After reducing the traditional policy tool, the target for the overnight federal funds rate, to close to zero, the Fed has aggressively employed two complementary types of non-traditional tools – asset purchases and forward guidance on the policy rate – to provide additional stimulus through their effects on long term rates and various risk premia. Effective forward guidance on interest rates causes market participants to lower their expectations and uncertainty about future path of interest rates and to anticipate that easier financial conditions will persist well in to the future. This pushes down the yield curve and leads to easier financial conditions. Federal Reserve asset purchases also make financial conditions more accommodative. Such purchases, by taking duration out of private hands, push down term premia and lead to lower long-term rates than would otherwise be the case for any given economic outlook. Agency MBS (mortgage-backed securities) purchases absorb prepayment risk and reduce secondary and primary mortgage rates, stimulating demand for housing and increasing purchasing power through refinancing. Lower long-term rates support the prices of equities and housing, boosting wealth and easing balance sheet constraints, while an accommodative monetary policy stance reduces downside risks for the economy and this leads to lower default risk premia on corporate debt. Our two tools work in a complementary manner. Asset purchases strengthen the credibility of the forward guidance on interest rates, while forward guidance provides information about how long the FOMC is likely to hold on to the assets it purchases.

Relevant EU directives would also need to be taken into account. All this strengthens my view that although synergies should be realised through consistency in the approaches to corporate and financial sector workouts, we need to recognise that banks (and insurance companies) are different. I have noted that, in corporate insolvencies, countries may differ in the extent to which their legal and statutory arrangements favour the debtor or the creditor. But they will also differ in the extent to which their insolvency laws embody a universal or territorial approach to cross-border insolvencies. Exactly the same distinction is relevant in an international financial insolvency. In the ”single-entity” approach, a bank with branches in several jurisdictions will be wound up according to universal principles, so that creditors and depositors worldwide are entitled to an equal claim on the bank’s worldwide assets. By contrast, a ”separate-entity” (or ”ring-fencing”) approach to liquidating an LCFI proceeds according to territorial principles, so that creditors and depositors of an individual bank branch in a particular jurisdiction take precedence in the distribution of all the LCFI’s assets within that jurisdiction, before the local liquidator is authorised to turn over any excess assets to the home country liquidator. This implies that, in both corporate sector and financial sector insolvencies, banking supervisors and insolvency practitioners will be subject to varying legal responsibilities that may make the co-ordination problem more difficult. I would argue that initiatives such as those of the ILG and UNCITRAL are more consistent with the spirit of a universal approach.