London Financial Regulation Seminar The Regulatory Response to the Financial Crisis - Northern Rock “The Need for a Spec

1. London Financial Regulation SeminarThe Regulatory Response to the Financial Crisis - Northern Rock“The Need for a Special Regime” Eva Hüpkes, London, 30 January 2008 L

2. Caution & Disclaimer

3. Outline • Why is a special regime needed? • What are its essential features? • What are the challenges?

4. Why is a special regime needed?

5. Banks are special - Banks provide payment and other essential services. • Need for speed - Economic value can disappear overnight. • General corporate insolvency law is inappropriate - It comes too late and produces a stay on the bank’s critical function.

6. A special regime - what are its essential features?

7. Early intervention and resolution • Flexibility and speed • Adequate protection of depositors

8. Early intervention and resolution • Pre-emptive action before liquidity or solvency problems become serious • Resolution that maintains externalities and minimizes the disruption to the essential services provided by the bank

9. Flexibility and speed • Need for tailor-made approaches that facilitate market solutions • No mechanical rules that hamper efficient, targeted outcomes – no automatic stays • Speedy restructuring • Rapid transfer of business lines

10. Adequate protection of depositors • Amount – Need to cover a large share of retail depositors • Speedy release of funds – Even with wide coverage, depositors will run if payouts are delayed

11. What are the challenges?

12. Legal challenges • Preserving critical functions while respecting the rights of stakeholders • Different shareholder rights (Europe vs. US) • Balancing the competing interests of different classes of stakeholders • Retail vs. wholesale • Shareholders vs. creditors

13. Economic challenges • Preserving externalities without reducing efficiency • Avoiding market distortions • Maintaining a level playing field • Dealing with the “too big to fail” problem

14. Political challenges • Political imperative to act • Fighting the last war • Hasty decisions • Allocation of intervention powers • Need for expertise • Concentration of power • Minimizing the fiscal cost (taxpayers´ burden)

15. Options for meeting the challenges • Predictability and powers • Provide ex ante clarity for all stakeholders about the implications of a bank becoming undercapitalised or illiquid • Save functions not institutions • Identify and implement measures to ensure that critical functions can be “carved out” (e.g. by way of a P&A of retail deposits, creation of bridge bank, good bank/bad bank structures) • Learn from experience elsewhere • Do not re-invent the wheel

16. Conclusions • An effective crisis resolution framework should: • Ensure the continued performance of critical functions • Promote an efficient financial system by fostering market discipline, market integrity, competition and financial innovation • Prevent the social costs associated with financial panic and bank failures