13th November 2015

Putting resolution on a firm footing

Written by Adam Cull, the BBA’s Senior Director (Financial Policy and Operations)

Today’s Supervisory Statement on the application of contractual stays in financial contracts governed by third country law is an important building block in ensuring systemically important banks can be resolved before they fail, potentially causing ‘contagion’ damage to other parts of the financial system. Although the Basel III capital and liquidity requirements have made banks much more resilient it is wise to plan for the worst.

The supervisory statement explains what the PRA expects a bank to do now to get the agreement of its non-EU creditors and counterparties, to whom it owes money, in the unlikely event that it fails and is taken over by the UK resolution authority. They will ‘stay’ any early termination or close-out rights unless they mirror those available as if their contract was written under UK or EU law.

The purpose of ‘staying’  or limiting non-EU early termination or close-out rights is to avoid the further complications that could impede the actions of the  resolution authority as it seeks to save important parts of the failed bank.

UK banks fully support any measures that make the work of the resolution authority more straightforward. But the task of getting agreement from creditors of counterparties perhaps on the other side of the world to stay existing rights in their financial contrast will be no small task.

So the BBA is pleased that the Bank of England listened to the concerns that we expressed in our response to the May consultation paper on this topic. The Bank, recognising that banks need more time to finish this task, has given the industry another six to twelve months to get agreement from their creditors and counterparties which is very helpful. At the same time the supervisory statement has also clarified more exactly the types of financial law contracts to which banks need to get agreement to the staying of early termination rights and excluded a greater number of financial market infrastructures and central government entities (such as CCPs and payment systems) from the types of counterparties from which agreement must be sought.

The task of ensuring compliance with the contractual stay requirement will still be a complex one, but the pragmatic approach of the supervisory statement will make it a little more straightforward, meaning that fewer of my colleagues in BBA member banks will have to work over the upcoming holiday period – a welcome and early Christmas present from the Bank of England!

 

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