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 Treasury Secretary Jack Lew and the UK's Chancellor of the
Exchequer, George Osborne, on Monday will run the first-ever joint
exercise simulating how they would prop up a large bank operating in
both countries that has landed in trouble.
Also taking part are Federal Reserve Chair Janet Yellen and Bank of
England Governor Mark Carney, and the heads of a large number of
other regulators, in a meeting hosted by the U.S. Federal Deposit
Insurance Corporation.
"There is no doubt that in 2008 the judgment taken by my predecessor
and others was that banks ... like the Royal Bank of Scotland
<RBS.L> and others were too big to fail," Osborne said.
"Now I want to make sure that ... we have real options, and that we
are able to avoid bailing in taxpayers with a bailout. And I’m
pretty confident that's the case now," he said.
Six years after the financial crisis, politicians and regulators
around the globe are keen to prove they have created rules that will
allow them to let a large bank go under without spending billions in
taxpayer dollars.
They have forced banks to ramp up equity and debt capital buffers to
protect taxpayers against losses, and have told them to write plans
that lay out how they can go through ordinary bankruptcy. The plans
are so-called living wills.
Yet salvaging a bank with operations in several countries - which is
the norm for most of the world's largest banks such as Deutsche Bank
<DBKGn.DE>, Citigroup Inc <C.N> and JPMorgan <JPM.N> - has proven to
be a particularly thorny issue.
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Regulators may not be used to talking to each other, and there have
also been suspicions that supervisors would first look to save the
domestic operations of a bank, and would worry less about units
abroad.
One scenario would test the hypothetical failure of a U.S. bank with
UK operations, and a second the demise of a large UK bank with U.S.
operations, the countries said. Results would be communicated after
the exercise.
The exercise comes as regulators are about to bring to fruition
further initiatives to make banking safer.
The first would force banks to have more long-term bonds that
investors know can lose their value during a crisis, on top of their
equity capital, to double their so-called Total Loss-Absorbing
Capacity (TLAC).
A second measure, expected to be announced this weekend, will force
through a change in derivative contracts, which in their current
form protect investors, and complicate the winding down of a bank
across borders.
(Reporting by Douwe Miedema and Randall Palmer; Editing by Matthew
Lewis and Andrea Ricci)
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