of FIs with cross-border operations. It considers:
- ways in which resolution actions can be coordinated cross-border;
- information sharing for the purposes of resolution.
Challenges of cross-border coordination
318. The decades preceding the global financial crisis saw a rapid growth in the globalisation of finance. Cross-border capital flows increased significantly and global FIs expanded their operations in, and thereby helped to create interdependencies between, growing numbers of jurisdictions. Legal and policy frameworks capable of supporting the resolution of FIs whose failure might pose significant risks to financial stability in multiple jurisdictions did not develop at the same pace. Processes for dealing with failing FIs remained very much national, rather than international, concerns.
319. When a number of cross-border FIs failed in the last financial crisis, it became clear that there were significant obstacles to resolving them in a manner which protected financial stability across the various jurisdictions affected. Most lacked resolution regimes with the scope or powers necessary to resolve large and complex FIs, even where their operations were predominantly domestic. The challenges of resolving cross-border entities were greater still given that any existing powers had only domestic reach and little time had been spent considering whether and how home and key host authorities could coordinate and cooperate in deploying their respective powers to stabilise the constituent parts of a cross-border group.138 As a result, some home authorities found themselves rescuing entire cross-border groups at substantial cost to their own taxpayers. In other cases, home authorities acted to stabilise only the local operations of a group, regardless of the effect on financial stability in host jurisdictions.
138 A review of obstacles to effective coordination in the resolution of cross-border banking groups can be found in the Basel Committee on Banking Supervision (March 2010) “Report and Recommendations of the Cross-border Bank Resolution Group”, http://www.bis.org/publ/bcbs169.htm
320. In the light of this experience, there is now a greater degree of consensus that the coordinated and cooperative resolution of a cross-border FI has the potential to better protect financial stability across home and host jurisdictions. Resolution planning work being carried out internationally to identify and agree approaches to resolution (or “resolution strategies”) for G-SIFIs, as required under the Key Attributes, suggests that such approaches could result in a significant share of a failing group’s activities being restored to a “going concern”; an outcome which could better preserve critical financial services and financial stability across multiple jurisdictions and preserve, rather than destroy, value. (The types of strategies being considered are summarised in Box I below).
321. An alternative model, where in a crisis home and host authorities take unilateral action designed to protect their own domestic interests, (including by ring-fencing local assets within each of their jurisdictions), has the potential to descend into a
“run” on the group. This would likely precipitate a disorderly break-up and value destruction as significant parts of the business could become very much a “gone concern”. Furthermore, if prospects for a coordinated and cooperative solution appear low in advance of any actual failure, it is now much more likely that home, and some host, jurisdictions will seek to set prudential requirements designed to better protect their national interest in the event that a cross-border group fails.
Requirements, for example, on global FIs to hold significantly more liquidity and capital in each jurisdiction would increase the costs of operating cross-border with potentially significant implications for economic development and growth.
Box I: Resolution strategies
Two (stylised) approaches to resolution are emerging from resolution planning work being carried out for each of the G-SIBs (as required under the Key Attributes). 139
Under a “single point of entry” (SPE) approach, cross-border groups operating in a highly integrated manner might be resolved by a single resolution authority, probably in the home country, exercising powers in relation to the holding or parent company. Losses across the group could be absorbed and the group recapitalised through, for example, the write-down and bail-in of liabilities issued by a holding or parent company. If sufficient loss
139 See Footnote 87 for reference.
absorbency is available, operating subsidiaries could continue as going concerns securing continuity for most, if not all, of the group.
Under a “multiple point of entry” (MPE) approach, FIs with a decentralised structure (i.e.
subgroups of relatively independent, separately capitalised and funded subsidiaries) might be resolved through resolution actions taken by two or more resolution authorities. This would likely result in the group being split on national, regional or functional lines. The options deployed in relation to the separate parts of the group could differ, with any combination of resolution options being deployed to achieve stabilisation or winding-up.
322. To avoid the sort of disorderly and costly break-up outlined in paragraph 321, the Key Attributes require that regimes encourage and support coordinated and cooperative approaches to resolution in a number of ways. The Preamble says that
“[i]n order to facilitate the coordinated resolution of firms active in multiple countries, jurisdictions should seek convergence of their resolution regimes through the legislative changes needed to incorporate the tools and powers set out in these Key Attributes into their national regimes”. In other words, by ensuring that each national regime meets the same common standards, the deployment of common resolution tools in a coordinated manner should be feasible. Beyond this, Key Attribute 7.1 says that “[t]he statutory mandate of a resolution authority should empower and strongly encourage the authority wherever possible to act to achieve a cooperative solution with foreign resolution authorities”. Furthermore, Key Attribute 7.5 says that “[j]urisdictions should provide for transparent and expedited processes to give effect to foreign resolution measures”.
323. At the same time the importance of “reserving the right of discretionary national action if necessary to achieve domestic stability in the absence of effective international cooperation and information sharing” is recognised (Key Attribute 7.2). Whilst implementation of the Key Attributes should significantly improve the prospects for coordinated and cooperative cross-border action, there can be no guarantee that this will be forthcoming and workable in each and every situation.
It may continue to be the case that individual jurisdictions lack the mandate, powers or incentives necessary to cooperate with their peers. Or the circumstances of a particular failure may be such that a coordinated resolution strategy, even one identified and agreed upon in advance, turns out not to be executable in practice.
324. In addition to requiring that member jurisdictions implement these aspects of the Key Attributes, the FSB has acknowledged a need to develop policy proposals “on how legal certainty in cross-border resolution can be further enhanced”; something it intends to do during 2014.140 The results of this work will be taken into account in further refining the proposals for the Hong Kong regime, but set out below are some of the ways in which it appears that the local resolution regime could encourage and support coordinated resolution action where it is in the interests of Hong Kong to do so (whilst at the same time retaining flexibility for the resolution authority to take national action to safeguard the local interest where appropriate).
It is noted that the resolution authority in Hong Kong will be acting as a host authority in a majority of these cases, given that a significant number of local FIs are subsidiaries or branches of foreign firms.
Supporting a coordinated approach to cross-border resolution
325. As required by the Key Attributes, and proposed in this consultation paper, it is intended that the resolution regime for Hong Kong should meet the same common standards that other home and host jurisdictions are in the process of implementing.
It is recognised that a coordinated approach to the resolution of a cross-border financial services group is only likely to be achievable where home and key host authorities ensure that all relevant FIs in each jurisdiction are within the scope of their resolution regimes with a full and comparable menu of resolution options and powers.
326. In a significant number of cases resolution planning is likely to confirm that G-SIFIs might best be resolved by means of an SPE approach to resolution, designed to stabilise most or all of the group’s global activities (see Box I above). It appears that in such cases, the home resolution authority will rely on the resolution authority in Hong Kong being able to exercise powers available under the local resolution regime in a manner that supports and gives effect to resolution being carried out at the group-level. This may be necessary, for example, to effectively enable the transfer of an entire FI, or some or all of its business, to a third party or bridge institution, where the business being transferred includes some combination
140 See Footnote 5 for reference.
of instruments of ownership, assets and liabilities and/or rights and obligations located in Hong Kong.
327. Absent an ability to make use of the local resolution regime to recognise and give effect to the actions of a home resolution authority, it may not be possible for the Hong Kong entities to be included in the group wide resolution designed to stabilise a cross-border group. Furthermore, the entry of a foreign parent company into a resolution process could trigger competing legal action in Hong Kong or the exercise of early termination, or cross-default, rights on a significant scale;
something the local resolution authority would be unable to stay or resist. So whilst a group-level resolution could stabilise the majority of the cross-border group, there is a risk that the Hong Kong entities might instead enter a local liquidation process, which is likely to be unnecessarily value destructive.
Furthermore, and as noted in paragraph 321, if a resolution regime in a host jurisdiction cannot be reliably deployed to support group-level resolution, some cross-border groups may begin to make, and home authorities might require, ring-fencing well in advance of any failure. Ultimately, there is a very real risk that this could mean that some groups reduce their footprint in such host jurisdictions pre-emptively.
328. The importance of being able to deploy the local resolution regime to support and give effect to a group-wide resolution is clear. However, it is clearly essential that any decision to use the local regime in this way should be contingent on an assessment, during the resolution planning phase and at the point of resolution, that a group-wide resolution is likely to deliver outcomes that are consistent with the objectives set for resolution locally (as outlined in Box F, Chapter 5).
329. Additionally, it would appear appropriate that before deciding to support resolution being carried out by a home resolution authority, the resolution authority in Hong Kong should be satisfied that local creditors will not be disadvantaged. This recognises that the legal frameworks in some foreign jurisdictions continue to give preference to creditors (including depositors, policyholders and other creditors) with local claims. This is not consistent with Key Attribute 7.4 which says that
“[n]ational laws and regulations should not discriminate against creditors on the basis of their nationality, the location of their claim or the jurisdiction where it is payable”.
330. In order to ensure that the local resolution regime could be used to support resolution conducted by a home resolution authority in all likely scenarios, provision may be needed for the local regime to be initiated where either one or both of the conditions proposed for initiating resolution of the group’s local entities (as outlined in Box D, Chapter 5) are not met locally. This may occur in cases where the local entities of the cross-border group appear viable and/or are assessed not to be systemically important or critical in Hong Kong.
331. As the conditions outlined in Box D, Chapter 5 would not be directly applicable, it is additionally proposed that the local resolution authority should be able to use the local resolution regime in cases where:
- a home resolution authority is initiating resolution in relation to a cross-border group whose Hong Kong operations are within the scope of the local regime; and - it is assessed, by the resolution authority in Hong Kong, that the approach to
resolution which the home authority proposes to adopt will deliver outcomes that are consistent with the objectives for resolution and will not disadvantage local creditors relative to foreign creditors.
332. In cases where the resolution authority in Hong Kong is not satisfied that the group-wide resolution will meet the conditions in paragraph 331, but subject to the conditions outlined in Box D, Chapter 5 being met locally, it is clearly important that the resolution authority in Hong Kong retains the flexibility to deploy the powers available under the local regime to carry out resolution of the entities in Hong Kong directly. In line with the scope of the regime proposed in Chapter 4, the resolution authority would be able to act in relation to both locally-incorporated FIs and the branches of foreign FIs. It is proposed that guidance on use of the regime would note that where the local resolution authority plans to take
“discretionary national action” in relation to the branch of a foreign FI, that “it should give prior notification and consult the foreign home authority” in line with Key Attribute 7.3.
333. In order to meet the requirements set by the Key Attribute 7.1 (outlined in paragraph 322), it proposed that the mandate for the local resolution authority should expressly permit and encourage cooperation with foreign counterparts on resolution matters. Additionally, consideration is being given as to whether, in line
with Key Attribute 2.3 (see paragraph 186), the resolution authority should be given an objective (or a function) to consider the potential impact of its resolution actions on financial stability in other jurisdictions. Such considerations would be relevant in cases where the resolution authority in Hong Kong is acting to support resolution being carried out by a home resolution authority as well as where it takes measures on its own initiative to protect local financial stability. It is not intended that this should result in the discretion of the local resolution authority to act in the domestic interest being restricted in any way. (Nor is it intended that it should place any undue burden on the local resolution authority in assessing the impact of its actions overseas).
334. The FSB identified in its Thematic Review on Resolution Regimes that “national legal frameworks for cross-border cooperation in resolution are, overall, less well-developed across all sectors than other areas of the KAs” and that “in most FSB jurisdictions, there are few or no relevant statutory provisions for coordination and cooperation for the effective resolution of cross-border firms”. Progress is gradually being made in addressing these gaps, however, and amongst the selected jurisdictions, the regimes in both Singapore and Switzerland provide for the resolution authority to support and give effect to resolution actions taken by foreign resolution authorities. It is anticipated that the EU RRD will require that all member states make provision for their domestic regimes to be used to recognise and enforce the actions of the resolution authorities in third countries where such actions support the objectives set for resolution under the RRD in the EU member state locally. It is noted, however, that it is expected that EU member states would only be mandated to consider the impact of their resolution actions on financial stability in other member states. Other jurisdictions are likely to strengthen these cross-border arrangements also, given that group-level resolution planning is identifying inadequate provision in this regard as an obstacle to the orderly resolution of cross-border FIs.
Question 32
Do you agree that it is important that the resolution regime in Hong Kong supports, and is seen to support, cooperative and coordinated approaches to the resolution of cross-border groups given Hong Kong’s status as a major financial centre playing host to a significant number of global financial services groups?
Question 33
Do you agree that the model outlined in paragraphs 331 to 333 to support and give effect to resolution actions being carried out by a foreign home resolution authority would be effective in supporting coordinated approaches to resolution where it is in the interests of Hong Kong to do so?
Information sharing
335. In order both to plan for, and carry out, the resolution of an FI which operates across multiple sectors of the local financial system or in a number of different jurisdictions, it is essential that all of the authorities with a role to play in resolution are able to exchange relevant information in a timely manner. Much of the relevant information to be shared will be non-public relating to individual FIs (and in some cases their customers) as well as the actions which might be taken by the FIs themselves or by the relevant authorities in resolution scenarios. It is also important, therefore, that receiving authorities should be subject to appropriate safeguards to protect the confidentiality of the shared information.
336. Legal obstacles to effective information sharing for the purposes of resolution are often greater in a cross-border context. Whilst existing legal gateways for information sharing between regulators may support information sharing for supervisory purposes, they may not extend to resolution. Commonly, as yet, the conduct of resolution functions is not specified as a ground for information sharing, nor are resolution authorities specifically named as parties with whom non-public information can be shared. This can present obstacles not only in cases where an authority other than a supervisor is designated as the resolution authority in a jurisdiction (which as noted in Chapter 5 may occur) but also because it does not support information sharing with the wider set of authorities who may have a role to play in resolution. These parties would include central banks, finance ministries and public authorities managing resolution funds or protection schemes.
337. Constraints on timely information sharing in both normal times and times of crisis, may jeopardise the ability of the relevant authorities to take coordinated actions which could lead to better outcomes for all concerned. Indeed, the prospects for unilateral action, of the sort described in paragraph 321 above, are likely to be greater in cases where the necessary information sharing does not occur.
Recognising its fundamental importance, the Key Attributes are supplemented by a set of Principles on information sharing for resolution purposes. These Principles outline the need for legal gateways, designed to support resolution, to be established subject to adequate confidentiality arrangements being in place.141 338. The approach adopted in the Principles has broad similarities to the existing
framework governing information sharing by the regulatory authorities in Hong Kong under their respective ordinances. The similarities include the promotion of legal gateways for information sharing by reference to the functions performed by the recipients; the imposition of conditions by reference to the confidentiality obligations governing recipients; and the protection from liability of those
framework governing information sharing by the regulatory authorities in Hong Kong under their respective ordinances. The similarities include the promotion of legal gateways for information sharing by reference to the functions performed by the recipients; the imposition of conditions by reference to the confidentiality obligations governing recipients; and the protection from liability of those