May 16, 2018

While speaking at the Harvard Law School in Cambridge, Randal K. Quarles outlined the U.S. approach to the cross-border resolution framework and examined the potential for adjustments for the current regime. He also examined whether the current prepositioning requirements for domestic and foreign firms operating in the United States are minimizing this risk and functioning in an efficient and transparent manner. From the vantage point of the United States, which is a large home and host regulator, he opined that "it is sensible to find a middle ground and fine tune our approach as we learn more and global conditions evolve."

Mr. Quarles emphasized that FED is committed to working with other jurisdictions to continue to build the foundation of the single-point-of-entry (SPOE) resolution framework. FED will continue to advocate for increasing the standardization in the global implementation of the regulatory capital rules, improving host supervisors' transparency into the global liquidity and capital positions of a global systemically important bank (G-SIB) on a consolidated and "deconsolidated" basis, and addressing impediments to a successful SPOE resolution. As with all regulations, FED will be open to considering adjustments that would improve transparency and efficiency and will continue to reassess the regime, as it makes advancements in developing the cross-border resolution framework. In this context, he highlighted the unique positions of the United States and the UK with large interests as both home country and host country regulators of internationally active banks. He added that, soon, EU is likely to assume this privilege as well. Meanwhile, "we understand that any requirements we impose on foreign banks operating in the United States may well be imposed on U.S. firms operating abroad."  

With respect to the U.S. approach, he added that FED and FDIC have used the living wills process to set the expectation that a firm appropriately balance prepositioned and centrally managed resources. Regarding capital, the positioning of a U.S. G-SIB's internal total loss absorbing capacity (TLAC) should reflect a balance of certainty—prepositioning internal TLAC directly at material entities—and flexibility—holding recapitalization resources at the parent, known as contributable resources—to meet unanticipated losses at material entities. Regarding liquidity, FED and FDIC expect a U.S. G-SIB to appropriately estimate and maintain sufficient liquidity for material entities, an expectation known as Resolution Liquidity Adequacy and Positioning, or RLAP. RLAP expectations are intended to be designed so that liquidity is not "double counted" among home and host jurisdictions, to provide transparency into the location of liquidity across the firm's material entities, and to ensure that liquidity can flow, where needed, with minimal potential disruption. The RLAP approach is aimed to ensure that surpluses in one host jurisdiction are not relied on to meet deficits in another host jurisdiction, given the confusion and vulnerabilities such reliance can cause in an actual stress.

He made "two principal points." The first being that "some amount of local capital and liquidity prepositioning can reduce the incentives for damaging and unpredictable seizures of resources by local regulators during times of stress—thus actually reducing the likelihood that improvised, beggar-thy-neighbor ring-fencing would frustrate completion of a successful SPOE resolution in the future... . The second point, however, is equally important: the best prepositioning structure is not an eternal verity mathematically deducible from first principles, but it is instead a practical balance designed to promote cooperation among humans, and any such balance is likely to be improvable with experience, reflection, and debate." FED is interested in views from the firms and the public on how the regimes can be improved. It expects to invite public comment on the living will guidance for U.S. and foreign firms in the near future. In addition, FED is weighing costs and benefits of the current approach of directing firms to determine the appropriate amount of prepositioned capital and liquidity. It is also considering whether formalizing resolution capital and liquidity requirements through a rulemaking process would improve the predictability and transparency of its approach.

Mr. Quarles added: "We continue to believe that the IHC [intermediate holding company] and attendant requirements are appropriate for foreign banks with large U.S. operations. However, in light of the experience with these structures, I believe we should consider whether the internal TLAC calibration for IHCs could be adjusted to reflect the practice of other regulators without adversely affecting resolvability and U.S. financial stability." The current calibration is at the top end of the scale set forth by FSB. Willingness by the United States to reconsider its calibration may prompt other jurisdictions to do the same, which could improve the prospects of successful resolution for both foreign G-SIBs operating in the United States and for U.S. G-SIBs operating abroad. Alternatively, it may be possible to streamline the elements of the resolution loss absorbency regime, which include both TLAC and long-term debt requirements. "I will be recommending to my colleagues that we look closely at these possibilities in the coming weeks and seek comment on ways to further improve this framework, " he emphasized.


Related Link: Speech

Keywords: Americas, US, Banking, Cross Border, Resolution Framework, G-SIB, TLAC, FED