Martin Gruenberg, the chairman of the FDIC, and Paul Tucker Martin, the deputy governor for financial stability at the Bank of England, believe we must. They identify a path forward in the Financial Times:
Over the past year, the FDIC and the Bank of England, in conjunction with the prudential regulators in our jurisdictions, have been working to develop contingency plans for the failure of globally systemic banks that have core operations in both the US and UK. Of the world’s 28 GSifis, 12 are headquartered in the US or UK. Because many of these institutions have operations that are concentrated in our two jurisdictions, we have a shared interest in ensuring that, when such a business fails, it can be resolved at no cost to taxpayers and without placing the financial system at risk. Importantly, a shared strategy will help us to avoid working at cross purposes or being blind to each other’s plans.
Our joint paper outlines a strategy we believe can accomplish our objectives. Under the plan, the resolution authority will take control of the parent of the GSifi group, apportion losses to the company’s shareholders and unsecured debtholders and remove senior management. In all likelihood, the organisation’s shareholders would lose all value.
The unsecured debtholders can expect that their claims would be written down to reflect any losses that shareholders could not cover. Sound subsidiaries (domestic and foreign) would be kept open and operating, thereby limiting contagion effects and cross-border complications. In both countries, whether during execution of the resolution or thereafter, restructuring measures may be taken, especially in the parts of the business responsible for the group’s distress. Those businesses could be shrunk, broken into smaller entities, or certain operations could be liquidated or closed. A portion of the surviving unsecured debt would be converted into equity, where needed, to provide capital to support the process.