Force banks to become simpler, Basel Committee says

The Basel Committee on Banking Supervision has called on regulators to push banks to simplify their structures in order to make them easier to wind up in the event of collapse.

"Capital or other prudential requirements, designed to encourage simplification of the structures" could be imposed on banks in order to reduce the cost and complexity of dealing with another Lehman Brothers-type resolution. The committee cited Lehman's 2,985 legal entities that operated in some 50 countries, which created problems for regulators both before the collapse (tracking exposures within the group was difficult) and after it.

The committee also threw its weight behind the concept of 'living wills' already backed by the Bank of England and the UK Financial Services Authority. Systemically-important cross-border banks should draw up plans for their own orderly wind-up, which would ease the process of resolution, the committee said. Better cross-border cooperation among regulators would also make it easier for a resolution to be carried out at a group level, rather than devolving into a scramble for bank assets as each national regulator seeks to protect its own taxpayers by ring-fencing everything it can.

At a national level, regulators should have the authority to resolve entire banking groups, as well as their subsidiaries, it added. "Existing national legal and regulatory arrangements are not designed to coordinate the resolution of problems in all of the significant legal entities of a financial group operating through a multiplicity of separate legal entities," the committee wrote.

Pointing to the problems surrounding the resolution of Dutch-Belgian bank Fortis, the committee said regulators should be prepared to override the claims of shareholders and contract counterparties if necessary in the name of systemic stability.

"The Fortis case illustrates the tension between the need to maintain financial stability, for which a bank under certain circumstances needs to be resolved in the public interest and with public support, and the position of the shareholders of such a bank (ie dilution of their stake)," it wrote, adding that Dutch and Belgian law at present was on the shareholders' side. Delaying contract terminations in order to transfer them to a healthy third party would prevent the collapse of one bank spreading instability further, it noted.

The report's 10 recommendations are open for comment until the end of the year.