Utilities, not buccaneers
16 Dec 09
HM Treasury’s latest paper on banking reform spells out the cost of the implicit guarantee that banks cannot be allowed to fail in the way other businesses fail
When the Government announced that “living wills” for investment banks would be among the reform measures introduced for the banking system, there was a degree of mystery over what that actually meant.
Now those questions have been partially answered with the publication this week of Establishing resolution arrangements for investment banks, a paper setting out what those measures will mean in practice.
The paper, launched by Treasury minister Lord Myners on Wednesday, sets out a requirement for banks to plan in detail to minimise the impact should they become insolvent, including building in contractual requirements for staff that will be valid even if the bank goes bust. They also include special provisions to protect insolvency practitioners, to make it possible for them to do what they need to do to act quickly and start unpicking the complex web of assets and liabilities that any collapsed financial institution leaves behind it.
Many of the detailed measures are fairly technical, but the message is clear: banks can no longer be seen as risk-taking enterprises that can be allowed to fail in the way that “normal” businesses fail. They are financial utilities, and if they become that is an issue not just for their creditors and staff, but also for the system as a whole.
The cost of the state’s implicit guarantee of protection is a tightening of the rules by which these institutions are regulated.
For more on the Treasury proposals see http://www.hm-treasury.gov.uk/press_121_09.htm