Achieving plausible separability for the resolution of cross-border banks

Abstract

Purpose

This paper aims to consider whether it is plausible to resolve troubled systemically important cross-border banks by dividing them so that the component national authorities can resolve the parts in their jurisdiction separately according to their own priorities.

Design/methodology/approach

The example of New Zealand is used. This country has chosen just such a route in its Open Bank Resolution (OBR) policy. The difficulties and advantages of this route to resolution are analyzed.

Findings

The paper concludes that the New Zealand route is plausible for systemic subsidiaries, providing there is deposit insurance. The minimum cost route is likely to be one where the home authority takes responsibility for the whole group and keeps all systemic operations running. It remains to be seen what the new EU-level proposals could achieve.

Research limitations/implications

OBR is as yet fortunately untried although there are some examples from a smaller scheme in Denmark.

Practical implications

These findings have important implications for financial regulators round the world but especially in the EU as it seeks to find a similar approach in the Recovery and Resolution Directive.

Originality/value

This topic has not been covered by others and will add ideas of practical value to the debate. One of the major problems addressed by the Basel Committee in its approach to supervision and regulation of cross-border banks is to come up with arrangements that allow the network of national authorities to handle problems in a large cross-border bank quickly, efficiently and preferably pre-emptively without recourse simply to a major taxpayer bailout.

Citation

Mayes, D. (2013), "Achieving plausible separability for the resolution of cross-border banks", Journal of Financial Economic Policy, Vol. 5 No. 4, pp. 388-404. https://doi.org/10.1108/JFEP-06-2013-0024