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From: Bank Resolution and Crisis Management: Law and Practice
Simon Gleeson, Randall Guynn

Part III Single Resolution and the BRRD, 13 The Architecture of the Brrd—a UK Perspective »

Simon Gleeson
From: European Banking Union (2nd Edition)
Edited By: Danny Busch, Guido Ferrarini
The UK was one of the few EU countries to have a fully developed bank resolution legislative scheme in place prior to the Bank Resolution and Recovery Directive (‘BRRD’), and the architecture of the BRRD owes much to the UK model. However, the process of implementing the BRRD approach in the UK created challenges which highlighted the underlying policy choices within the BRRD, and demonstrated that the underlying model of the structure of resolution within the BRRD is very different from that assumed in the UK (and, in passing, the US). It also demonstrated that the BRRD is to some extent intended to operate in tandem with the Single Resolution Mechanism (‘SRM’) as well as EU State Aid guidelines; this is particularly clear when it comes to issues such as the establishment and operation of resolution funds and the conduct of bail-in. The chapter explores these issues, seeks to identify the extent to which the BRRD and the UK statutory approaches are compatible, and uses incompatibilities to identify the underlying intellectual architecture of the BRRD structure. Finally, the onset of Brexit presents a new set of challenges for both UK and EU resolution authorities, and the chapter examines the extent to which these may be significant in the future.

Part I The Elements of Bank Financial Supervision, 5 Bank Capital Requirements »

From: Gleeson on the International Regulation of Banking (3rd Edition)
Simon Gleeson
This chapter begins by discussing the three overlapping capital requirements that banks are subject to. The first is the orthodox Basel capital requirement. The second is the Leverage Ratio, which is simply a non-risk-weighted capital requirement. The third is the stress test requirement. This has historically been the largest of the three. Stress testing identifies a particular probable state of the world, estimates the total loss which would occur if that state of the world were to eventuate, and requires capital sufficient to ensure that the bank retains sufficient capital after suffering the projected losses. The remainder of the chapter covers Pillar 2 assessment, capital floor, and capital buffers.

Part I Elements of Bank Resolution Regimes, 3 Bank Resolution and Bank Groups »

From: Bank Resolution and Crisis Management: Law and Practice
Simon Gleeson, Randall Guynn
This chapter looks at how the structure of bank groups is factored into the resolution process. In analysing the resolution of banks and other legal entities, a focus on the legal entities alone is a form of false consciousness. Instead, the focus needs to be on resolving the overall financial enterprise of which the bank is a part. By focusing on resolving groups instead of individual legal entities, financial regulatory authorities around the world have developed the single-point-of-entry (SPE) resolution strategy, which has been widely accepted as the most promising solution to the too-big-to-fail problem. When applied to a banking group with a holding company at the top and operating subsidiaries at the bottom, only the top-tier holding company would be put into a bankruptcy or resolution proceeding. The holding company’s assets would then be used to recapitalize the operating subsidiaries, perhaps pursuant to secured capital contribution agreements, and keep them out of their own insolvency or resolution proceedings. The recapitalized group would then be stabilized and its residual value distributed to the failed holding company's stakeholders in satisfaction of their claims.

Bank Resolution and Crisis Management: Law and Practice »

Simon Gleeson, Randall Guynn

Part I Elements of Bank Resolution Regimes, 2 Bank Resolution Techniques »

From: Bank Resolution and Crisis Management: Law and Practice
Simon Gleeson, Randall Guynn
This chapter discusses the available ‘toolkits’—or mechanisms—for resolving all types of banks and their affiliates, with the caveat that such tools can only be implemented on a case-by-case basis. In order to demonstrate the coverage of these methods, the hierarchy of approaches to bank failure is as follows: sale of the business by the purchase of assets and the assumption of liabilities (i.e. a purchase and assumption transaction), write-down or conversion of long-term unsecured debt into equity (bail-in), liquidation, and state aid (bail-out). Additionally, the normal state of resolution for a business in the commercial world is a restructuring in which creditors consent to a variation in their rights in order to maximize the residual value of an insolvent commercial company for the collective benefit of all its stakeholders and preserve its critical operations for the benefit of the broader market—a method that should be adapted for use in the banking industry.

6 Banking, Payments and Money »

From: The Legal Concept of Money
Simon Gleeson
This chapter illustrates how state money only does a specific job, but the monetary jobs which need to be done across an economy generally require a wide variety of different types of instrument, and there is no reason why sovereign-issued money should seek to perform all of those functions. The central bank only acts as ‘paymaster’ to commercial banks and payment service providers, and those commercial banks and payment service providers act as paymasters to the rest of the economy. A paymaster is a person who provides payment services—someone who, when instructed, makes a payment to another on the basis that they either have or will recoup the value from that other. The chapter shows that the real economy rests on a foundation of money provided by the central bank.

The Basel Accords—A Note on Terminology »

From: Gleeson on the International Regulation of Banking (3rd Edition)
Simon Gleeson

Part I The Elements of Bank Financial Supervision, 3 Basel and International Bank Regulation »

From: Gleeson on the International Regulation of Banking (3rd Edition)
Simon Gleeson
This chapter begins by discussing the Basel committee and the Basel Accord. It details how the Basel committee, an organization with no powers, constitution, or even legal existence, became the dominant power in bank regulation. The Basel Capital Accord of 1988 set out a simple weighting system for different types of assets and standardized the rules as to what should count as capital. While the 1988 Accord was applied initially only to internationally active banks in the G10 countries, it quickly became acknowledged as a benchmark measure of a bank's solvency and is believed to have been adopted in some form by more than 100 countries. The remainder of the chapter covers policy responses to the recent financial crisis, Basel 2.5, Basel 3 framework document, and other initiatives.

Part I The Elements of Bank Financial Supervision, 4 The Composition of Bank Capital »

From: Gleeson on the International Regulation of Banking (3rd Edition)
Simon Gleeson
This chapter discusses the concept of bank capital. The essence of regulatory capital requirements as originally conceived was to procure that banks had sufficient capital to absorb both expected and unexpected losses. However, recent market developments have indicated two different but important functions of capital. Going Concern Capital is that capital which can absorb losses, both when the firm is in a state of financial health and during periods of financial stress, thus maintaining market confidence in the financial system and avoiding disruption to depositors. Gone Concern Capital is that capital which absorbs losses on the failure of a firm, protecting depositors in a winding up or resolution. The remainder of the chapter covers Tier 1 and Tier 2 capital; deductions; bank holdings in banking, financial, and insurance entities; provisioning, expected loss and revaluation; and capital monitoring.

Part IV Other Risks, 20 Concentration and Large Exposures »

From: Gleeson on the International Regulation of Banking (3rd Edition)
Simon Gleeson
This chapter discusses the large exposure regime. The large exposures regime is one of the two substantial components of the prudential capital regulatory system — the other being liquidity — which did not fall within the Basel 2 regime. Both have now been brought within the Basel 3 regime, although the large exposure rules are expected to come into effect only from 1 January 2019. The essence of the large exposures regime is the idea that banks should diversify their risk. There are three core rules which are relevant for the large exposures regime. One is the rule that any exposure which is sufficiently ‘large’ should be reported to the regulator; the second is that no single exposure should be permitted to exceed 25 per cent of capital (15% for exposure to G-SIBs).

Contents »

From: Bank Resolution and Crisis Management: Law and Practice
Simon Gleeson, Randall Guynn

Contents—Detailed »

From: Gleeson on the International Regulation of Banking (3rd Edition)
Simon Gleeson

Contents—Summary »

From: Gleeson on the International Regulation of Banking (3rd Edition)
Simon Gleeson

Contents—Summary »

From: Bank Resolution and Crisis Management: Law and Practice
Simon Gleeson, Randall Guynn

Part III Investment Banking, 15 Counterparty Risk in the Trading Book »

From: Gleeson on the International Regulation of Banking (3rd Edition)
Simon Gleeson
This chapter sets out rules that result in certain exposures being treated as having a greater degree of risk than their actual mark to market value. In order to explain this, consider a bank which owns 100 of shares in A, but also has a derivative in place with X under which it is entitled to be paid the value of 100 shares in A. Both positions give rise to the same risk as to the future price of A, and both will be valued by reference to the value of the shares in A. However, if the value of the shares in A increases, the bank's credit exposure to X will increase. The rules set out in this chapter seek to capture this extra level of risk by treating the value of the derivative as being slightly higher than its mark to market value; thereby requiring a slightly higher level of capital to be held against it. This is the counterparty credit risk requirement (CCR).

Part II Commercial Banking, 7 Credit Risk »

From: Gleeson on the International Regulation of Banking (3rd Edition)
Simon Gleeson
This chapter discusses the concept of credit risk. Of all the risks that banks are exposed to, credit risk is the most important and the most intuitively obvious. It is important to remember that credit means more than simply loans. At the heart of financial transactions are credit exposures. For an economist, the function of a bank is maturity transformation and intertemporal transfers of resources. But in a world where debts were always repaid, these functions would be as mechanical as the transmission of water or electricity. It is the unpredictability of credit that differentiates banking from other businesses. The remainder of the chapter covers risk weighting of assets, valuation of exposures, and provisioning and expected loss.

Part III Investment Banking, 16 Credit Value Adjustment »

From: Gleeson on the International Regulation of Banking (3rd Edition)
Simon Gleeson
The chapter discusses credit value adjustment (CVA) under Basel 2.5 and Basel 3. CVA is an adjustment to the fair value (or price) of derivative instruments to account for counterparty credit risk (CCR). Thus, CVA is commonly viewed as the price of CCR. The purpose of the CVA capital charge is to capitalize the risk of future changes in CVA. For most exposures, at any given time the market credit spread on the relevant counterparty is good proxy for the CVA applicable to the exposure, but the regulatory calculations involved reflect a number of factors as well as this particular input.

Part VI Bank Group Supervision, 26 Cross-Border Supervision of Bank Groups »

From: Gleeson on the International Regulation of Banking (3rd Edition)
Simon Gleeson
This chapter discusses the cross-border supervision of banks. A currently popular method is ‘colleges’ of supervisors. The basic idea is that in order to regulate an international bank you convene a meeting of all of the regulators who regulate different parts of that bank (in jurisdictions which have different regulators for different financial activities there may be several regulators present from one jurisdiction), and discuss in a concerted fashion the progress and performance of the bank as a whole. However, the main problem with this approach is the conflicting views stemming from the different priorities of different regulators, driven generally by national considerations. The EU has adopted a lead supervisor approach in which a single supervisor is appointed as responsible for overseeing the affairs of any group which straddles more than one member state. Since the EU architecture does not, by and large, give national supervisors any actual powers outside their home jurisdictions, the role of EU lead supervisor is broadly confined to consolidated supervision.

Dedication »

From: The Legal Concept of Money
Simon Gleeson