Ending Too-Big-To-Fail: Progress Since the Crisis, the Importance of Loss-Absorbing Capacity and the UK Approach to Resolution

Abstract

In 2008 the largest cross-border banks were too big to fail and had to be bailed out, inappropriately penalising taxpayers and rewarding bank investors. This paper reviews the major progress since then in seeking to end ‘too-big-to-fail’. This has involved several strands: the development of resolution regimes; the negotiation and agreement of cooperative resolution strategies for global systemically-important banks (G-SIBs); the identification of barriers to resolvability; and paving the way to removing those barriers. A crucial aspect of this is requiring all banks to have sufficient loss-absorbing capacity to ensure their orderly resolution. Following adoption by the G20 of the Financial Stability Board’s standard on total loss-absorbing capacity (TLAC), the UK authorities have recently published their policy on TLAC and its Bank Recovery and Resolution Directive equivalent Minimum Requirement for Own Funds and Eligible Liabilities (MREL)—the minimum requirement for own funds and eligible liabilities. The provisions link both the quantum and quality of TLAC or MREL resources to the preferred resolution strategy, whether that is bail-in, partial transfer or liquidation, on a case-by-case basis. This ensures that a one-size-fits-all approach is not taken to resolution of different types of bank. The UK rules also provide a degree of flexibility to UK banks in meeting their MRELs, both by specifying appropriate transitional arrangements and by making the final requirements subject to review by the UK authorities. This will take into account any changes to the UK regulatory environment in coming years and the actual experience of UK banks in raising loss-absorbing resources.