Managing Financial Failure in an Evolving Economic and Financial Environment

Large and complex financial institutions (LCFIs) create a significant challenge for the international regulatory community. Their complex group structures often consist of multiple legal entities operating in a variety of different jurisdictions. The close linkages among business areas within an LCFI increase the risks of contagion both from one business area to another and across jurisdictions. For these reasons it is urgent to develop effective measures that can be applied across the relevant jurisdictions to address the risk that their size and complexity will make them “too big to fail”. Three types of action are needed. They are all based on the presumption that it is unrealistic to expect the creation of a global regulatory authority or an international insolvency framework in the foreseeable future. The first type of action is to ensure that national authorities have the necessary powers to cope with a crisis in an LCFI operating in their jurisdiction and that they have effective means to cooperate with their counterparts in other jurisdictions. The second type of action is to ensure that insolvency procedures for groups of companies in all the relevant jurisdictions are mutually consistent and operationally compatible. Finally, it is important that corporate structures correspond to economic reality. Regulators need to establish clear rules on the use of the corporate form. The three types of action are complementary. In the absence of predefined modes for cross-border coordination, authorities may put greater weight on having legal form and function closely aligned so that the applicable resolution procedures in a crisis are clear and predicable. Where there is a high degree of cooperation, attention to corporate form may be less important