In addition, one of the most important decisions for resolution authorities will be which legal entities within a systemically important firm to place into insolvency proceedings and which entities can and should be maintained for sale as going concerns. In his September 1 testimony before the Financial Crisis Inquiry Commission, my colleague, Tom Baxter, general counsel of the Federal Reserve Bank of New York, described how Lehman’s brokerdealer was not placed into insolvency, remained a going concern temporarily funded by the central bank and was sold within days after Lehman’s bankruptcy filing. The work needed to understand how coordinated resolution might work and when it will work underscores for us that an immediate jump to a fully fledged international resolution process is not really feasible. This is in fact why doing the hard and painstaking work of resolution planning is so important. Resolution planning is a smaller version of the statistical simulation I described, more closely tied to the specifics of the individual institution’s case, in which the financial authorities in the jurisdictions where the firm’s major operations are located work through potential scenarios. Those scenarios will reflect the current structure of the firm and the normal range of the distribution of assets and liabilities across legal entities. Resolution planning is likely to contribute a great deal of insight into how a full-fledged international process could work, insight that we do not have today.

Some of the issues in resolving large, internationally active financial firms have been recognized for some time – the multiplicity of jurisdictions, differences in insolvency regimes across countries, complexities in unwinding certain books and the largely untested nature of national, much less international, resolution processes for such very large financial firms. Over the last 20 years, the international legal and supervisory communities have undertaken several efforts to address these issues. In the wake of the financial crisis, the Basel Committee on Banking Supervision formed a Cross-Border Bank Resolution Group to identify what improvements could be made to the international resolution process and recommend actions to be taken. It published its recommendations in March 2010. The CBRG’s report is admirable in its clear description of the problems encountered in the fall of 2008 and the concrete nature of its recommendations. I will be referring to them throughout my remarks. As the CBRG was completing its draft report, the Financial Stability Board asked a working group, the Cross Border Crisis Management Group, to advance the development of recovery and resolution plans for cross-border institutions as recommended by the CBRG. I’d like to make three points today. The first is to highlight the importance of timely supervisory action in preserving the value in a financial firm. The second is to underscore the important innovation in supervisory practice represented by recovery planning. The third is to paint a picture, an admittedly optimistic picture, of the improvements in the international resolution process made possible by following the recommendations of the CBRG.