EU bank-failure bill may hinder too-big-to-fail fix, says BoE

LONDON: The Bank of England (BoE) took aim at a European Union plan to boost supervisors’ powers to stop cash leaving ailing lenders, adding its weight to mounting criticism of a bill intended to make sure big banks can be wound down without wreaking havoc on the economy.

The BoE warned of “very serious consequences” if lawmakers adopt an EU bill that sets out a five-day moratorium on payments from failed banks in the process of restructuring.

The stay is out of sync with an existing industry agreement that stops banks from winding up derivatives contracts with a struggling firm for two days, according to a BoE working paper seen by Bloomberg News.

Industry groups are stepping up their lobbying campaign against the plan before lawmakers in Brussels return to work after the summer break.

The Association for Financial Markets in Europe (AFME), whose members include Barclays Bank Plc and Deutsche Bank AG, said the proposed powers would disrupt markets and compound the woes of targeted firms.

The proposal “would undermine the objectives of resolution, it endangers financial stability and increases contagion risk,” Charlie Bannister, manager for recovery and resolution at AFME, said in an interview. “It challenges the effectiveness of existing powers and would be a backward step.”

The need to prevent counterparties from racing for the door when a financial firm gets into trouble was highlighted by the messy bankruptcy of Lehman Brothers Holdings Inc in 2008, which contributed to a broader crisis in credit markets. In response, the industry agreed to rewrite standard financial contracts to allow certain securities and funding contracts to remain intact for as long as 48 hours after a bank fails.

In its July 10 paper, the BoE said the proposed moratorium in resolution conflicted with existing market protocols, and this “threatens the international progress to address the risk of cross-border termination of contracts and could leave EU firms at a competitive disadvantage.”

The protocols developed by the International Swaps and Derivatives Association are a voluntary mechanism for the world’s biggest banks to recognise each other’s payment-stay rules.

They also include an opt-out provision in case those rules are changed to lengthen the stay. The EU’s moratorium plan “would likely trigger this opt-out right,” the BoE said.

“This would be a step backwards in terms of resolvability and undermine the progress made towards addressing one of the main barriers to cross-border resolution,” according to the BoE. — Bloomberg