceon swap markets that proved destabilizing.
Moreover, foreign banksthat relied heavily on short-term, U.S. dollar
liabilitieswere forced to sell U.S. dollarassetsand reduce lending rapidly
when that funding source evaporated, thereby compounding risksto U.S.
financial stability.

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Although the United Statesdid not suffer adestabilizing failure of foreign
banks, many rode out the crisis onlywith the helpof extraordinary
support from home- and host-country regulators.
Following national treatment practice, the Federal Reserve itself provided
substantial discount window access to U.S. branches and the opportunity
to participate in the Primary Dealer Credit Facility to U.S. primary-dealer
subsidiariesof foreign banks.
Moreover, thepotential for fundingdisruptionsdid not disappear with the
waning of the global financial crisis.
In 2011, for example, as concernsabout the eurozone rose, U.S. money
market fundssuddenly pulled back their lending tolarge euroarea
banks, reducing lendingto these firms by roughly $200 billion over just
four months.
Whilethere has been some reduction in operations and some change in
funding patternsby foreign banking organizations in the United States
since the crisis, particularly by European firms reacting to euro zone
financial stress, the basic circumstances havenot changed.
The proportion of foreign banking assetsto total U.S. banking assetshas
remained at about one-fifth since the end of the 1990s.
But the concentration and complexity of those assetshave changed
noticeably from earlier decades, and have not reversed in recent years
despite the global financial crisisand subsequent events.
Ten foreign banksnow account for more than two-thirds of foreign bank
third-party assetsheld in the United States, up from 40 percent in 1995.
And while the largest U.S. operationsof foreign banksdo not approach
the size of our largest domestic financial institutions, it isstriking that
there are 23 foreign bankswith at least $50 billion in assetsin the United
States--the thresholdestablished by the Dodd-Frank Act for special
prudential measuresfor domestic firms--compared with 25 U.S. firms.

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Most notably, perhaps, fiveof thetop-10 U.S. broker-dealersareownedby
foreign banks.
Like their U.S.-owned counterparts, large foreign-owned U.S.
broker-dealerswere highly leveraged in the years leading up to thecrisis.
Their reliance on short-term funding alsoincreased, with much of the
expansion of both U.S.-owned and foreign-owned U.S. broker-dealer
activities attributable to the growth in secured funding markets during
the past 15 years.
Finally, we should note that one of the fundamental elementsof the
current approach--our ability, ashost supervisors, to rely on the foreign
bank to act asa source of strength to itsU.S. operations--has come into
question in the wake of the crisis.
The likelihood that some home-country governments of significant
international firmswill backstoptheir banks' foreign operationsin a crisis
appearsto have diminished.
It alsoappearsthat constraints have been placed on the ability of the
home officesof some large international banksto provide support to their
foreign operations.
The motivations behind these actions are not hard to understand and
appreciate, but theydo affect the supervisoryterrain for host countries
such as the United States.
International andDomesticRegulatoryResponse
Since the crisis, important changeshave been made to strengthen
international regulatory standards.
TheBasel III capital and liquidity frameworksare big improvements, and
the proposed capital surchargesfor systemicallyimportant firms will be
another important step forward.

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But thesereforms are primarily directed at the consolidated level, with
littleattention to vulnerabilitiesposed by internationallyactive banksin
host markets.
The risksassociated with large intra-group funding flowshave remained
largelyunaddressed.
Managing international regulatory initiatives alsohasbecome more
difficult, as the number of complex items on the agenda has increased.
And despite continued work by the Financial Stability Board, challenges
to cross-border resolution are likelyto remain significant.
For the foreseeablefuture, then, our regulatory system must recognize
that while internationally active bankslive globally, they may well die
locally.
Quite apart from the need to act pragmatically under the
circumstances, it isnot clear that we shouldaim toward extensive
harmonization of national regulatory practicesrelated to foreign banking
organizations.
The nature and extent of foreign banking activities vary substantially
acrossnational markets, suggesting that regulatory responsesmight best
vary aswell.
For instance, the importance of the U.S. dollar in many international
transactions can motivate foreign banksto use their U.S. operationsto
raise dollar funding for their international operations, potentially creating
vulnerabilities.
Such a model isunlikely to prevail in most other host financial markets
around the world.
Indeed, in responseto financial stability riskshighlighted during the
crisis, ongoing challengesassociated with the resolution of large
cross-border firms, and thelimitationsof the international reform
agenda, several national authorities have alreadyintroduced their own
policiestofortify the resourcesof internationally active bankswithin their
geographic boundaries.

21
Regulatorsin the United Kingdom, for example, have recentlyincreased
requirements for liquidity to cover local operations of domestic and
foreign banks, set stricter rulesaround intra-group exposuresof U.K.
banksto foreign subsidiaries, and moved to ring-fence home-country
retail operations.
Meanwhile, Swiss authorities have explicitly prioritized the domestic
systemically important operations of their large, internationally active
firms in resolution.
H ere in the United States, Congressincluded in the Dodd-Frank Act a
number of changesdirected at the financial stability risk posed byforeign
banks.
Sections165 and 166 instruct the Federal Reserveto implement enhanced
prudential standards for large foreign banksaswell asfor large domestic
BH Csand nonbank systemicallyimportant financial institutions.
Dodd-Frank alsobolstered capital requirements for FH Cs, including
foreign FH Cs, by extending the well-capitalizedand well-managed
requirements beyond U.S. bank subsidiaries to the top-tier holding
company.
In addition, the so-calledCollinsAmendment in Dodd-Frank removed
the exemption from BH C capital requirements granted by the Federal
Reserve'sSupervision and Regulation Letter 01-01.
The required phase-out of SR 01-01was clearlyintended tostrengthen the
capital regime applied to the U.S. operationsof foreign banks;
however, theorganizational flexibility that the amendment gave to foreign
banksin the United Stateshas allowedsome large foreign banksto
restructuretheir U.S. operations to minimize the impact of thisregulatory
change.
As a result, in the absenceof additional structural requirementsfor
foreign banksin the United States, the effectivenessof our capital regime
for large foreign bankswith both bank and nonbank operationsin the
United Statesdependson the foreign bank'sown organizational choices.

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ARebalancedApproachto ForeignBank Regulation
As hasbeen the casein the past, we need to adjust theregulatory
requirements for foreign banksin responseto changesin the nature of
their activities in the United States, the risksattendant to those
changes, and instructionsfrom Congressin new statutory provisions.
The modified regime should counteract the risks posed to U.S. financial
stability by the activities of foreign banking organizations, as manifested
in the years leading up to, and through, the financial crisis.
Special attention must be paid to the risk of runsassociated with
significant relianceon short-term funding.
In addition, the regime shouldreduce the difficultiesin resolution of
cross-border firms.
Finally, it should take steps to diminish the potential need for ex-post
ring-fencing when losses mount or runs develop during a crisis, since
such actions may well be unhelpfullyprocyclical.
At the same time, in modifying our regulatory regime for foreign banking
organizations, we must remain mindful of the benefitsthat foreign banks
can bring to our economy and of the important policiesof national
treatment and comparable competitive opportunity.
Thus, we shouldchart a middle course, not moving to a fullyterritorial
model of foreign bank regulation, but instead making targeted
adjustmentsto addressthe risksI have identified.
In basic terms, three such adjustmentsare desirable.
First, a more uniform structureshould berequired for the largest U.S.
operations of foreign banks--specifically,that these firms establish a
top-tier U.S. intermediate holding company (IH C) over all U.S. bank and
nonbank subsidiaries.

23
An IH C would make application of enhanced prudential supervision
more consistent acrossforeign banksand reduce theability of foreign
banksto avoid U.S. consolidated-capital regulations.
BecauseU.S. branchesand agenciesare part of the foreign parent
bank, they would not be included in the IH C.
H owever, they would be subject to the activity restrictions applicableto
branchesand agencies today as well as to certain additional measures
discussed below.
Second, the same capital rulesapplicableto U.S. BH Csshould also apply
to U.S. IH Cs.
These rules have been reshaped to counteract the risks to the U.S.
financial system revealed by the crisis and should be implemented
consistentlyacrossall firms that engage in similar activities.
Similarly, other enhanced prudential standardsrequired by the
Dodd-Frank Act--including stresstesting requirements, risk
management requirements, single counterparty credit limits, and early
remediation requirements--should be applied to the U.S. operations of
large foreign banksin a manner consistent with theBoard's domestic
proposal.
Third, there should be liquidity standardsfor large U.S. operationsof
foreign banks.
Standardsare needed to increase the liquidity resiliency of these
operationsduring timesof stressand to reducethe threat of destabilizing
runsas dollarfunding channelsdry up and short-term debt cannot be
rolledover.
For IH Cs, the standards should be broadly consistent with the standards
the Federal Reserve has proposed for large domestic BH Cs, pending final
adoption and phase-in of quantitative liquidity requirements by the Basel
Committee.

24
That is, they should be designed to ensurethat, in stressed
circumstances, the U.S. operations have enough high-quality liquid
assetsto meet expected net outflowsin the short term.
There should alsobe liquidity standardsfor foreign bank branch and
agency networks in the United States, although they may be less
stringent, in recognition of the integration of branchesand agencies into
the global bank as a whole.
By imposing a more standardized regulatory structure on the U.S.
operations of foreign banks, we can ensurethat enhanced prudential
standardsare applied consistently acrossforeign banksand in
comparable waysbetween U.S. banking organizations and foreign
banking organizations.
As with domestic firms subject to enhanced prudential standards, the
Federal Reserve would work to ensurethat the new regime is minimally
disruptive, through transition periodsand other means.
An IH C structure would alsoprovide the Federal Reserve, asumbrella
supervisor of the U.S. operations of foreign banks, with a uniform
platform to implement a consistent supervisory program acrosslarge
foreign banks.
In the caseof foreign bankswith thelargest U.S. operations, the IH C
wouldalsohelp mitigate resolution difficulties by providing U.S.
regulatorswith one consolidated U.S. legal entity to placeinto
receivership under title II of the Dodd-Frank Act if the failure of the
foreign bank would threaten U.S. financial stability.
Branchesand agencies would remain separate, but all other entities
would be included.
Further, an IH C structure would facilitate a consistent U.S. capital
regime for bank and nonbank activities of foreign banksunder the
IH C, similar to the approach taken in other jurisdictions, such as the
United Kingdom and some continental European countries.

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Some observerswill, I am sure, ask if it is necessary to depart from the
prevailing firm-by-firm approach to foreign banking regulation and to
adopt generallyapplicablerequirements in implementing the
Dodd-Frank enhanced prudential standardsfor foreign banks.
It is difficult to seehow relianceon thisapproach can beeffective in
addressing risksto U.S. financial stability, at least in the absence of
extraterritorial application of our own standardsand supervision, and
perhapsnot even then.
We would, at a minimum, need to make regular and detailed assessments
of each firm's home-country regulatory and resolution regimes, the
financial stability risk posed by each firm in the United States, and the
financial condition of the consolidated banking organization.
In fact, such an approach might result in the worst of both worlds--an
ongoing intrusivenessinto the consolidated supervision of foreign banks
by their home-country regulatorswithout the ultimate ability to evaluate
those bankscomprehensivelyor to direct changesin a parent bank's
practicesnecessaryto mitigate risksin the United States.
Although the Federal Reservewill continue to cooperate with its foreign
counterpartsin overseeing large, multinational banking operations, that
supervisorytool cannot provide complete protection against risks
engendered by U.S operations asextensive asthose of many large U.S.
institutions.
It is alsoimportant to note that while the reformsI have described today
contain some elementsthat are more territorial than our current
approach, including requiring some additional capital and liquidity
buffersto be held in the United States, they do not represent a complete
departure from prior practice.
This enhanced approach would allowforeign banksto continue to
operatebranchesin the United Statesand would generallyallowbranches
to meet comparable capital requirementsat the consolidated level.

26
Similarly, thisapproach would not impose a cap on intra-group
flows, thereby allowing foreign banksin sound financial condition to
continuetoobtain U.S. dollar fundingfor their global operationsthrough
their U.S. entities.
It would instead provide an incentive to term out at least some of this
funding in a way that reducesthe risk of runs.
Requiring additional local capital and liquidity buffers, like any
prudential regulation, may incrementally increase cost and reduce
flexibilityof internationally active banksthat manage their capital and
liquidity on a centralized basis.
H owever, managing liquidity and capital on a local basiscan have
benefitsnot just for financial stability generally, but alsofor firms
themselves.
During the crisis, the more decentralizedglobal banksrelied somewhat
lesson cross-currencyfunding and were lessexposed to disruptions in
international wholesalefunding and foreign exchange swap marketsthan
the more centralized banks.
Indeed, asnoted earlier, in the wake of the crisisand of subsequent
stresses, many foreign bankshave modified their funding practicesand
businessmodels.
In revamping our approach, we will both be guarding against a return to
pre-crisispracticesand, more generally, ensuring that foreign banking
operations in the United Statesthat pose potential risksto U.S. financial
stability are regulated similarly to domestic banking operations posing
similar risks.
Conclusion
The imperative for change in our foreign bank regulation isclear
and, indeed, mandated by Dodd-Frank.
Of course, I have provided only an outline of the threekey measuresthat
will best navigate the middle courseI have suggested.

27
The all-important detailsare under discussion at theBoard.
I anticipatethat in thecoming weekswe will completeour work and issue
a notice of proposed rulemaking that will elaboratethe basic approach I
haveforeshadowed.
I look forward to hearing your general reactionstoday and more specific
feedback after the Board has adopted a proposed rule.

28
OpportunitiesfacingIslamicfinanceand
challengesin managingcapitalflowsinAsia
Outline of special addressby Mr Tharman
Shanmugaratnam, Chairman of the Monetary
Authority of Singapore, at the 8th World Islamic
Economic Forum, Johor Bahru, Malaysia
The Prime Minister of Malaysia, H is Excellency
Dato‘ Sri Najib Tun Razak, The President of
Comoros, H isExcellencyIkililou Dhoinine, The
President of the Islamic Development Bank, H is
ExcellencyAhmad Mohamed Ali, Chairman of the World Islamic
Economic Forum Foundation Tun Musa H itam
Ministers and distinguished guests, Ladiesand gentlemen
Introduction
It is my pleasure to be here today and have the opportunity to share some
thoughts.
Let me first congratulate the WIEF on the progressit has made in
establishing itself asa leading international forum for economic leaders
and opinion shapersfrom a broad range of countriesto discussissuesof
interest in Islamic Finance and related themes in global finance.
The theme of the Forum, ―Changing Trends, New Opportunities‖ is
particularlyrelevant.
Allow me to first offer a brief perspective on opportunities facing Islamic
finance.
I will then go on to talk about the challengeswe face in Asia in managing
capital flowsin the aftermath of the Global Financial Crisis.

29
Islamicfinance:opportunitiesfor growth
The Islamic finance industry is estimated to have grown by some 19% per
year since 2006 – to record nearly US$1.3 trillion of total shariah compliant
assetsin 2012.
But there is still considerablescope for itsdevelopment:
•Islamic finance presentlyformslessthan 1% the global financial
industry.
•For a large number of countries, even in jurisdictions with substantial
Muslim populations, Islamic finance currentlyconstituteslessthan 5% of
their financial sector.
•And despite a record level of sukuk issuance in 2012, the industry as a
wholeisstill largelyconcentrated on the banking sector.
There is much ahead in the journey to developIslamic capital markets
and the takaful (Islamic insurance) industry.
I believe thenext 10–15yearsoffer significant opportunitiesfor the growth
and diversification of Islamic finance.
Let me highlight thereasonsto be optimistic about itsprospects:
•First, Islamic financial institutions have in the main escaped significant
damage in the global financial crisis.
They are well-placedtogrow, at a time when many of the global
banks, especiallythe European banks, are deleveraging or focusing on
consolidating their balancesheets.
•Second, Islamic finance has much potential to diversify into new growth
areas such as trade and infrastructure financing in Asia and the emerging
markets.

30
These new areas will allow Islamic banks to reduce their exposure to the
real estate sector, and to take advantage of the stronger growth potential
of the emerging market economies.
There are gapsto be filledin structured trade finance and in funding for
infrastructural projectsasthe emerging markets grow, and as global
finance consolidates.
•Third, Islamic finance can alsoseek to meet the increased demand for
simpler and more transparent productsand ‗back-to-basics‘finance.
Investorsare now much more circumspect about complex productsand
their risks.
Thecrisistaught investorsworldwidenot only about thedamagetheycan
face from the risksthat are known and unsurprising, but of the risksof
‗what we do not know‘.
Islamic finance, with itsfocuson transparency, price certainty and
risk-sharing, can ride this wave of demand for simpler and more basic
investments.
H owever, Islamic finance will have to overcome a few important
challengesin order to grow itsshare in global finance and contribute to
cross-border finance.
These include the need to reducefragmentation in Islamic finance
markets due to differencesin accepted standardsof Shariah compliance
between regions, jurisdictions, and in some caseseven domestically
within jurisdictions.
This has hampered the flowof liquidity between jurisdictions, and isin
part why there is yet no Islamic equivalentsto the international money
and bond markets.
There isconsiderableprogressbeing made to addressthese challenges.

31
Bodiessuch as AAOIFI, IDB‘sIslamic Research & Training
Institute, and Malaysia‘sInternational Shariah Research Academy
(ISRA) have made significant effortsto narrow the differencesin
acceptability of Shariah compliance.
The Islamic Financial ServicesBoard (IFSB), in conjunction with
international standardssetting bodiessuch asthe Bank of International
Settlements(BIS), IOSCO and IAIS and various regulatorsfrom Islamic
and conventional jurisdictions, are alsoformulating international
standardsand best practicesfor the industry.
Islamic finance is alsoseeing increasing interest in Asia.
We are seeing financial institutions leveraging on the strengthsand
expertise that have been developedin both Islamic and conventional
financial markets.
This isexpanding the range of Shariah-compliant productsand allowing
the Islamic finance industry to tap on broad and deep investor pools
globallyand in Asia.
•Malaysia is widely recognised as a leader in Islamic finance, in
particular for the issuanceof sukuks.
•Islamic finance is alsoseeing growing interest in other Asian financial
centressuch as Singapore, H ong Kong and Tokyo.
•Just recentlyin mid-November 2012, institutional and private investors
in Singapore and H K were the largest investorsin the US$15.5 billion
global sukuk issued by the Abu Dhabi Islamic Bank (ADIB).
•Between our two countries, we are seeing Malaysian bankscollaborating
with Singapore corporatesand financial players tostructureS$
denominated corporate sukuk programmes.

32
And Singapore-listed companies are venturing out to tap the Ringgit
sukuk market in Malaysia.
These are trendsthat we are keen to encourage.
To repeat therefore, I am optimistic that we can realisethe significant
growth potential for Islamic finance in the next 10–15 years.
Managingthe challengeof capital flowsin the post-crisisera
Let me move on now to say a few things about the challengesthat many
in the emerging world face in managing capital flows, particularly in the
face of the extremelylow interest ratesbeing set in the advanced
economies (AEs).
We are in an unprecedented situation.
Interest ratesare expected to stay extremelylow in the USand much of
the advanced world for a few years, reflecting decisionsby their central
banksto keep monetary conditions highly accommodative until their
economies resume normal growth.
There isdebate among economists on how effective these activist
monetary policies, such as the USFed‘sQE3 strategy, will be in reviving
entrepreneurial spirits and rivate investments.
If the strategy succeedsand the US economy recovers, it will be a plus
for Asia aswell.
In themeantime, however, thereare significant implicationsfor emerging
market economies, as global investorssearch for better returns – better
than the near-zero ratesthey get on cash and treasury bills.
With large amountsof liquidity now moving between markets, short-term
shiftsin investor sentiment leadsto volatility in capital flows.

33
We have seen how a shock in the European periphery can send money
that was invested in emerging markets rushing back to the US or other
safe havens.
To be clear about it, there isa lot that is good about capital
flows, including even short term flows.
They add liquidity to markets, by bringing more buyers and sellers
together.
H owever, weknowtoo that capital inflowscan alsobe toomuch of agood
thing.
They can lead to asset prices, or exchange rates, becoming disconnected
from fundamentals.
And the sudden withdrawal of capital from emerging economieswhen
investorsswitch from ‗risk on‘to ‗risk off‘ in their portfolios can be
destabilising.
As I mentioned, the current global condition isunprecedented.
The policy responsesin the advanced countries too are without
precedent.
Globallytherefore, we need some humility in understanding the benefits
and costsof QE3 and easy monetary policiesin the advanced countries.
But it will be wise to strengthen our policy toolkitsin Asia, so that we can
deal with unpredictableand often excessivecapital flows.
There are some lessonsthat come out of our experiencesin Asia and
elsewhere, and policy responsesthat we can learn from each other.
I will mention three setsof policy responsesthat will inevitably have to
figure in our toolkits.

34
First, there ismuch sense in curtailing volatility in the exchange rate over
the short-term.
The costs of volatile and uncertain exchange rates are high in small open
economies especially – which is what most of our ASEAN economies are.
Accordingly, Malaysia, Singapore and several other Asian countries have
notfelt comfortableleaving their exchangeratesentirely to market forces.
Their central banks, within each of their monetary policy
frameworks, have sought to instil a focuson longer term
fundamentals.
There ismerit in allowing exchange ratesin Asia‘s emerging economies
to appreciate graduallyover the long term, reflecting their more rapid
growth.
If we resist these long term trends, we are likelyto see more inflation in
our economies.
But some stability in the short term is wise.
Second, macro-prudential policiesare now an important part of thepolicy
tool kit.
ManyAsian countrieshave introduced new macro-prudential measuresto
try and avoid bubblesin their property markets over the last two years.
Malaysia brought in stricter limits on loan-to-valueratios on housing
loans.
Singapore and H ong Kong have done similarly, and have introduced
additional stamp dutiesor transaction taxesto discourage speculative
demand for residential properties.
These targeted administrative and prudential measuresare not
conventional macro-economic tools.

35
But they are likelyto remain part of our policy toolkit, at least for
the foreseeablefuture, given the real risksto macro-economic stability
that an environment of very lowglobal interest ratesposes.
A third and more fundamental strategy hasto focuson building greater
depth in Asia‘s capital markets, while ensuring that our banking systems
remain sound.
A good example of thisstrategy isin fact in Malaysia.
Bank Negara‘sFinancial Sector Blueprint II (2012–2020), released aspart
of the government‘s Economic Transformation Programme (ETP), will
build on the solid foundations of Malaysia‘sfinancial system, including
developinga deep and vibrant bond market.
The banksin several leadingAsian countries, including Malaysia and
Singapore, are generallywell-managed and well-capitalised.
They were a sourceof strength for usduring the global financial crisis.
H owever, Asia‘s capital markets, and especiallythe corporate
bond markets, need much more depth.
Broader and deeper capital markets will allowinvestorsto invest for the
long term while hedging against risks.
They will helpusmeet the growing infrastructural and other long term
investment needsof the region.
Thisisthereforea very important priority in theregion, and thereisin fact
significant scope for futuredevelopment of Asian capital markets.
Regulatorsare working to harmonise rulesand market practicesacross
the region, such as issuance proceduresand settlement standards.

36
We alsoneed to develop the securitisation markets, with appropriate
safeguards, so that bankscan recycle their capital.
More too is being done to boost linkagesbetween our markets and
economies.
We have to pool liquidity acrossour markets, soas to add depth to the
Asian capital market.
An exampleishow the Malaysian stock exchange, Bursa Malaysia, the
Singapore Exchange and the Stock Exchange of Thailand recently
launchedan ASEAN Trading Link.
Weare alsocooperating toencouragefinancing for infrastructureprojects
in the region.
The ASEAN Infrastructure Fund (AIF), an initiative that was led by
Malaysia, isa good example.
It will pool resources, knowledge and experienceamong ASEAN
governments and the Asian Development Bank (ADB) for loansto
sovereign or sovereign-guaranteed infrastructure projects.
The Fund will alsoissue bonds, soas to bring in private sector and
institutional investors.
Another example of such cooperation in the region is the Credit
Guarantee and Investment Facility (CGIF) amongst the ASEAN+3
countries, which aims to help companiesin ASEAN+3 countriesraise
long term financing for infrastructure investment by providing the
governments‘ guarantees on their corporate bonds, thereby reducing risk
for bond-holders.
Projectssuch asIskandar Malaysia are alsoa prime example of how
intra-regional investmentscan be encouraged, and how countriesin our
region can developcompetitive strengthsjointly.

37
•Iskandar Malaysia‘sperformance has been impressive – poised to exceed
itstargeted RM100billion investment mark bytheend of thisyear.
•I am glad there is good progresson the joint ventureby Temasek
H oldingsand Khazanah Nasional, Pulau Indah VenturesSdn Bhd to
co-developtwo separate sitesin Medini.
•Other significant projectsinclude a S$1.5 billion integrated eco-friendly
tech-park byAscendas and Malaysia‘sUEM Land Berhad in Nusajaya
(one of the five flagship zonesin Iskandar).
Once completed, the park will accommodate a range of
industriesincluding electronicsand precision engineering.
•Just in the last month, we have seen other significant investment
commitments in Iskandar reported by Singapore companies.
Iskandar Malaysia will enhance the complementary space between our
two economies.
It is a win-win.
To ensure continued progressin Iskandar, Singapore and Malaysia will
continue to take stepsto improve connectivity, cross-border trade
facilitation, and immigration processes.
Conclusion
I would like to conclude by emphasising once again that I am basically
optimistic about the prospectsin our bilateral and regional cooperation.
We face many challengesin this post-Global Financial Crisis era.
But theopportunitiesfor usin Asia are intact, and our ability tocooperate
with each other to achieve our full potential as a region isan asset for all
our countries.

38
ResolvingGlobally
Active, Systemically
Important, Financial
Institutions
Ajoint paper by theFederal Deposit InsuranceCorporationand theBank
of England
Resolving GloballyActive, SystemicallyImportant, Financial Institutions
Federal Deposit InsuranceCorporation and the Bank of England
Executivesummary
The financial crisis that began in 2007 hasdriven home the importance of
an orderlyresolution processfor globallyactive, systemically
important, financial institutions (G-SIFIs).
Given that challenge, the authorities in the United States(U.S.) and the
United Kingdom (U.K.) have been workingtogether todevelop resolution
strategies that couldbe applied to their largest financial institutions.
These strategies have been designed to enablelargeand complex
cross-border firms to be resolvedwithout threatening financial stability
and without putting public fundsat risk.
This work has taken place in connection with the implementation of the
G20 Financial Stability Board‘sKeyAttributes of Effective Resolution
Regimes for Financial Institutions.
The joint planning has been productive and effective.
It has enhanced the resolution planningprocessin both
jurisdictions, tackled key issuesin relation to cross-border
coordination, and identified potential challengesthat will be addressed
through further work.

39
This paper focuses on the application of ―top-down‖ resolution strategies
that involve a single resolution authority applying its powers to the top of
a financial group, that is, at the parent company level.
Thepaper discusseshowsuch a top-downstrategycould beimplemented
for a U.S. or a U.K. financial group in a cross-border context.
In the U.S., thestrategy has been developed in the context of the powers
provided bythe Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010.
Such a strategy would applya single receivership at the top-tier holding
company, assign lossesto shareholdersand unsecured creditors of the
holding company, and transfer sound operating subsidiaries to a new
solvent entity or entities.
In the U.K., the strategy has been developedon the basisof the powers
provided bythe U.K. Banking Act 2009 and in anticipation of the further
powersthat will be provided by the European Union Recovery and
Resolution Directive and the domestic reforms that implement the
recommendations of the U.K.
Independent Commission on Banking. Such a strategy would involve the
bail-in (write-down or conversion) of creditors at the top of the group in
order to restore the wholegroup to solvency.
Both the U.S. and U.K. approachesensure continuity of all critical
servicesperformed by the operating firm(s), thereby reducing risks to
financial stability.
Both approachesensure activities of the firm in the foreign jurisdictions
in which it operatesare unaffected, thereby minimizing risksto
cross-border implementation.
The unsecured debt holderscan expect that their claimswould be written
down to reflect anylossesthat shareholderscannot cover, with some

40
converted partly into equity in order to provide sufficient capital to return
the sound businessesof the G-SIFI to private sector operation.
Sound subsidiaries (domestic and foreign) would be kept open and
operating, thereby limiting contagion effectsand cross-border
complications.
In both countries, whether during execution of the resolution or
thereafter, restructuring measuresmay be taken, especially in the partsof
the businesscausing the distress, including shrinking those businesses,
breaking them into smallerentities, and/ or liquidating or closing certain
operations.
Both approacheswould be accompanied by the replacement of culpable
senior management.
This paper outlinesseveral common considerationsthat affect these
particular approachestoresolution in the U.S. and the U.K., including the
need to ensuresufficient lossabsorbencyat the top of the group.
TheFederal Deposit InsuranceCorporationand theBank of England will
continue to work together on these resolution strategies.
ResolvingGloballyActive, SystemicallyImportant, Financial
Institutions, FederalDeposit InsuranceCorporation and the
Bank of England
Introduction
1The Federal Deposit InsuranceCorporation (FDIC) and the Bank of
England—together with the Board of Governorsof the Federal Reserve
System, the Federal ReserveBank of New York, and the Financial
ServicesAuthority—have been working to develop resolution strategies
for the failure of globallyactive, systemicallyimportant, financial
institutions (SIFIsor G-SIFIs) with significant operationson both sides
of the Atlantic.

41
This work has taken placein connection with the implementation of the
Financial Stability Board‘s(FSB) KeyAttributes of Effective Resolution
Regimes for Financial Institutions (Key Attributes), as well asin
connection with thereforms to the legal arrangements for handling the
failure of financial institutions that were instituted in the United States
(U.S.) and the United Kingdom (U.K.) in responseto the recent financial
crisis.
2The goal isto produce resolution strategies that could be implemented
for the failure of oneor more of the largest financial institutions with
extensiveactivities in our respective jurisdictions.
These resolution strategies should maintain systemicallyimportant
operations and contain threatsto financial stability.
Theyshould alsoassign lossestoshareholdersand unsecured creditorsin
the group, thereby avoiding the need for a bailout bytaxpayers.
Thesestrategiesshould be sufficientlyrobust tomanagethechallengesof
cross-border implementation and to the operational challengesof
execution.
3As highlighted in the FSB‘srecentlypublished draft Guidance on
Recovery and Resolution Planning, strategies for resolutionmay broadly
be categorized as either applying resolution powers to the top of a group
by a single national resolution authority (single point of entry), or
applying resolution toolsto different parts of the group by two or more
resolution authorities acting in a coordinated way (multiplepointsof
entry).
Which strategy ismost suitable to resolving the group will depend upon a
range of factors.
For example, a single point of entry strategy may offer the simplest and
most effectivechoice if thedebt issued at thetop of the group issufficient
to absorb the group‘slosses.

42
Where thisis not the case, a multiplepointsof entry strategy will be more
suitable, particularlyif different partsof the group can continue on a
standalonebasis.
4The focusof thispaper ison a single point of entry resolution approach.
It is hoped that thedetail it provides on the single point of entry
approach, when combined with the publishedFSB Guidance on
Recovery and Resolution Planning, will give greater predictability for
market participants about how resolution authorities may approach a
resolution.
This predictability cannot, however, be absolute, asthe resolution
authorities must not be constrained in exercising discretion in pursuit of
their statutory objectivesin how best to resolvea firm.
Post-crisisresolution strategy
5The financial crisisthat began in late 2007 highlighted the shortcomings
of the arrangements for handling the failure of large financial institutions
that were in placeon either side of the Atlantic.
Large banking organizations in both the U.S. and the U.K. had become
highly leveraged and complex, with numerousand dispersed financial
operations, extensiveoff-balance-sheet activities, and opaque financial
statements.
These institutions were managed as single entities, despite their
subsidiariesbeing structured as separate and distinct legal entities.
They were highly interconnected through their capital markets
activities, interbank lending, payments, and off-balance-sheet
arrangements.
6The legislative frameworks and resolution regimes at the time were
ill-suited to dealing with financial institution failures of this scale and
interconnectedness.

43
In the U.S., theFDIC only had thepower to placean insured depository
institution into receivership; it could not resolve failed or failing bank
holding companies or other nonbank financial companies that posed a
systemic risk.
In theU.K., until 2009there wasnospecial resolution regime availablefor
banksor other financial companies, whatever their size or
complexity, and asa result the U.K. was reliant on standard insolvency
proceduressuch as administration.
7As demonstrated by the Title I requirement of the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010 (Dodd-Frank
Act), the U.S. would prefer that large financial organizations be
resolvablethrough ordinary bankruptcy.
H owever, the U.S. bankruptcy processmay not be ableto handlethe
failure of a systemic financial institution without significant disruption to
the financial system.
8Similarly, the U.K. administration processoften takestime and involves
significant uncertainty regarding the outcome.
Forcing large financial organizations through administration can create
significant and systemic risksfor thereal economyby interruptingcritical
services, disrupting key financial relationships, and freezing financial
markets. In addition, it can destroy value, harming the real economy.
9 Given theseproblemswith thebankruptcy process, the U.S. and the
U.K. authoritiesresorted to providing large scalepublic support to failing
financial companies during the 2007-09 crisisto prevent further systemic
disruption.
This public support hasexposed taxpayersto lossand resulted in the
bailout of multiple financial institutions and their creditors.

44
10Following the crisis, an overhaul of the framework for dealing with
large and complex financial institution failureswas required.
Whileit may be useful to strengthen the current bankruptcy code or
administration rulesto improve the handling of financial failures,
systemic considerationswarrant having an alternative resolution strategy.
11A resolution strategy for a failed or failing G-SIFI should assign losses
to shareholdersand unsecured creditors, and hold management
responsiblefor the failure of the firm.
The strategy shouldprovide continuity of the critical servicesthat the
institution provides within the financial system and to the real economy,
thereby minimizing systemic risk.
The strategy should also enablea prompt transition of the firm‘songoing
operationsto full private ownership and control without taxpayer support.
Given the cross-border nature of G-SIFIs, the resolution strategy should
ensurefinancial stabilityconcernsare addressed acrossall jurisdictionsin
which the firm operates.
To be successful,such an approach will require closecooperation
between home and foreign authorities.
12Under the strategies currentlybeing developedby the U.S. and the
U.K., theresolution authority could intervene at the top of the group.
Culpablesenior management of the parent and operating businesses
would be removed, and losseswould be apportioned to shareholdersand
unsecured creditors.
In all likelihood, shareholderswould lose all value and unsecured
creditorsshould thusexpect that their claimswould be written down to
reflect any lossesthat shareholdersdid not cover.

45
Under both the U.S. and U.K. approaches, legal safeguardsensure that
creditorsrecover no lessthan they would under insolvency.
13An efficient path for returning the sound operations of the G-SIFI to
the private sector would be provided by exchanging or converting a
sufficient amount of the unsecureddebt from the original creditorsof the
failed company into equity.
In the U.S., thenew equity would become capital in one or more newly
formed operating entities.
In the U.K., the same approach could be used, or the equity could be used
to recapitalize the failing financial company itself—thus, the highest layer
of surviving bailed-in creditors would become the owners of the resolved
firm.
In either country, the new equity holderswould take on the
corresponding risk of being shareholdersin a financial institution.
Throughout, subsidiaries (domestic and foreign) carrying out critical
activities would be kept open and operating, therebylimiting contagion
effects.
Such a resolution strategy wouldensure market discipline and maintain
financial stability without cost to taxpayers.
Legislativeframeworksfor implementingthe strategy
14It should be stressed that the application of such a strategy can be
achieved only within a legislative framework that provides authorities
with key resolution powers.
The FSB KeyAttributes have establisheda crucial framework for the
implementation of an effective set of resolution powersand practicesinto
national regimes.

46
In the U.S., thesepowershad alreadybecome availableunder the
Dodd-Frank Act.
In the U.K., the additional powersneeded to enhance the existing
resolutionframework established under theBanking Act 2009 (the
Banking Act) are expected to be fullyprovided by the European
Commission‘s proposalsfor a European Union Recovery and Resolution
Directive (RRD) and through the domestic reforms that implement the
recommendations of the U.K. Independent Commission on Banking
(ICB), enhancing the existing resolution framework established under
the Banking Act.
The development of effective resolution strategies isbeing carried out in
anticipation of such legislation.
U.S. regime
15 The framework provided by the Dodd-Frank Act in the U.S. greatly
enhancesthe ability of regulatorsto addressthe problemsof
large, complex financial institutions in any future crisis.
TitleI of the Dodd-Frank Act requireseach G-SIFI toperiodically submit
to the FDIC and the Federal Reservea resolution plan that must address
the company‘splansfor itsrapid and orderlyresolution under the U.S.
Bankruptcy Code.
The FDIC and the Federal Reserveare required to review the plansto
determine jointly whether a company‘splan iscredible.
If a plan is found to be deficient and adequate revisions are not made, the
FDIC and the Federal Reserve may jointly impose more stringent
capital, leverage, or liquidity requirements, or restrictions on
growth, activities, or operations of the company, including its
subsidiaries.
Ultimately, the company could be ordered to divest assetsor operations to
facilitate an orderly resolution under bankruptcy in the event of failure.

47
Once submitted and accepted, the SIFIs‘ plansfor resolution under
bankruptcy will support the FDIC‘splanningfor the exercise of its
resolutionpowers byproviding the FDIC with an understanding of each
SIFI‘sstructure, complexity, and processes.
16 Title II of the Dodd-Frank Act provides the FDIC with new powersto
resolveSIFIs by establishing the orderlyliquidation authority (OLA).
Under the OLA, the FDIC may beappointed receiver for any U.S.
financial companythat meetsspecified criteria, including being in default
or in danger of default, and whose resolution under theU.S. Bankruptcy
Code (or other relevant insolvencyprocess) would likely create systemic
instability.
Title II requiresthat the lossesof any financial company placedinto
receivership will not be borneby taxpayers, but by common and preferred
stockholders, debt holders, and other unsecured creditors, and that
management responsible for the condition of the financial company will
be replaced.
Once appointed receiver for a failed financial company, theFDIC would
be required to carry out a resolution of the company in a manner that
mitigates risk to financial stability and minimizes moral hazard.
Any costsborneby the U.S. authorities in resolving theinstitution not
paid from proceedsof the resolution will berecovered from theindustry.
U.K. regime
17 In the U.K., the Banking Act providestheBank of England with tools
for resolving failing deposit-taking banksand building societies.
Powers similar to those of the FDIC are available, including powersto
transfer all or part of a failed bank‘sbusinessto a private sector purchaser
or to a bridge bank until a private purchaser can be found.

48
The Banking Act alsoprovides the U.K. authorities with a bespokebank
insolvencyprocedure that fullyprotectsinsured depositorswhile
liquidating a failed bank‘sassets.
These powershave proved valuable;for example, during the crisisthey
allowedthe authorities to transfer the retail and wholesaledeposits,
branches, and a significant proportion of the residential mortgage
portfolio of a failed building society to another building society.
18The Banking Act powersdo not, however, provide a whollyeffective
solutiontothefailure of a large, complex, and international financial firm.
The critical economic functionsof a G-SIFI are currentlyintertwined
legally, operationally, and financiallyacrossjurisdictions and legal
entities.
For U.K. firms, thesefunctions frequentlyreside in the same entities as
the firms‘ core unsecuredliabilities.
Using the existing statutory transfer powerswould involve separating and
transferring large and complex businessesfrom within operating entities
to a purchaser or bridge bank, whileleaving behind the remaining
liabilitiesand bad assetsin the failed firm to be wound up through
insolvency.
These operating companiesmay have several thousand counterparties,
customers, and contracts.
Such a transfer would be almost impossible to achieve over a resolution
weekend without destroying valueand causing financial stability
concernsin multiple jurisdictions.
19The introduction of a statutory bail-in resolution tool (the power to
write down or convert into equity theliabilitiesof a failing firm) under the
RRD iscritical to implementing a wholegroup resolution of U.K. firmsin
a way that reducesthe risksto financial stability.

49
A bail-in tool would enablethe U.K. authorities to recapitalize an
institution by allocatinglossesto itsshareholdersand unsecured
creditors, thereby avoiding the need to split or transferoperating entities.
The provisions in the RRD that enable the resolution authority to impose
atemporarystayon theexerciseof terminationrightsby counterpartiesin
the event of a firm‘sentry into resolution (in other words, preventing
counterparties from terminating their contractual arrangements with a
firm solelyas a resultof the firm‘s entry into resolution) will be needed to
ensurethe bail-in is executed in an orderlymanner.
20The existing Banking Act doesnot cover nondeposit-taking financial
firms, notablyinvestment banksand financial market infrastructures
(clearing housesin particular), the failure of which, in many cases, would
alsohave significant financial stability consequences.
The Banking Act alsohas limitations with regard to the application of
resolution toolsto financial holding companies.
The U.K. isin theprocessof expanding the scopeof the Banking Act to
includethese firms.
This is expected to be achieved through the introduction of the U.K.
Financial Services Bill, which is due to complete its passage through
Parliament by the end of thisyear.
21In addition to expanding the U.K. resolution regime, the Financial
ServicesBill will significantly enhancethe U.K.‘sapproach to banking
supervision.
Going forward, the framework for prudential supervision in the U.K. will
emphasize supervisory judgment, rather than supervision based solely on
rules.
Under thisframework, considerationsof resolvabilityor easeof resolution
would become a core part of the supervisoryprocess.

50
22In conjunction with the Financial ServicesBill, the adoption of the
recommendations of the ICB will alsosignificantly improve the
resolvabilityof the U.K. domestic retail bank by ringfencing it from the
rest of the group.
This will help to preserve core domestic intermediation servicesif a
group-wide resolution is not feasiblefor some reason.
23To ensure that banksare resolvable,the Financial ServicesAuthority
(and in the future, the Prudential Regulation Authority (PRA)) will
require firms under the Financial ServicesAct 2010to produce Recovery
and Resolution Plans(RRPs).
Firmswill submit the information that the authoritieswill need toprepare
resolution plansand to assessresolvability.
Where barriersto resolution are identified, firms will be required to
remove them through changesto their structure and operations.
The proposed RRD providesauthorities with the necessarypowersto
achieve this, including the ability to require changesto the legal or
operational structuresof institutions, and to require firms to cease
specific activities.
Descriptionof the resolution strategies
U.S. approachto singlepoint of entry resolution strategy
24 Under the U.S. approach, the FDIC will be appointed receiver of the
top-tier parent holding company of the financial group followingthe
company‘sfailure and the completion of the appointment processset
forth under the Dodd-Frank Act.
Immediately after theparent holding company isplaced into
receivership, the FDIC will transfer assets(primarily the equity and

51
investmentsin subsidiaries) from the receivership estate to a bridge
financial holding company.
By taking control of the SIFI at the top of the group, subsidiaries
(domestic and foreign) carrying out critical servicescan remain open and
operating, limiting the need for destabilizing insolvencyproceedings at
the subsidiary level.
Equity claimsof the shareholdersand the claimsof the subordinated and
unsecured debt holderswill likelyremain in the receivership.
25Initially, thebridge holding company will becontrolled by theFDIC as
receiver.
Thenext stagein theresolution istotransferownership and control of the
surviving operations to private hands.
Before thishappens, the FDIC must ensurethat the bridge has a strong
capital baseand must addresswhatever liquidity concernsremain.
The FDIC would alsolikely require the restructuring of the firm—
potentially into one or more smaller, non-systemic firmsthat could be
resolvedunder bankruptcy.
26Byleaving behind substantial unsecured liabilities and stockholder
equity in the receivership, assetstransferred to the bridge holding
company will significantly exceed itsliabilities, resulting in a
well-capitalizedholdingcompany.
After the creation of the bridge financial company, but before any
transition to the private sector, a valuation processwould be undertaken
to estimate the extent of lossesin the receivership and apportion these
lossesto the equity holdersand subordinated and unsecured creditors
according to their order of priority.

52
In all likelihood, the equity holderswould be wiped out and their claims
would have littleor no value.
27To capitalize the new operations—one or more new private entities—
the FDIC expectsthat it will have to look to subordinated debt or even
senior unsecured debt claimsas the immediate source of capital.
The original debt holderscan thusexpect that their claimswill be written
down to reflect anylossesin the receivership of the parent that the
shareholderscannot cover and that, like those of the shareholders, these
claimswill be left in the receivership.
28At thispoint, the remaining claimsof the debt holderswill be
converted, in part, into equity claimsthat will serve to capitalize the new
operations.
The debt holdersmay alsoreceiveconvertible subordinated debt in the
new operations.
This debt would provide a cushion against further lossesin thefirm, asit
can be converted into equity if needed.
Any remaining claimsof the debt holderscould be transferred to the new
operations in the form of new unsecured debt.
29The transfer of equity and investments in operating subsidiaries to the
bridge holding company shoulddo much to alleviate liquidity pressures.
Ongoing operations and their attendant liabilitiesalsowill be supported
by assurancesfrom the FDIC, as receiver.
As demonstrated by past bridge-bank operations, the assuranceof
performance should encourage market funding and stabilize the bridge
financial company.

53
H owever, in the casewhere credit markets are impaired and market
funding isnot availablein the short term, the Dodd-Frank Act provides
for FDIC accessto the Orderly Liquidation Fund (OLF), a fund within
the U.S. Treasury.
In addition to providing a back-up source of funding, the OLF may also
be used to provide guarantees, within limits, on the debt of the new
operations.
An expected goal of the strategy is to minimize or avoid use of the OLF.
To the extent that the OLF is used, it must either berepaid from
recoverieson the assetsof the failed financial company or from
assessmentsagainst the largest, most complex financial companies.
The Dodd-Frank Act prohibits the lossof any taxpayer money in the
orderlyliquidation process.
U.K. approachto singlepoint of entry resolutionstrategy
30The U.K.‘splanned approach to single point of entry alsoinvolvesa
top-down resolution.
On the basisthat the RRD will introduce a broad bail-in power, the U.K.
authorities would seek to recapitalize the financial group through the
imposition of losseson shareholdersand, as appropriate, creditorsof the
firm via the exercise of a statutory bail-in power.
This U.K. group resolution approach need not employa bridge bank and
administration, although such powersare availablein theU.K. and may
be appropriate under certain circumstances.
31Current proposalsfor implementing such a strategy incorporate a
period in which equity and debt securitieswould be transferred from the
shareholdersand debt holdersto an appointed trustee.

54
The trustee would hold the securitiesduring a valuation period in which
the extent of the lossesexpected to be incurred by the firm would be
establishedand, in turn, the recapitalization requirement determined.
During thisperiod, listing of the company‘sequity securities (and
potentiallydebt securities) would be suspended.
Once the recapitalization requirement has been determined, an
announcement of the final terms of the bail-in would be made to the
previoussecurity holders.
This announcement would include full detailsof the write-down and/ or
conversion.
32Debt securities would becancelledor written down in order to return
the firm to solvencyby reducing the level of outstanding liabilities.
The losseswould be applied up the firm‘scapital structure in a process
that respectsthe existing creditor hierarchy under insolvency law.
The value of anyloans from the parent to itsoperating subsidiaries would
be written down in a manner that ensuresthat the subsidiaries remain
solvent and viable.
33Completion of the exchange would see thetrustee transfer the equity
(and potentiallysome of the existing debt securities written down
accordingly) back to the original creditorsof the firm.
Those creditorsunableto hold equity securities(for example, for reasons
of investment mandate restrictions) would be ableto request that the
trustee sell the equity securitieson their behalf.
The trust would then be dissolvedand the equity securities(and
potentiallydebt securities) of the firm would resume trading.

55
The firm would now be recapitalized and primarily owned by the
(appropriate layer of) original creditors of theinstitution.
As described later, the processwould be accompanied by restructuring
measuresto addressthe causesof thefirm‘s failure and to restore the
businessto viability.
34TheU.K. hasalsogiven consideration to therecapitalizationprocessin
a scenario in which a G-SIFI‘sliabilitiesdo not include much debt
issuance at the holding company or parent bank level but instead
comprise insured retail depositsheld in the operating subsidiaries.
Under such a scenario, deposit guarantee schemes may be required to
contribute to the recapitalization of the firm, as they may do under the
Banking Act in the useof other resolution tools.
The proposed RRD alsopermits such an approach becauseit allows
deposit guarantee scheme fundsto be used to support the use of
resolution tools, including bail-in, provided that the amount contributed
doesnot exceed what the deposit guarantee scheme would have as a
claimant in liquidation if it had made a payout to the insured depositors.
That is consistent with the contribution requirement that is already
imposed on the Financial ServicesCompensation Scheme in the U.K. in
theexerciseof resolution powersand simulatesthelossesthat would have
been incurred by those deposit guarantee schemesduring bank
insolvency.
But insofar asa bail-in providesfor continuity in operationsand preserves
value, lossesto a deposit guarantee scheme in a bail-in shouldbe much
lower than in liquidation.
Insured depositors themselveswould remain unaffected.
Uninsured deposits would be treated in line with other similarly ranked
liabilities in the resolution process, with the expectation that they might
be written down.

56
35Following the recapitalization process, thefirm would be restructured
to addressthe causesof itsfailure.
It should then be solvent and viable, and asa result in a position to access
market funding.
In recognition of the fact that it will take time for lossesto beassessed for
purposesof recapitalization, and that it will take time to executethe
restructuring plan that will underpin the firm‘s viability, immediate
accessmay prove difficult.
In certain circumstances, to reduce the immediate funding need and so
facilitate market access, illiquid assetsmight be removed from the
balancesheet of thefirm and transferred into an asset management
company to beworked out over a longer period.
36If market funding were not immediately available, temporary funding
may need to be provided by the authorities to meet the firms‘ liquidity
needs.
The funding would onlybe provided on a fullycollateralizedbasiswith
appropriate haircutsapplied to thecollateral to reduce further the risk of
loss.
In the unlikelyevent that losseswere associated with the provision of
temporarypublic sectorsupport, such losseswould be recovered fromthe
financial sector.
37It is important to note that the strategy described above would not
necessarilybeappropriate for all U.K. G-SIFIsin all circumstances.
Other strategies may be more appropriate depending on the structure of a
group, the nature of its business, and the size and location of the group‘s
losses.

57
For example, in caseswhere the losseson assetsin a particular operating
subsidiary were potentiallyso great that theycould not be absorbed by
bailing in at group level orwhere the businesshad incurred such
significant lossesand was so weighed down by toxic assetsthat the
capital needsin resolution were too difficult to estimate
credibly, resolution at the level of one or more operating subsidiaries may
be moreappropriate.
In thissituation, the application of resolution toolsto operating
subsidiarieswould be easier if the subsidiaries providing critical
economic serviceswere operationallyand financially ringfenced from the
rest of the group.
38 This is one of the advantagesof the ringfence which is being
introduced in the U.K. It will provide flexibility in the event of fatal
problemselsewherein the group to transfer the ringfenced entity to a
bridge bank or purchaser in its entirety.
If losseswere concentrated in the ringfenced entity and capital in the
ringfenced entity was insufficient to absorb them, then lossescould be
borne bycreditors of the ringfenced bank (including debt holderswhere
the ringfenced bank had issued debt into the market).
This could be achieved either by bail-in or by transferring the operations
of the ringfenced bank to a bridge bank, leaving uninsured creditors
behind in administration.
Draft legislation to establish thisringfence of the largest retail
deposit-takers is due to be introduced into Parliament earlyin 2013 and if
passed will provide valuableadditional flexibility in implementing
resolution strategies to preserve the provision of core servicesin the U.K.
businessof U.K. G-SIFIs.

58
Keycommonconsiderationsfor U.S. andU.K. approaches
39As outlined above, high-level transaction structureshave been
developedfor each jurisdiction.
As discussed in the FSB Guidance on Recoveryand Resolution
Planning, for any resolution to be effective, consideration needsto be
given in advanceto variouspreconditionsand operational requirements.
Several of theseconsiderations in relation to a top-down resolution
strategy are discussed in more detail below.
Resolutionand restructuringmeasures
40A top-down resolution by definition focuseson assigning lossesand
establishing new capital structuresat the top of the group.
This approach keepsthe rest of the group, potentiallycomprised of
hundredsor thousandsof legal entities, intact.
H owever, a top-down resolution would need to be accompanied, or
shortlyfollowed, by significant restructuring measuresto addressthe
causesof the firm‘s failure and to underpin the firm‘s viability.
Such a restructuring may include shrinking the G-SIFI‘sbalance
sheet, breaking the company up into smaller entities, and/ or sellingor
closing certain operations.
The newlyrestructured companieswill all need to have strong corporate
governance and management oversight, which would likelynecessitate
significant changesto management and board personnel and processes.
In both countries, it islikelythat supervisory actionswill continue after
the return to private ownership to ensurethat the firm ison a stable and

59
sustainablefooting and the problemsthat caused the firm to fail in the
first placehave been properly dealt with.
41In the U.S., effective governance will be an important issue for both the
transitional bridge financial company and the newly capitalized entity or
entities into which the bridge will transition.
The FDIC, as receiver, will control the bridge financial company and
would immediately appoint a temporary board of directors and Chief
Executive Officer (CEO) to run the bridge.
The claimsof the failed G-SIFI‘sunsecured creditorswill be converted
intoequity and, asaresult, theformer creditorswill becomeownersof the
new private sectoroperations.
They will thereafter be responsiblefor electing a new board of
directors, which will in turn appoint a new CEO.
42During the period in which the FDIC controlsthe bridge financial
company, decisionswill be made on how to on simplify and shrink the
institution.
It also would likely require restructuring of the firm—perhaps into one or
more smaller, non-systemic firms. Consideration will also be given to how
to create a more stable, lesssystemicallyimportant institution.
Required changes, including divestiture, may be influenced by the failed
firm‘s Title I resolution plan.
Once determined, the required actions and relevant time frames for their
execution will be specified in formal supervisory agreementswith the new
ownersof the private sector operations.
43The required actionswould be executed in private marketsby the new
owners.

60
For example, the new ownersmight be required to sell a portion of their
branch structureto reducetheir footprint, divest their foreign operations,
or separate their commercial and investment banking operations.
The resulting new private sector operations would be smaller, more
manageable—and perhapsmore profitable.
They would alsobe easier to examine and supervise. Importantly, all new
operations must be resolvableunder bankruptcy without public support.
44 In the U.K., similar considerationswould enter into decisions on the
restructuring process.
Depending on the specific timeline for resolution, the restructuring may
occur primarily either during the trusteestage (before the delivery of
equity securities to the creditors) or during the stage following the
dissolution of the trust.
The extent of the restructuring measures required would depend on the
cause of failure, and the extent to which losses were contained within a
particular pool of assetsor legal entity.
If lossesat the firm were localized,the restructuring measuresrequired
may be limited.
These would likelyrequire a saleor wind-down of relevant businesslines
and withdrawal from loss-making activities.
The senior management that were responsiblefor bringing the firm into
distresswould alsobe replaced.
On the other hand, if lossesat the firm were pervasive and spread across
multiplebusinesslines, a more fundamental restructuring of the firm‘s
businesswould be required.

61
This would likelyinclude a complete governance overhaul and a
thorough reorganization of the activities of the institution.
In the extreme case, much of the institution may enter managed
wind-down over a prolonged period of time.
In such a scenario, it islikely that a legal and operational ringfencing of a
banking group‘s retail banking activities from the group‘sinvestment
banking activities would prove particularlyvaluablein facilitating such a
restructuring.
Maintainingfinancialstability
45 Both the U.S. and U.K. resolution proposalsare designed to maintain
financial stability by ensuring that critical businessfunctions continue to
be performed.
Critical businessfunctions are generallyperformed at the level of the
operating subsidiaries—assetsof the holding companiesof U.S. and U.K.
G-SIFIstend to comprise littlemore than the equity stakesin the
operating subsidiaries.
The newly resolved group would be solvent and viable, and should be in a
position therefore to access market funding or, if necessary, funding from
the authorities as discussed above.
Liquidity will be downstreamed in a ―businessasusual‖ manner to the
operating subsidiaries immediately following the resolution weekend.
As described above, the balancesheetsof the operating subsidiaries
shouldbe broadly unaffected bythe resolution action at the top of the
group.
To recapitalize the operating subsidiaries that had incurred losses, the
equity or debt held by the parent in thosesubsidiaries would need to be
written down.

62
The parent and, indirectly, the subsidiary operating companies may also
be subject to change of control proceduresarising from a switch of
ownership from the existing shareholdersto creditors.
Provision of critical shared servicesacrossthe group shouldbe
unaffected.
46 Given minimal disruption to the balancesheet of the operating
companies, and given that the group shouldbe recapitalized following
the assignment of lossesto shareholdersand creditors, counterparties
shouldnot have strong incentivesto cease trading with the operating
companies during and following the resolution.
The contingency plans are designed to minimize the triggering of
cross-defaults or closeout of netting arrangements at the operating
companies.
In certain cases, a stay on termination rights may be applied to ensure
that termination of counterparty relationshipscannot be triggered solely
as a resultof entryinto resolution.
A stay may assist in promoting the continuity of a variety of critical
economic functionsthat are dependent on maintaining counterparty
relationships(for example, those functionsrelating to wholesalemarket
activities) and alsoavoiding the rapid, disorderly, and potentially
value-destructivecloseout of financial contractsand liquidation of
securities.
The stay couldalso minimize the closeout risk that may resultfrom
cross-defaultclauseswithin financial contracts.
In the scenario in which the holding company isplaced into
receivership, the stay would extend to certain subsidiary counterparties
subject tofinancial contractsthat referencethe holding company.

63
Given cross-border considerations, it isimportant that stayson
termination applyto both domestic and foreign operations of G-SIFIs.
In certain cases, authorities cannot currentlyextend stayson termination
to foreign operations.
Supporting actions by host authorities may be required (as included in
the KeyAttributes), or it may be necessaryto introduce clausesthat
recognize foreign resolution actions, including stayson termination, into
counterparty documentation.
47Similarly, becausethe group remains solvent, retail or corporate
depositorsshould not have an incentive to ―run‖ from the firm under
resolution insofar as their banking arrangements, transacted at the
operating company level, remain unaffected.
In order to achieve this, the authorities recognize the need for effective
communication to depositors, making it clear that their depositswill be
protected.
48If continuity of critical functions isto be achieved, the firm will need
continuing accessto core servicesprovided by the financial market
infrastructures(for example, payment systemsand central
counterparties) during and followingresolution.
To achieve this, authorities in both the U.S. and U.K. have begun a
processof engaging with such infrastructuresto develop effective
proceduresrelating to the treatment of members who have entered
resolution.
Minimizationof cross-border coordinationrisk
49It shouldbe stressed that a key advantage of a whole group, single
point of entry approach is that it avoidsthe need to commence separate
territorial and entity-focused insolvencyproceedings, which could be
disruptive, difficult to coordinate, and would depend on the satisfaction

64
of a large number of pre-conditionsin termsof structure and operations
of the group for successful execution.
Becausethe whole group resolution strategies maintain continuity of
businessat the subsidiary level, foreign subsidiaries and branchesshould
be broadly unaffected by the resolution action taken at the home holding
company level.
The strategies remove the need to commence foreign insolvency
proceedingsor enforce legal powersover foreign assets(although, as
discussed later, it may be necessary to write down or convert debt at the
top of the group that are subject to foreign law).
Liquidity should continue to be downstreamed from the holding
company to foreign subsidiaries and branches.
Given minimal disruption to operating entities, resolution authorities,
directors, and creditors of foreign subsidiaries and branchesshouldhave
littleincentive to take action other than to cooperate with the
implementation of the group resolution.
In particular, host stakeholdersshouldnot have an incentive to ringfence
assetsor petition for a preemptive insolvency—preemptive actions that
wouldotherwise destroy value and may disrupt markets at home and
abroad.
50A keypart of thework undertaken by theU.S. and theU.K. hasbeen to
identify the regulatory obligations of foreign authorities in responseto a
resolution originated by a home authority.
Where anyimpediments to effective wholegroup resolution have been
identified, authorities are in the processof exploring methodsto
overcome them.
51The KeyAttributes stressthe importance of a globallycoordinated
approach to resolution, and emphasize that resolution authorities should

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