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The borders of bank failures

By David McMillin · Bankrate.com
Friday, December 14, 2012
Posted: 4 pm ET

Think banks are too big to fail? Think again.

In a joint letter published in The Financial Times from Martin Gruenberg, FDIC Chairman, and Paul Tucker, deputy governor for financial stability of the Bank of England, the two financial leaders write that "the 'too big to fail' problem must be cured." In a first step to developing a remedy, regulators from the two countries have been working together to outline how to deal with big banks that operate in both the United States and the United Kingdom. It's a collaborative effort that will guide the resolution process in the event that any "globally active, systemically important financial institution" fails.

Those resolution plans would not include one very important piece: taxpayer money. Instead, regulators would have the ability to fire executives and force shareholders to bear the losses. The plans seem to be a clear signal to banking executives that no institution, regardless of size, is immune from failure. It's also a clear signal that anyone invested in the institution will feel the repercussions. A white paper from the two regulating agencies clearly states that "in all likelihood, shareholders would lose all value."

Learning from the past

In the paper, the two countries readily admit that their lack of preparation for a worst-case scenario contributed to the challenges of dealing with big banks with problematic balance sheets.

"The financial crisis that began in late 2007 highlighted the shortcomings of the arrangements for handling the failure of large financial institutions that were in place on either side of the Atlantic," the paper states.

Crossing more borders

The US-UK partnership seems to be a strong first step in preventing chaos if one of the mega-banks does fail in the future. Still, I think we'll need to see regulators from a wide range of countries band together in order to prevent an international fallout. The biggest banks have operations everywhere.

What do you think of the international partnership for preventing bank failures? Should US regulators work to partner with other countries to keep the global banking industry healthy?

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