Actividad permanente y actividad misional permanente

Under this model, cross-border SIFIs would be subject to a single common process for resolution, including bankruptcy. The SIFIs would be chartered by their home country regulator or supervisor, with home country defi ned as the country in which the SIFI is headquartered. The home country regulator would be in charge of supervision in the standard ways, including through remedial actions.

If a bankruptcy of the SIFI occurs, recoveries of any and all world-wide assets would be available for distribution to stakeholders according to the home country’s set of priorities.93 _{All creditors of the same class, wherever located,}

would be treated equally, pursuant to the same home country rules governing the ranking of creditor classes, that is, no distinction would be made in the treatment of claims regarding the jurisdiction in which assets or liabilities are located. Thus, the resolution could focus on maximizing value globally and would not be distracted by the costly and time-consuming disentangling of multiple intra- group relationships and claims.

For the universal approach to work, all national rules for resolution and insolvency as well as associated processes would have to recognize the universality principle.94 _{This means that countries would recognize the extra-territorial effect}

of proceedings initiated abroad. Depositor preferences and ring-fencing assets would be ruled out, and no one would be able to bring suit in the host country once a bankruptcy is fi led in the home country.

The resolution itself could be undertaken through specialized court procedures or through the resolution authority or supervisor in the home country (as discussed in Chapter 4). The presumption is that a resolution authority takes the lead in the process. Under this model, the home country regulator would control the SIFI resolution process for all of the SIFI’s entities at home and abroad. It is also assumed that the home country organizes a rescue and bears its costs.

There can be several problems with the home country regulator controlling the resolution process, however. Perhaps most importantly, the home country may not fully take the interests of other countries into account when intervening or resolving. The home country regulator is, after all, only responsible to the home country taxpayers and may not necessarily provide support for host country entities when there is limited impact on the home country. Indeed, home country taxpayers may object to assisting foreign creditors, particularly if the causes of the crisis relate to events outside their jurisdiction (e.g., consider a large subsidiary going bankrupt because the local government defaults on its obligations). Furthermore, the fi nancing and potential costs could exceed the

93 This does not preclude the bankruptcy of subsidiaries on a local basis as long as that does not affect the SIFI as a group on a material basis. Obviously, this can involve a large degree of judgment, but the point is that the resolution is not limited to home activities and all branches, but does need to consider subsidiaries as they can be material to the SIFI as a whole.

94 Under universality, other national rules for resolution and insolvency (in terms of triggers, repayment priorities, treatment of inter-affi liate claims, right of set-off, time to repay liquid claims) or the effi ciency of judicial systems would not need to be similar. Actually, in theory, there might a benefi t to some competition among legal systems. Financial institutions could choose their HQ location according to what they consider the most attractive legal and judicial system. Furthermore, they even choose to have their claims follow a certain legal system, even when their HQ location remains somewhere else (see Wallison, 2010). The key is that once a resolution of the SIFI is triggered, worldwide assets are available for the resolution.

home country’s capacity and fi scal resources (‘too big to save’); Iceland is a good example. Also, the home authorities may lack the capacity and resources to detect problems arising in foreign jurisdictions that may threaten a fi rm’s viability.

Meanwhile, host countries may be reluctant to rely on home country authorities for regulation, nor will they want to defer to them for resolution if this implies that the host country’s creditors will be treated less favourably than they would be in a territorial proceeding. They may also be concerned that as foreign creditors they would receive less favourable treatment than similarly situated domestic creditors in the home jurisdiction (Group of Ten Contact Group, 2002). This reluctance would be heightened in cases where the local operations of the foreign entity are of systemic importance. The operation as a single entity may also make it more diffi cult to carry out a resolution that seeks to separate and continue operating critical, systemically important functions when other non- essential businesses are wound down (Hüpkes, 2005).

Consequently, under the universal model, there will be a need for predetermined policies or agreements regarding the sharing of burdens if a SIFI needs to be resolved. This is clear for one of the more typical resolution events – when temporary bridge fi nancing is needed. Burden sharing requires clarifying who is responsible for organizing and providing this fi nancing while being exposed to potential losses. (Note that the specifi c amounts to be provided can still be determined on a case-by-case basis.)

Given the size of a typical SIFI, such fi nancing needs could be large and the regulator or other party would need to have access to fi scal backup from various governments. Since losses may arise, the arrangement also needs to specify ex ante how these losses will be allocated. Furthermore, any agreement would have to be consistent with the application on a cross-border basis of national deposit insurance/guarantee schemes and ‘resolution’ funds.

Various models for organizing this fi nancing and burden-sharing will be presented later. But the key to avoiding coordination issues is to specify how these matters are to be handled ex ante rather than to improvise ex post – as has generally happened in the recent fi nancial crisis. This ex ante agreement can offer the additional benefi t: the countries involved have greater incentives to make sure that each supervisor makes an adequate investment in order to minimize the possibility that a SIFI would get into diffi culties because the fi nancing and fi nal costs would be shared by all.

Balanced against this advantage is the risk of free-riding by some supervisors since the burden sharing is pooled. As a general proposition, however, having clarity on the resources potentially at risk increases accountability and fosters incentives to assign responsibilities more clearly. This can enhance incentives to critically evaluate home and host country regulation and supervision, increase cooperation, including better information sharing, and reduce overall risks and costs.

The SIFI’s organizational structure that fi ts most naturally with this universal approach is a single entity, that is, a SIFI incorporated in one jurisdiction and operating a global network composed of branch offi ces. Its integration facilitates dealing with stress because it would permit liquidity to fl ow freely from one

Resolution in an International Context

location to another. Moreover, the home country authorities license, supervise and regulate the global business of the fi nancial fi rm; that means the home central bank is responsible for providing liquidity assistance and the home resolution authority would take the lead in resolving it down if necessary.