Featured Product

    Randal Quarles of FED on Finding Balance in Cross-Border Resolution

    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

    Related Articles
    News

    BCBS Amends Capital Treatment of Non-Performing Loan Securitizations

    BCBS published a technical amendment to the capital treatment of securitizations of non-performing loans by banks.

    November 26, 2020 WebPage Regulatory News
    News

    BoE to Move Statistical Data Collection to BEEDs Portal

    BoE announced that the Data and Statistics Division is planning to move collection of statistical data to the BoE Electronic Data Submission (BEEDS) portal.

    November 25, 2020 WebPage Regulatory News
    News

    APRA Updates Reporting Standards and Guidance for EFS Data Collection

    APRA published the updated reporting standards and guidance for the collection of Economic and Financial Statistics (EFS), following a consultation process. Also published was a response letter to the feedback received on the proposal for amending the EFS reporting standards and guidance.

    November 24, 2020 WebPage Regulatory News
    News

    EC Consults on Criteria for Environmentally Sustainable Activities

    EC is consulting on a draft delegated regulation to supplement the Taxonomy Regulation (2020/852) by establishing the technical screening criteria for determining the conditions under which an economic activity qualifies as environmentally sustainable.

    November 20, 2020 WebPage Regulatory News
    News

    IFRS Examines Incorporation of Climate Risk Issues into IFRS Standards

    The IFRS Foundation published material highlighting the ways in which existing requirements in IFRS standards require companies to consider climate-related matters when their effect is material to the financial statements.

    November 20, 2020 WebPage Regulatory News
    News

    EBA Analyzes Impact of Unwind Mechanism of Liquidity Coverage Ratio

    EBA published a report analyzing the impact of the unwind mechanism of the liquidity coverage ratio (LCR) for a sample of European banks over a three-year period, from the end of 2016 to the first quarter of 2020.

    November 19, 2020 WebPage Regulatory News
    News

    ECB Outlines Views on Possible Changes to AnaCredit Rule and TLTROs

    In response to questions from a member of the European Parliament, the ECB President Christine Lagarde issued a letter clarifying the possibility of amending the AnaCredit Regulation and making targeted longer-term refinancing operations (TLTROs) dependent on the climate-related impact of bank loans.

    November 19, 2020 WebPage Regulatory News
    News

    IASB Begins First Phase of Post-Implementation Review of IFRS 9

    IASB started the post-implementation review of the classification and measurement requirements in IFRS 9 on financial instruments and added the review as a project to its work plan.

    November 18, 2020 WebPage Regulatory News
    News

    FSB Report Examines Progress in Resolvability of Systemic Institutions

    FSB published a report that examines progress in implementing policy measures to enhance the resolvability of systemically important financial institutions.

    November 18, 2020 WebPage Regulatory News
    News

    EBA Benchmarks National Insolvency Frameworks Across EU

    EBA published a report on the benchmarking of national loan enforcement frameworks across 27 EU member states, in response to the call for advice from EC.

    November 18, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 6162