By:Breakingviews.com
Posted by: Lily Mei
If any element of the global banking crackdown is vulnerable to being kicked into the long grass, it is “living wills.” The idea is for banks to create contingency plans for safely dismantling themselves if they were to fail in a crisis. It is a difficult project and some leaders, including Britain’s chancellor of the Exchequer, Alistair Darling, want work to start sooner rather than later.
In theory, living wills would minimize systemic risk by providing central banks with a road map for supporting, nationalizing or abandoning problem institutions, or parts of them, especially if they have operations all over the world. When Lehman Brothers collapsed, for instance, it was impossible to transfer some essentially healthy businesses to new owners. There were too many legal entities in different countries. A clearer and simpler legal structure could have reduced the pain.
Global banks need to have a fragmented anatomy to be capable of being broken up easily. But as things stand, they are so complex that any attempt at dismantling them would be like unscrambling an egg. The complications largely results from structures designed to minimize tax. But while an increase in the tax revenue from banks would be an indirect bonus of living wills for governments, it shouldn’t be the government’s sole reason to allow them.
In practical terms, the goal should be for many banks to look more like HSBC. The lender’s major subsidiaries are all incorporated entities, with their own capital bases and balance sheets. At the moment, most banks look more like Barclays. A single firm dealing with the bank might have contractual arrangements with a dozen or more legal entities in several jurisdictions, but capital is held at group level.
The shift would require many lenders to undergo substantial legal reorganization. This could take more than five years, say bankers.. There is also a risk that if living wills are transparent or easily deduced, banks could become the target of mischief from, say, hedge funds.
But these aren’t reasons to defer work on living wills.
In theory, living wills would minimize systemic risk by providing central banks with a road map for supporting, nationalizing or abandoning problem institutions, or parts of them, especially if they have operations all over the world. When Lehman Brothers collapsed, for instance, it was impossible to transfer some essentially healthy businesses to new owners. There were too many legal entities in different countries. A clearer and simpler legal structure could have reduced the pain.
Global banks need to have a fragmented anatomy to be capable of being broken up easily. But as things stand, they are so complex that any attempt at dismantling them would be like unscrambling an egg. The complications largely results from structures designed to minimize tax. But while an increase in the tax revenue from banks would be an indirect bonus of living wills for governments, it shouldn’t be the government’s sole reason to allow them.
In practical terms, the goal should be for many banks to look more like HSBC. The lender’s major subsidiaries are all incorporated entities, with their own capital bases and balance sheets. At the moment, most banks look more like Barclays. A single firm dealing with the bank might have contractual arrangements with a dozen or more legal entities in several jurisdictions, but capital is held at group level.
The shift would require many lenders to undergo substantial legal reorganization. This could take more than five years, say bankers.. There is also a risk that if living wills are transparent or easily deduced, banks could become the target of mischief from, say, hedge funds.
But these aren’t reasons to defer work on living wills.
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