Banks in the United States came under sharp criticism from regulators this week for the quality of “living wills” – plans designed to guide the orderly wind-up of a failing financial institution.
The strongly worded rebuke illustrated key differences between the U.S. financial services firms and Canada’s largest banks, whose chief regulator is “satisfied” with progress on living wills.
“To date we are satisfied with the contributions made, and the level of importance assigned to this issue by the institutions,” Canada’s Office of the Superintendent of Financial Institutions said in an emailed statement to the Financial Post.
OSFI’s assessment of the situation in Canada stands in sharp contrast to a statement this week about U.S. banks from Thomas M. Hoenig, vice-chairman of the U.S. Federal Deposit Insurance Corporation. He deemed the plans of the U.S. banks “deficient” and said that each “fails to convincingly demonstrate how, in failure, any one of these firms could overcome obstacles to entering bankruptcy without precipitating a financial crisis.”
In the Aug. 5 statement, Mr. Hoenig said the “living will” plans submitted by the large U.S. banks “provide no credible or clear path through bankruptcy that doesn’t require unrealistic assumptions and direct or indirect public support.”
The contrast between Canada and the United States can be explained in part by differences in the size and complexity of the banks. A large U.S. institution may have more business lines, a more complex legal structure, and it may operate in more jurisdictions.
But another key difference is the relationship between the financial institutions and regulators.
The relationship between OSFI and the Canadian banks has been described as collegial, while some observers in the United States noted that there was little to no discussion with U.S. financial institutions until the back-to-the-drawing-board bombshell from regulators this week. That’s despite the fact that the post-financial-crisis Dodd Frank Wall Street Reform Act has required U.S. banks to file living will plans since 2012.
Living wills for banks were one of the key measures introduced in the wake of the 2008 financial crisis to try to shore up the stability of the financial system.
“Living wills, among other resolution measures, can be an important element in resolving an institution in an orderly fashion in times of stress,” OSFI said in its statement to the Financial Post, adding that the regulator continues to work with the banks and regulatory partners including the Canadian Deposit Insurance Corporation.
Canada is also in the midst of creating a “bail-in” regime that would trigger the conversion of debt instruments into equity to support a failing bank. The aim of such a regime, which also contemplates the potential cancellation of existing bank shares, is to keep governments – and therefore taxpayers — from having to fund a bail-out in the unlikely event of a bank failure.
Federal financial minister Joe Oliver kicked off a six-week consultation on the proposed Canadian bail-in regime last week.
A bail-in regime in the United States has similar goals but is different from the Canadian proposal. In the event a U.S. bank was about to fail, debt at the bank’s holding company would be converted into equity in scaled-down operating subsidiaries.
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