Still no escape for taxpayers if more major banks go bust

Huw Jones

Five years since the start of the financial crisis, taxpayers would still be forced to foot the bill should more banks fail because countries are delaying alternative solutions.

Finding a way to shut down big banks quickly without triggering market mayhem – the threat of which prompted governments around the world to resort to publicly-funded bailouts between 2007 and 2009 – remains a mammoth task.

Britain, Switzerland and the United States, frustrated by the slow pace of reform, have drawn up plans giving their local regulators power to step in if a major lender goes bust. But they still need a global deal to give those same powers to regulators worldwide if the laws are to be effective.

The UK published its plans this month, hoping to get other countries moving and draw lessons from the collapse of US bank Lehman Brothers in September 2008, the impact of which is still being felt.

“The UK may have set the pace, but not all countries seem to be following the same schedule,” said Steven Hall, a partner at KPMG.

Similarly concerned by such slow progress the Financial Stability Board has launched a public review of how far G20 countries have come in implementing new so-called resolution laws, ten months after it listed the powers they must give to their financial regulators.

Few countries have implemented new legislation so far.

The next few weeks are crucial if this bank reform is to stay on the agenda.

The FSB has ordered G20 countries to outline by September their strategies for winding down their top banks without state aid if they hit terminal trouble.

Then in December 29 top banks identified by the FSB must submit “living wills” to show how they would cope with a big market shock without taxpayer help.

Officials are not confident, however, that the first deadline will be met. If deadlines are missed, the financial markets are likely to react in adverse fashion to news that many major banks are still not bomb-proof.

National financial regulators have set up crisis management groups for 24 of the 29 biggest banks, but the FSB has warned that more work is needed on resolution plans and cross-border supervisory cooperation. Finance industry officials doubt that big banks in many countries can fully meet the December FSB deadline for their living wills.

Britain forced its six biggest banks, HSBC, Barclays, RBS, Lloyds, Standard Chartered and the UK arm of Spain’s Santander to submit their living wills in June.

Most EU countries put their individual plans for dealing with failed banks on hold after proposing just one cross-border law to deal with all the banks in the zone.

That law has still not been approved.

There are clashes in particular over how bondholders in a bank should suffer losses.