Resolving Globally Active, Systemically Important, 

Financial Institutions

A joint paper by the Federal Deposit Insurance Corporation and the Bank of England

10 December 2012
10 December 2012 

ii

Resolving Globally Active, Systemically Important, Financial Institutions

Federal Deposit Insurance Corporation and the Bank of England

Executive summary

The financial crisis that began in 2007 has driven home the importance of an orderly 

resolution process for globally active, systemically important, financial institutions (G-SIFIs).

Given that challenge, the authorities in the United States (U.S.) and the United Kingdom 

(U.K.) have been working together to develop resolution strategies that could be applied to 

their largest financial institutions. These strategies have been designed to enable large and 

complex cross-border firms to be resolved without threatening financial stability and without 

putting public funds at risk. This work has taken place in connection with the implementation 

of the G20 Financial Stability Board’s Key Attributes of Effective Resolution Regimes for 

Financial Institutions. The joint planning has been productive and effective. It has enhanced 

the resolution planning process in both jurisdictions, tackled key issues in relation to crossborder coordination, and identified potential challenges that will be addressed through further 

work.

This paper focuses on the application of “top-down” resolution strategies that involve a single 

resolution authority applying its powers to the top of a financial group, that is, at the parent 

company level. The paper discusses how such a top-down strategy could be implemented for 

a U.S. or a U.K. financial group in a cross-border context. 

In the U.S., the strategy has been developed in the context of the powers provided by the 

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Such a strategy

would apply a single receivership at the top-tier holding company, assign losses to 

shareholders and unsecured creditors of the holding company, and transfer sound operating 

subsidiaries to a new solvent entity or entities. 

In the U.K., the strategy has been developed on the basis of the powers provided by the U.K. 

Banking Act 2009 and in anticipation of the further powers that will be provided by the 

European Union Recovery and Resolution Directive and the domestic reforms that implement 

the recommendations of the U.K. Independent Commission on Banking. Such a strategy 

would involve the bail-in (write-down or conversion) of creditors at the top of the group in 

order to restore the whole group to solvency. 

Both the U.S. and U.K. approaches ensure continuity of all critical services performed by the 

operating firm(s), thereby reducing risks to financial stability. Both approaches ensure 

activities of the firm in the foreign jurisdictions in which it operates are unaffected, thereby 

minimizing risks to cross-border implementation. The unsecured debt holders can expect that 

their claims would be written down to reflect any losses that shareholders cannot cover, with 

some converted partly into equity in order to provide sufficient capital to return the sound

businesses of the G-SIFI to private sector operation. Sound subsidiaries (domestic and 

foreign) would be kept open and operating, thereby limiting contagion effects and crossborder complications. In both countries, whether during execution of the resolution or 

thereafter, restructuring measures may be taken, especially in the parts of the business 

causing the distress, including shrinking those businesses, breaking them into smaller entities, 

and/or liquidating or closing certain operations. Both approaches would be accompanied by 

the replacement of culpable senior management.
10 December 2012 

iii

This paper outlines several common considerations that affect these particular approaches to 

resolution in the U.S. and the U.K., including the need to ensure sufficient loss absorbency at 

the top of the group. The Federal Deposit Insurance Corporation and the Bank of England 

will continue to work together on these resolution strategies.
10 December 2012 

1

Resolving Globally Active, Systemically Important, Financial Institutions

Federal Deposit Insurance Corporation and the Bank of England1

Introduction

1 The Federal Deposit Insurance Corporation (FDIC) and the Bank of England—

together with the Board of Governors of the Federal Reserve System, the Federal Reserve 

Bank of New York, and the Financial Services Authority—have been working to develop 

resolution strategies for the failure of globally active, systemically important, financial 

institutions (SIFIs or G-SIFIs) with significant operations on both sides of the Atlantic. This 

work has taken place in connection with the implementation of the Financial Stability 

Board’s (FSB) Key Attributes of Effective Resolution Regimes for Financial Institutions (Key 

Attributes), as well as in connection with the reforms to the legal arrangements for handling 

the failure of financial institutions that were instituted in the United States (U.S.) and the 

United Kingdom (U.K.) in response to the recent financial crisis.

2 The goal is to produce resolution strategies that could be implemented for the failure 

of one or more of the largest financial institutions with extensive activities in our respective 

jurisdictions. These resolution strategies should maintain systemically important operations 

and contain threats to financial stability. They should also assign losses to shareholders and 

unsecured creditors in the group, thereby avoiding the need for a bailout by taxpayers. These 

strategies should be sufficiently robust to manage the challenges of cross-border 

implementation and to the operational challenges of execution.

3 As highlighted in the FSB’s recently published draft Guidance on Recovery and 

Resolution Planning,

2

strategies for resolution may broadly be categorized as either applying

resolution powers to the top of a group by a single national resolution authority (single point 

of entry), or applying resolution tools to different parts of the group by two or more 

resolution authorities acting in a coordinated way (multiple points of entry). Which strategy is 

most suitable to resolving the group will depend upon a range of factors. For example, a 

single point of entry strategy may offer the simplest and most effective choice if the debt 

issued at the top of the group is sufficient to absorb the group’s losses. Where this is not the 

case, a multiple points of entry strategy will be more suitable, particularly if different parts of 

the group can continue on a standalone basis. 

4 The focus of this paper is on a single point of entry resolution approach. It is hoped 

that the detail it provides on the single point of entry approach, when combined with the 

published FSB Guidance on Recovery and Resolution Planning, will give greater 

predictability for market participants about how resolution authorities may approach a 

resolution. This predictability cannot, however, be absolute, as the resolution authorities must 

not be constrained in exercising discretion in pursuit of their statutory objectives in how best 

to resolve a firm.

 

1 This paper has been written jointly by the Federal Deposit Insurance Corporation and the Bank of England.

2

See FSB Consultative Document “Recovery and Resolution Planning: Making the Key Attributes 

Requirements Operational,” www.financialstabilityboard.org/publications/r_121102.pdf.
10 December 2012 

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Post-crisis resolution strategy 

5 The financial crisis that began in late 2007 highlighted the shortcomings of the 

arrangements for handling the failure of large financial institutions that were in place on 

either side of the Atlantic. Large banking organizations in both the U.S. and the U.K. had 

become highly leveraged and complex, with numerous and dispersed financial operations, 

extensive off-balance-sheet activities, and opaque financial statements. These institutions 

were managed as single entities, despite their subsidiaries being structured as separate and 

distinct legal entities. They were highly interconnected through their capital markets 

activities, interbank lending, payments, and off-balance-sheet arrangements.

6 The legislative frameworks and resolution regimes at the time were ill-suited to 

dealing with financial institution failures of this scale and interconnectedness. In the U.S., the 

FDIC only had the power to place an insured depository institution into receivership; it could 

not resolve failed or failing bank holding companies or other nonbank financial companies 

that posed a systemic risk. In the U.K., until 2009 there was no special resolution regime 

available for banks or other financial companies, whatever their size or complexity, and as a 

result the U.K. was reliant on standard insolvency procedures such as administration. 

7 As demonstrated by the Title I requirement of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act of 2010 (Dodd-Frank Act), the U.S. would prefer that large 

financial organizations be resolvable through ordinary bankruptcy. However, the U.S. 

bankruptcy process may not be able to handle the failure of a systemic financial institution 

without significant disruption to the financial system. 

8 Similarly, the U.K. administration process often takes time and involves significant 

uncertainty regarding the outcome. Forcing large financial organizations through 

administration can create significant and systemic risks for the real economy by interrupting 

critical services, disrupting key financial relationships, and freezing financial markets. In 

addition, it can destroy value, harming the real economy.

9 Given these problems with the bankruptcy process, the U.S. and the U.K. authorities 

resorted to providing large scale public support to failing financial companies during the 

2007-09 crisis to prevent further systemic disruption. This public support has exposed 

taxpayers to loss and resulted in the bailout of multiple financial institutions and their 

creditors. 

10 Following the crisis, an overhaul of the framework for dealing with large and complex 

financial institution failures was required. While it may be useful to strengthen the current 

bankruptcy code or administration rules to improve the handling of financial failures, 

systemic considerations warrant having an alternative resolution strategy.

11 A resolution strategy for a failed or failing G-SIFI should assign losses to 

shareholders and unsecured creditors, and hold management responsible for the failure of the 

firm. The strategy should provide continuity of the critical services that the institution 

provides within the financial system and to the real economy, thereby minimizing systemic 

risk. The strategy should also enable a prompt transition of the firm’s ongoing operations to 

full private ownership and control without taxpayer support. Given the cross-border nature of 

G-SIFIs, the resolution strategy should ensure financial stability concerns are addressed 
10 December 2012 

3

across all jurisdictions in which the firm operates. To be successful, such an approach will 

require close cooperation between home and foreign authorities. 

12 Under the strategies currently being developed by the U.S. and the U.K., the 

resolution authority could intervene at the top of the group. Culpable senior management of 

the parent and operating businesses would be removed, and losses would be apportioned to 

shareholders and unsecured creditors. In all likelihood, shareholders would lose all value and

unsecured creditors should thus expect that their claims would be written down to reflect any 

losses that shareholders did not cover. Under both the U.S. and U.K. approaches, legal 

safeguards ensure that creditors recover no less than they would under insolvency.

13 An efficient path for returning the sound operations of the G-SIFI to the private sector 

would be provided by exchanging or converting a sufficient amount of the unsecured debt 

from the original creditors of the failed company into equity. In the U.S., the new equity 

would become capital in one or more newly formed operating entities. In the U.K., the same 

approach could be used, or the equity could be used to recapitalize the failing financial 

company itself—thus, the highest layer of surviving bailed-in creditors would become the 

owners of the resolved firm. In either country, the new equity holders would take on the 

corresponding risk of being shareholders in a financial institution. Throughout, subsidiaries 

(domestic and foreign) carrying out critical activities would be kept open and operating, 

thereby limiting contagion effects. Such a resolution strategy would ensure market discipline 

and maintain financial stability without cost to taxpayers. 

Legislative frameworks for implementing the strategy

14 It should be stressed that the application of such a strategy can be achieved only 

within a legislative framework that provides authorities with key resolution powers. The FSB 

Key Attributes have established a crucial framework for the implementation of an effective 

set of resolution powers and practices into national regimes. In the U.S., these powers had 

already become available under the Dodd-Frank Act. In the U.K., the additional powers 

needed to enhance the existing resolution framework established under the Banking Act 2009

(the Banking Act) are expected to be fully provided by the European Commission’s proposals 

for a European Union Recovery and Resolution Directive (RRD) and through the domestic 

reforms that implement the recommendations of the U.K. Independent Commission on 

Banking (ICB), enhancing the existing resolution framework established under the Banking 

Act. The development of effective resolution strategies is being carried out in anticipation of 

such legislation. 

U.S. regime

15 The framework provided by the Dodd-Frank Act in the U.S. greatly enhances the 

ability of regulators to address the problems of large, complex financial institutions in any 

future crisis. Title I of the Dodd-Frank Act requires each G-SIFI to periodically submit to the 

FDIC and the Federal Reserve a resolution plan that must address the company’s plans for its 

rapid and orderly resolution under the U.S. Bankruptcy Code. The FDIC and the Federal 

Reserve are required to review the plans to determine jointly whether a company’s plan is 

credible. If a plan is found to be deficient and adequate revisions are not made, the FDIC and 

the Federal Reserve may jointly impose more stringent capital, leverage, or liquidity 

requirements, or restrictions on growth, activities, or operations of the company, including its 

subsidiaries. Ultimately, the company could be ordered to divest assets or operations to 
10 December 2012 

4

facilitate an orderly resolution under bankruptcy in the event of failure. Once submitted and 

accepted, the SIFIs’ plans for resolution under bankruptcy will support the FDIC’s planning 

for the exercise of its resolution powers by providing the FDIC with an understanding of each 

SIFI’s structure, complexity, and processes.

16 Title II of the Dodd-Frank Act provides the FDIC with new powers to resolve SIFIs 

by establishing the orderly liquidation authority (OLA). Under the OLA, the FDIC may be 

appointed receiver for any U.S. financial company that meets specified criteria, including 

being in default or in danger of default, and whose resolution under the U.S. Bankruptcy 

Code (or other relevant insolvency process) would likely create systemic instability.3Title II 

requires that the losses of any financial company placed into receivership will not be borne 

by taxpayers, but by common and preferred stockholders, debt holders, and other unsecured 

creditors, and that management responsible for the condition of the financial company will be 

replaced. Once appointed receiver for a failed financial company, the FDIC would be 

required to carry out a resolution of the company in a manner that mitigates risk to financial 

stability and minimizes moral hazard.4 Any costs borne by the U.S. authorities in resolving 

the institution not paid from proceeds of the resolution will be recovered from the industry.

U.K. regime

17 In the U.K., the Banking Act provides the Bank of England with tools for resolving 

failing deposit-taking banks and building societies.5Powers similar to those of the FDIC are 

available, including powers to transfer all or part of a failed bank’s business to a private 

sector purchaser or to a bridge bank until a private purchaser can be found. The Banking Act 

also provides the U.K. authorities with a bespoke bank insolvency procedure that fully 

protects insured depositors while liquidating a failed bank’s assets. These powers have 

proved valuable; for example, during the crisis they allowed the authorities to transfer the 

retail and wholesale deposits, branches, and a significant proportion of the residential 

mortgage portfolio of a failed building society to another building society.

18 The Banking Act powers do not, however, provide a wholly effective solution to the 

failure of a large, complex, and international financial firm. The critical economic functions 

of a G-SIFI are currently intertwined legally, operationally, and financially across 

jurisdictions and legal entities. For U.K. firms, these functions frequently reside in the same 

entities as the firms’ core unsecured liabilities. Using the existing statutory transfer powers 

would involve separating and transferring large and complex businesses from within 

operating entities to a purchaser or bridge bank, while leaving behind the remaining liabilities

and bad assets in the failed firm to be wound up through insolvency. These operating 

companies may have several thousand counterparties, customers, and contracts. Such a 

transfer would be almost impossible to achieve over a resolution weekend without destroying 

value and causing financial stability concerns in multiple jurisdictions. 

 

3 The process for such appointment is set forth in Sections 202 and 203 of the Dodd-Frank Act, 12 U.S.C. §§ 

5382 and 3.

4

See Section 204(a) of the Dodd-Frank Act, 12 U.S.C. § 5384.

5

In addition, the U.K. Treasury is empowered to take a bank into Temporary Public Ownership where the 

power is necessary to resolve or reduce a serious threat to U.K. financial stability. The powers are set out in 

Articles 9 and 13 of the Banking Act. 
10 December 2012 

5

19 The introduction of a statutory bail-in resolution tool (the power to write down or 

convert into equity the liabilities of a failing firm) under the RRD is critical to implementing 

a whole group resolution of U.K. firms in a way that reduces the risks to financial stability. A 

bail-in tool would enable the U.K. authorities to recapitalize an institution by allocating 

losses to its shareholders and unsecured creditors, thereby avoiding the need to split or 

transfer operating entities. The provisions in the RRD that enable the resolution authority to 

impose a temporary stay on the exercise of termination rights by counterparties in the event 

of a firm’s entry into resolution (in other words, preventing counterparties from terminating 

their contractual arrangements with a firm solely as a result of the firm’s entry into 

resolution) will be needed to ensure the bail-in is executed in an orderly manner.

20 The existing Banking Act does not cover nondeposit-taking financial firms, notably 

investment banks and financial market infrastructures (clearing houses in particular), the 

failure of which, in many cases, would also have significant financial stability consequences. 

The Banking Act also has limitations with regard to the application of resolution tools to 

financial holding companies. The U.K. is in the process of expanding the scope of the 

Banking Act to include these firms. This is expected to be achieved through the introduction 

of the U.K. Financial Services Bill,

6 which is due to complete its passage through Parliament

by the end of this year.

21 In addition to expanding the U.K. resolution regime, the Financial Services Bill will 

significantly enhance the U.K.’s approach to banking supervision. Going forward, the 

framework for prudential supervision in the U.K. will emphasize supervisory judgment, 

rather than supervision based solely on rules. Under this framework, considerations of 

resolvability or ease of resolution would become a core part of the supervisory process.

22 In conjunction with the Financial Services Bill, the adoption of the recommendations 

of the ICB will also significantly improve the resolvability of the U.K. domestic retail bank 

by ringfencing it from the rest of the group. This will help to preserve core domestic 

intermediation services if a group-wide resolution is not feasible for some reason.

23 To ensure that banks are resolvable, the Financial Services Authority (and in the

future, the Prudential Regulation Authority7(PRA)) will require firms under the Financial 

Services Act 2010 to produce Recovery and Resolution Plans (RRPs). Firms will submit the 

information that the authorities will need to prepare resolution plans and to assess 

resolvability. Where barriers to resolution are identified, firms will be required to remove 

them through changes to their structure and operations. The proposed RRD provides 

authorities with the necessary powers to achieve this, including the ability to require changes 

to the legal or operational structures of institutions, and to require firms to cease specific 

activities.8

 

6

See http://www.hm-treasury.gov.uk/consult_financial_sector_resolution_broadening_regime.htm.

7 Once the Financial Services Bill comes into force in 2013, the Financial Services Authority will be replaced by 

two new regulatory bodies, the PRA and the Financial Conduct Authority. The PRA, a subsidiary of the Bank of 

England, will become the prudential regulator of deposit-takers, insurers, and the largest investment firms. It 

will have the objective of promoting the safety and soundness of these firms, in part through minimizing the 

adverse effect of their failure on the U.K. financial system. 

8

See Article 14(4) of the proposed RRD, including 14(4)(e) “requiring the institution to limit or cease specific 

existing or proposed activities,” and 14(4)(g) “requiring changes to legal or operational structures of the 

institution so as to reduce complexity in order to ensure that critical functions may be legally and economically 

separated from other functions through the application of the resolution tools.”
10 December 2012 

6

Description of the resolution strategies

U.S. approach to single point of entry resolution strategy

24 Under the U.S. approach, the FDIC will be appointed receiver of the top-tier parent 

holding company of the financial group following the company’s failure and the completion 

of the appointment process set forth under the Dodd-Frank Act. Immediately after the parent 

holding company is placed into receivership, the FDIC will transfer assets (primarily the 

equity and investments in subsidiaries) from the receivership estate to a bridge financial 

holding company. By taking control of the SIFI at the top of the group, subsidiaries (domestic 

and foreign) carrying out critical services can remain open and operating, limiting the need 

for destabilizing insolvency proceedings at the subsidiary level. Equity claims of the 

shareholders and the claims of the subordinated and unsecured debt holders will likely remain

in the receivership. 

25 Initially, the bridge holding company will be controlled by the FDIC as receiver. The 

next stage in the resolution is to transfer ownership and control of the surviving operations to 

private hands. Before this happens, the FDIC must ensure that the bridge has a strong capital 

base and must address whatever liquidity concerns remain. The FDIC would also likely 

require the restructuring of the firm—potentially into one or more smaller, non-systemic 

firms that could be resolved under bankruptcy. 

26 By leaving behind substantial unsecured liabilities and stockholder equity in the 

receivership, assets transferred to the bridge holding company will significantly exceed its 

liabilities, resulting in a well-capitalized holding company. After the creation of the bridge 

financial company, but before any transition to the private sector, a valuation process would 

be undertaken to estimate the extent of losses in the receivership and apportion these losses to 

the equity holders and subordinated and unsecured creditors according to their order of 

priority. In all likelihood, the equity holders would be wiped out and their claims would have 

little or no value.

27 To capitalize the new operations—one or more new private entities—the FDIC 

expects that it will have to look to subordinated debt or even senior unsecured debt claims as 

the immediate source of capital. The original debt holders can thus expect that their claims 

will be written down to reflect any losses in the receivership of the parent that the 

shareholders cannot cover and that, like those of the shareholders, these claims will be left in 

the receivership. 

28 At this point, the remaining claims of the debt holders will be converted, in part, into 

equity claims that will serve to capitalize the new operations. The debt holders may also 

receive convertible subordinated debt in the new operations. This debt would provide a 

cushion against further losses in the firm, as it can be converted into equity if needed. Any 

remaining claims of the debt holders could be transferred to the new operations in the form of 

new unsecured debt. 

29 The transfer of equity and investments in operating subsidiaries to the bridge holding 

company should do much to alleviate liquidity pressures. Ongoing operations and their 

attendant liabilities also will be supported by assurances from the FDIC, as receiver. As 

demonstrated by past bridge-bank operations, the assurance of performance should encourage 

market funding and stabilize the bridge financial company. However, in the case where credit 
10 December 2012 

7

markets are impaired and market funding is not available in the short term, the Dodd-Frank 

Act provides for FDIC access to the Orderly Liquidation Fund (OLF), a fund within the U.S. 

Treasury. In addition to providing a back-up source of funding, the OLF may also be used to 

provide guarantees, within limits, on the debt of the new operations. An expected goal of the 

strategy is to minimize or avoid use of the OLF. To the extent that the OLF is used, it must 

either be repaid from recoveries on the assets of the failed financial company or from 

assessments against the largest, most complex financial companies.9The Dodd-Frank Act 

prohibits the loss of any taxpayer money in the orderly liquidation process. 

U.K. approach to single point of entry resolution strategy

30 The U.K.’s planned approach to single point of entry also involves a top-down 

resolution. On the basis that the RRD will introduce a broad bail-in power, the U.K. 

authorities would seek to recapitalize the financial group through the imposition of losses on 

shareholders and, as appropriate, creditors of the firm via the exercise of a statutory bail-in

power. This U.K. group resolution approach need not employ a bridge bank and 

administration, although such powers are available in the U.K. and may be appropriate under 

certain circumstances.

31 Current proposals for implementing such a strategy incorporate a period in which 

equity and debt securities would be transferred from the shareholders and debt holders to an 

appointed trustee. The trustee would hold the securities during a valuation period in which 

the extent of the losses expected to be incurred by the firm would be established and, in turn, 

the recapitalization requirement determined. During this period, listing of the company’s 

equity securities (and potentially debt securities) would be suspended. Once the

recapitalization requirement has been determined, an announcement of the final terms of the 

bail-in would be made to the previous security holders. This announcement would include 

full details of the write-down and/or conversion.

32 Debt securities would be cancelled or written down in order to return the firm to 

solvency by reducing the level of outstanding liabilities. The losses would be applied up the 

firm’s capital structure in a process that respects the existing creditor hierarchy under 

insolvency law. The value of any loans from the parent to its operating subsidiaries would be 

written down in a manner that ensures that the subsidiaries remain solvent and viable. 

33 Completion of the exchange would see the trustee transfer the equity (and potentially 

some of the existing debt securities written down accordingly) back to the original creditors 

of the firm. Those creditors unable to hold equity securities (for example, for reasons of 

investment mandate restrictions) would be able to request that the trustee sell the equity 

securities on their behalf. The trust would then be dissolved and the equity securities (and 

potentially debt securities) of the firm would resume trading. The firm would now be 

recapitalized and primarily owned by the (appropriate layer of) original creditors of the 

institution. As described later, the process would be accompanied by restructuring measures 

to address the causes of the firm’s failure and to restore the business to viability. 

 

9 The FDIC is also allowed to claw back any advance payments to claimants of the receivership if losses exceed 

original estimates. The set of companies that may be subject to an assessment, and the extent to which their 

assessment is subject to adjustment for certain risk factors, is set out in Section 210(o) of the Dodd-Frank Act. 
10 December 2012 

8

34 The U.K. has also given consideration to the recapitalization process in a scenario in 

which a G-SIFI’s liabilities do not include much debt issuance at the holding company or 

parent bank level but instead comprise insured retail deposits held in the operating 

subsidiaries. Under such a scenario, deposit guarantee schemes may be required to contribute 

to the recapitalization of the firm, as they may do under the Banking Act in the use of other 

resolution tools. The proposed RRD also permits such an approach because it allows deposit 

guarantee scheme funds to be used to support the use of resolution tools, including bail-in, 

provided that the amount contributed does not exceed what the deposit guarantee scheme 

would have as a claimant in liquidation if it had made a payout to the insured depositors. That 

is consistent with the contribution requirement that is already imposed on the Financial 

Services Compensation Scheme in the U.K. in the exercise of resolution powers10 and 

simulates the losses that would have been incurred by those deposit guarantee schemes

during bank insolvency. But insofar as a bail-in provides for continuity in operations and 

preserves value, losses to a deposit guarantee scheme in a bail-in should be much lower than 

in liquidation. Insured depositors themselves would remain unaffected. Uninsured deposits

would be treated in line with other similarly ranked liabilities in the resolution process, with 

the expectation that they might be written down.

35 Following the recapitalization process, the firm would be restructured to address the 

causes of its failure. It should then be solvent and viable, and as a result in a position to 

access market funding. In recognition of the fact that it will take time for losses to be assessed

for purposes of recapitalization, and that it will take time to execute the restructuring plan that 

will underpin the firm’s viability, immediate access may prove difficult. In certain 

circumstances, to reduce the immediate funding need and so facilitate market access, illiquid 

assets might be removed from the balance sheet of the firm and transferred into an asset 

management company to be worked out over a longer period.

36 If market funding were not immediately available, temporary funding may need to be 

provided by the authorities to meet the firms’ liquidity needs. The funding would only be 

provided on a fully collateralized basis with appropriate haircuts applied to the collateral to 

reduce further the risk of loss. In the unlikely event that losses were associated with the 

provision of temporary public sector support, such losses would be recovered from the 

financial sector. 

37 It is important to note that the strategy described above would not necessarily be 

appropriate for all U.K. G-SIFIs in all circumstances. Other strategies may be more 

appropriate depending on the structure of a group, the nature of its business, and the size and 

location of the group’s losses. For example, in cases where the losses on assets in a particular 

operating subsidiary were potentially so great that they could not be absorbed by bailing in at 

group level or where the business had incurred such significant losses and was so weighed 

down by toxic assets that the capital needs in resolution were too difficult to estimate 

credibly, resolution at the level of one or more operating subsidiaries may be more 

appropriate. In this situation, the application of resolution tools to operating subsidiaries 

would be easier if the subsidiaries providing critical economic services were operationally 

and financially ringfenced from the rest of the group. 

 

10 The provisions for the Financial Services Compensation Scheme to contribute to the costs of a resolution are 

set out in Article 171ff of the Banking Act 2009. 
10 December 2012 

9

38 This is one of the advantages of the ringfence which is being introduced in the U.K. It

will provide flexibility in the event of fatal problems elsewhere in the group to transfer the 

ringfenced entity to a bridge bank or purchaser in its entirety. If losses were concentrated in 

the ringfenced entity and capital in the ringfenced entity was insufficient to absorb them, then 

losses could be borne by creditors of the ringfenced bank (including debt holders where the 

ringfenced bank had issued debt into the market). This could be achieved either by bail-in or 

by transferring the operations of the ringfenced bank to a bridge bank, leaving uninsured 

creditors behind in administration. Draft legislation to establish this ringfence of the largest 

retail deposit-takers is due to be introduced into Parliament early in 2013 and if passed will

provide valuable additional flexibility in implementing resolution strategies to preserve the 

provision of core services in the U.K. business of U.K. G-SIFIs.

Key common considerations for U.S. and U.K. approaches

39 As outlined above, high-level transaction structures have been developed for each 

jurisdiction. As discussed in the FSB Guidance on Recovery and Resolution Planning, for 

any resolution to be effective, consideration needs to be given in advance to various 

preconditions and operational requirements. Several of these considerations in relation to a 

top-down resolution strategy are discussed in more detail below.

Resolution and restructuring measures 

40 A top-down resolution by definition focuses on assigning losses and establishing new 

capital structures at the top of the group. This approach keeps the rest of the group, 

potentially comprised of hundreds or thousands of legal entities, intact. However, a top-down

resolution would need to be accompanied, or shortly followed, by significant restructuring 

measures to address the causes of the firm’s failure and to underpin the firm’s viability. Such 

a restructuring may include shrinking the G-SIFI’s balance sheet, breaking the company up 

into smaller entities, and/or selling or closing certain operations. The newly restructured 

companies will all need to have strong corporate governance and management oversight, 

which would likely necessitate significant changes to management and board personnel and 

processes. In both countries, it is likely that supervisory actions will continue after the return 

to private ownership to ensure that the firm is on a stable and sustainable footing and the 

problems that caused the firm to fail in the first place have been properly dealt with.

41 In the U.S., effective governance will be an important issue for both the transitional 

bridge financial company and the newly capitalized entity or entities into which the bridge 

will transition. The FDIC, as receiver, will control the bridge financial company and would 

immediately appoint a temporary board of directors and Chief Executive Officer (CEO) to 

run the bridge. The claims of the failed G-SIFI’s unsecured creditors will be converted into 

equity and, as a result, the former creditors will become owners of the new private sector 

operations. They will thereafter be responsible for electing a new board of directors, which 

will in turn appoint a new CEO. 

42 During the period in which the FDIC controls the bridge financial company, decisions 

will be made on how to on simplify and shrink the institution. It also would likely require 

restructuring of the firm—perhaps into one or more smaller, non-systemic firms. 

Consideration will also be given to how to create a more stable, less systemically important 

institution. Required changes, including divestiture, may be influenced by the failed firm’s 

Title I resolution plan. Once determined, the required actions and relevant time frames for 
10 December 2012 

10

their execution will be specified in formal supervisory agreements with the new owners of the 

private sector operations. 

43 The required actions would be executed in private markets by the new owners. For 

example, the new owners might be required to sell a portion of their branch structure to 

reduce their footprint, divest their foreign operations, or separate their commercial and 

investment banking operations. The resulting new private sector operations would be smaller, 

more manageable—and perhaps more profitable. They would also be easier to examine and 

supervise. Importantly, all new operations must be resolvable under bankruptcy without 

public support. 

44 In the U.K., similar considerations would enter into decisions on the restructuring 

process. Depending on the specific timeline for resolution, the restructuring may occur 

primarily either during the trustee stage (before the delivery of equity securities to the 

creditors) or during the stage following the dissolution of the trust. The extent of the 

restructuring measures required would depend on the cause of failure, and the extent to which 

losses were contained within a particular pool of assets or legal entity. If losses at the firm 

were localized, the restructuring measures required may be limited. These would likely 

require a sale or wind-down of relevant business lines and withdrawal from loss-making 

activities. The senior management that were responsible for bringing the firm into distress

would also be replaced. On the other hand, if losses at the firm were pervasive and spread 

across multiple business lines, a more fundamental restructuring of the firm’s business would 

be required. This would likely include a complete governance overhaul and a thorough 

reorganization of the activities of the institution. In the extreme case, much of the institution 

may enter managed wind-down over a prolonged period of time. In such a scenario, it is 

likely that a legal and operational ringfencing of a banking group’s retail banking activities 

from the group’s investment banking activities would prove particularly valuable in

facilitating such a restructuring.

Maintaining financial stability

45 Both the U.S. and U.K. resolution proposals are designed to maintain financial 

stability by ensuring that critical business functions continue to be performed. Critical 

business functions are generally performed at the level of the operating subsidiaries—assets 

of the holding companies of U.S. and U.K. G-SIFIs tend to comprise little more than the 

equity stakes in the operating subsidiaries. The newly resolved group would be solvent and 

viable, and should be in a position therefore to access market funding or, if necessary, 

funding from the authorities as discussed above. Liquidity will be downstreamed in a 

“business as usual” manner to the operating subsidiaries immediately following the resolution 

weekend. As described above, the balance sheets of the operating subsidiaries should be 

broadly unaffected by the resolution action at the top of the group. To recapitalize the 

operating subsidiaries that had incurred losses, the equity or debt held by the parent in those 

subsidiaries would need to be written down. The parent and, indirectly, the subsidiary 

operating companies may also be subject to change of control procedures arising from a 

switch of ownership from the existing shareholders to creditors.

11 Provision of critical shared 

services across the group should be unaffected.

 

11 Subject to appropriate regulatory approvals.
10 December 2012 

11

46 Given minimal disruption to the balance sheet of the operating companies, and given 

that the group should be recapitalized following the assignment of losses to shareholders and 

creditors, counterparties should not have strong incentives to cease trading with the operating 

companies during and following the resolution. The contingency plans are designed to 

minimize the triggering of cross-defaults or closeout of netting arrangements at the operating 

companies. In certain cases, a stay on termination rights may be applied to ensure that 

termination of counterparty relationships cannot be triggered solely as a result of entry into 

resolution. A stay may assist in promoting the continuity of a variety of critical economic 

functions that are dependent on maintaining counterparty relationships (for example, those 

functions relating to wholesale market activities) and also avoiding the rapid, disorderly, and 

potentially value-destructive closeout of financial contracts and liquidation of securities. The 

stay could also minimize the closeout risk that may result from cross-default clauses within 

financial contracts. In the scenario in which the holding company is placed into receivership, 

the stay would extend to certain subsidiary counterparties subject to financial contracts that 

reference the holding company. Given cross-border considerations, it is important that stays 

on termination apply to both domestic and foreign operations of G-SIFIs. In certain cases, 

authorities cannot currently extend stays on termination to foreign operations. Supporting 

actions by host authorities may be required (as included in the Key Attributes), or it may be 

necessary to introduce clauses that recognize foreign resolution actions, including stays on 

termination, into counterparty documentation.

47 Similarly, because the group remains solvent, retail or corporate depositors should not 

have an incentive to “run” from the firm under resolution insofar as their banking 

arrangements, transacted at the operating company level, remain unaffected. In order to 

achieve this, the authorities recognize the need for effective communication to depositors, 

making it clear that their deposits will be protected. 

48 If continuity of critical functions is to be achieved, the firm will need continuing 

access to core services provided by the financial market infrastructures (for example, 

payment systems and central counterparties) during and following resolution. To achieve this, 

authorities in both the U.S. and U.K. have begun a process of engaging with such 

infrastructures to develop effective procedures relating to the treatment of members who have 

entered resolution.

Minimization of cross-border coordination risk

49 It should be stressed that a key advantage of a whole group, single point of entry 

approach is that it avoids the need to commence separate territorial and entity-focused 

insolvency proceedings, which could be disruptive, difficult to coordinate, and would depend 

on the satisfaction of a large number of pre-conditions in terms of structure and operations of 

the group for successful execution. Because the whole group resolution strategies maintain 

continuity of business at the subsidiary level, foreign subsidiaries and branches should be 

broadly unaffected by the resolution action taken at the home holding company level. The 

strategies remove the need to commence foreign insolvency proceedings or enforce legal 

powers over foreign assets (although, as discussed later, it may be necessary to write down or

convert debt at the top of the group that are subject to foreign law). Liquidity should continue 

to be downstreamed from the holding company to foreign subsidiaries and branches. Given 

minimal disruption to operating entities, resolution authorities, directors, and creditors of 

foreign subsidiaries and branches should have little incentive to take action other than to 

cooperate with the implementation of the group resolution. In particular, host stakeholders 
10 December 2012 

12

should not have an incentive to ringfence assets or petition for a preemptive insolvency—

preemptive actions that would otherwise destroy value and may disrupt markets at home and 

abroad.

50 A key part of the work undertaken by the U.S. and the U.K. has been to identify the 

regulatory obligations of foreign authorities in response to a resolution originated by a home 

authority. Where any impediments to effective whole group resolution have been identified, 

authorities are in the process of exploring methods to overcome them.

51 The Key Attributes stress the importance of a globally coordinated approach to 

resolution, and emphasize that resolution authorities should consider the potential impact of 

their resolution actions on the financial stability of foreign jurisdictions. The Key Attributes 

propose a framework that would facilitate cross-border cooperation between resolution 

authorities. This framework would help to ensure that local resolution authorities support a 

resolution carried out by a foreign authority. 

52 A central element of the cross-border cooperation process set out in the Key 

Attributes is the establishment of Crisis Management Groups (CMGs)—groups composed of 

supervisors, central banks, and resolution authorities of the key jurisdictions in which a GSIFI operates. Members of these groups are expected to enter into firm-specific cross-border 

cooperation agreements that detail the proposed means by which a particular resolution 

should be coordinated between authorities. To provide a platform for such cooperation 

agreements, authorities in the home jurisdiction are required to submit firm-specific 

resolution strategies to members of the CMG for consultation by the end of 2012.

12

53 These resolution strategies set out at a high level the key elements of the approach to 

resolution and outline the use of key resolution powers. The strategies will be translated into 

detailed resolution plans for each firm during the first half of 2013.13 These resolution plans 

will provide specific detail on implementing the proposed resolution strategy, including 

consideration of entities to which resolution powers may be applied and the possible roles of 

relevant national resolution authorities. Subsequently, firm-specific resolvability assessments 

will be developed by the end of 2013. The resolvability assessments will identify barriers to 

implementation of the resolution plans, and will be key to demonstrating the extent to which 

the resolution plan for each G-SIFI is feasible and credible without severe systemic 

disruption and without exposing taxpayers to loss. In addition, certain U.S. and U.K. G-SIFIs 

have been required to make their first full RRP submissions in 2012 to support the 

development of viable resolution plans by the authorities. These submissions will help to 

expose, among other things, actions that firms will need to take to improve their resolvability.

Write-down of liabilities and conversion of debt into equity 

54 Under a top-down resolution, shareholders and certain creditors at the top of the group 

absorb losses and recapitalize the group as whole. For a top-down approach to work, there 

must be sufficient loss-absorbing capacity available at the top of the group to absorb losses 

sustained within operational subsidiaries.

 

12 See FSB Progress Report on the Resolution of SIFIs, 

http://www.financialstabilityboard.org/publications/r_121031aa.pdf

13 See aforementioned FSB Guidance for Recovery and Resolution Planning.
10 December 2012 

13

55 In the U.S., the capital structures of large financial holding companies are 

characterized by equity and large amounts of unsecured debt of various maturities. This debt 

is structurally subordinated within the group, and limited external unsecured debt tends to be 

raised at entities below the financial holding company. Regulation may be adopted to ensure 

that sufficient debt is held at the top-tier holding company level. 

56 In the U.K., on the other hand, financial holding companies at the top of the group 

often do not account for a significant proportion of the group’s unsecured debt raised by 

groups externally. Looking ahead, either the groups could restructure so that more debt is 

issued out of the holding company or the U.K. authorities could look to bail-in the liabilities 

of the top operating companies within each group. The latter course would require careful 

planning given that senior unsecured bonds typically rank alongside other unsecured 

liabilities that are unlikely to be bailed-in. Detailed consideration of this part of the resolution 

strategy for individual banking groups will need to take account of the precise provisions of 

the RRD as eventually passed into law. Also, both the draft RRD and the U.K. government’s 

plans for implementing the ICB report include requirements aimed at ensuring that banks 

have sufficient capital and debt in issue to make them resolvable using bail-in or other 

resolution tools. The U.K. authorities will in due course consider how the final versions of 

those requirements should be applied to U.K. G-SIFIs given their group structures and 

resolvability.

57 Consideration also needs to be given to ensuring that debt issued at the top of the 

group that is subject to foreign law can be written down or converted alongside liabilities 

subject to the law of the home jurisdiction. This may be crucial to ensuring that the firm’s 

recapitalization needs can be met and that creditors are treated fairly. Ensuring that foreign 

law securities can be written down or converted into equity alongside securities issued under 

the law of the home jurisdiction may require the inclusion of contractual recognition of 

foreign resolution proceedings within debt contracts.

Valuation

58 During resolution, a valuation process will need to be undertaken to assess the losses 

on assets that the firm has incurred and the capital needed under stress assumptions to restore 

confidence in the firm, which will determine the extent to which creditor claims should be 

written down and converted. The valuation will determine how far up the capital structure the 

write down or conversion of debt may need to apply (that is, whether shareholders and 

subordinated debt holders can fully absorb losses in order to recapitalize the firm, or whether 

senior unsecured creditors would also need to be included). The valuation process will in turn 

determine what financial instruments if any—for example, common equity in the new firm or 

warrants—the different classes of original creditors of the firm should receive.

59 Given the differences in the U.S. and U.K. resolution processes, the precise valuation 

requirements and timelines are unlikely to be the same for the two jurisdictions. 

Consideration is being given in both jurisdictions as to how much of the valuation process 

can be prepared in advance of resolution (for example, as part of enhanced preparation under 

the U.K. Proactive Intervention Framework14). Consideration is also being given as to 

 

14 The PRA’s Proactive Intervention Framework will provide a systematic approach for the assessment of a 

firm’s proximity to failure to enable supervisors to identify and respond to emerging risks at an early stage. See 

“The PRA’s approach to banking supervision,” October 2012. 
10 December 2012 

14

whether new financial statements would be required, and whether the firm’s external auditors 

would need to be replaced for the valuation process to provide sufficient comfort to the 

market that the ongoing operations were fully (re)capitalized and solvent. An effective 

valuation process should facilitate the issuance of new securities and other financial 

instruments, and would likely be required by rating agencies in order to make a judgment on 

the creditworthiness of the resolved institution. The U.S. and U.K. authorities are considering 

how a credible valuation could be carried out quickly and effectively, and with flexibility to 

respond to the characteristics of particular institutions and the nature of their failures.

Listing requirements post-resolution

60 To return the firm to the market effectively, the public listing of its equity and debt 

securities would need to resume. Insofar as new debt or equity instruments are issued, listing 

rules may require that a prospectus or other offering documentation be provided to investors. 

This would likely include audited financial statements for the firm, and may therefore take a 

significant amount of time to achieve. 

61 Under the U.S. approach, a new parent entity is established during resolution. 

Therefore, new securities would need to be issued in satisfaction of creditor claims. Such 

securities would either need to be issued pursuant to effective registration statements, or may, 

in certain instances, be listed pursuant to an exemption from registration.

62 In the case of a U.K. resolution, new equity and debt securities would not necessarily 

need to be issued following resolution. Under certain circumstances, it is possible, subject to 

a number of conditions, that existing equity and debt securities could resume trading without 

the need for a prospectus. 

63 In both jurisdictions, engagement with securities regulators well in advance of, and 

also during, resolution will be key to ensuring that public listing can be achieved in a timely 

manner following resolution.

Conclusion

64 In both the U.S. and the U.K., legislative reforms already made or planned in response 

to the financial crisis provide new powers for resolving failed or failing G-SIFIs. The FDIC 

and the Bank of England have developed resolution strategies that take control of the failed 

company at the top of the group, impose losses on shareholders and unsecured creditors—not 

on taxpayers—and remove top management and hold them accountable for their actions. 

These strategies provide an efficient path for returning the systemically important parts of the 

G-SIFI to the private sector by exchanging or converting a sufficient amount of creditor 

claims from the failed company into capital in the newly resolved entities. Because the 

resolution action is taken at the top of the group and by the home authorities, continuity of all 

critical services would be maintained and subsidiaries (foreign and domestic) would remain 

open and operating with access to sufficient liquidity. As a result, the strategy achieves the 

important goals of imposing market accountability and maintaining financial stability in all 

jurisdictions in which the firm operates.

65 The FDIC and the Bank of England continue to work to ensure that their respective 

resolution strategies will be fully operational. Importantly, the process of cross-border 

dialogue that has facilitated the above strategies reflects a shared public interest in developing 
10 December 2012 

15

the capacity to resolve a G-SIFI in a credible and effective manner, and offers a model for 

multilateral resolution planning more broadly.