Financial Stability Board high level objectives versus Open Bank Resolution framework

1 November 2012

The Financial Stability Board (FSB) issued a paper on the "Key Attributes of Effective Resolution Regimes for Financial Institutions" in October 2011 setting out the core elements deemed necessary for an effective resolution regime. The paper presented the objectives and essential features that resolution regimes should have, focused mainly on the powers necessary to effect prompt and orderly resolution. A key focus of the paper is on the resolvability of large and complex systematically important institutions.

The Reserve Bank has assessed the New Zealand crisis management and resolution regime, and in particular the Open Bank Resolution (OBR) policy, against the key attributes identified by the FSB. The following table provides a high-level comparison of the OBR framework against the FSB objectives, and demonstrates a high degree of alignment with proposed model. The Reserve Bank will publish a more detailed assessment in due course.

FSB objective

NZ OBR framework

Alignment

Ensure continuity of systemically important financial services, and payment, clearing and settlement functions.

The core of the failed bank will be kept intact, re-opened for business the next day, with continued access to the payments system

Aligned

Protect, where applicable and in coordination with the relevant insurance schemes and arrangements, such depositors, insurance policy holders and investors as are covered by such schemes and arrangements, and ensure rapid return of segregated assets.

Depositors are exposed to losses once shareholders and subordinated creditors funds are exhausted. Access to available funds the day after failure.

There is no depositor preference or insurance in New Zealand.

Not applicable

Allocate losses to firm owners (shareholders) and unsecured and uninsured creditors in a manner that respects the hierarchy of claims.

OBR allocates losses according to legal ranking. Shareholders and subordinated creditors bear first loss. Unsecured creditors treated pari passu.

Aligned

Not rely on public solvency support and not create an expectation that such support will be available.

OBR freezes conservative proportion of liabilities with excess returned later if not required to cover losses. Government guarantees initial unfrozen portion. Government solvency support only if initial freeze is insufficient.

Substantially aligned

Avoid unnecessary destruction of value, and therefore seek to minimise the overall cost of resolution in home and host jurisdictions and, where consistent with other objectives, losses for creditors.

Bank continues to operate preserving business and core of the bank intact to preserve exit options. RBNZ has legal responsibility to have regard to impact on Australian financial system.

Substantially aligned

Provide for speed and transparency and as much predictability as possible through legal and procedural clarity and advanced planning for orderly resolution.

Clear framework set out in existing legislation. Systems are being pre-positioned to ensure process is timely and orderly.

Aligned

Provide a mandate in law for cooperation, information exchange and coordination domestically and with relevant foreign resolution authorities before and during a resolution.

Existing legislation contains all necessary provisions to share/require provision of relevant information with/to overseas authorities.

Aligned

Ensure that non-viable firms can exit the market in an orderly way.

Existing legislation contains powers to restructure, sell or liquidate a failed bank. Liquidity provisions available to ensure timely payout where required.

Aligned

Be credible, and thereby enhance market discipline and provide incentives for market-based solutions.

Significant investment by banks and RBNZ to pre-position. Strong public support from the government.

Aligned