And we expect subsidiaries to be capable of accreting a portion of their own capital, rather than being fully dependent on a drip-feed of capital from the parent, as this creates poor incentives and can become problematic if the parent gets into trouble. We expect high standards of governance (including clear accountability for the management of local entities via the new Senior Manager’s Regime) and risk management, consistent with these firms’ importance to the financial system. At this juncture we have chosen not to apply either domestic system wide stress tests or local capital buffers to reflect the systemic importance domestically of these institutions. We instead seek to develop close dialogue and greater information sharing with the home regulator on the stress exposures they see for the group as a whole, and to allow us to judge how these will affect the UK entity. All this is cooperation. But what about the risk that this coordination and insight might disappear, particularly in the event of stress? How do we create committed cooperation? In that event, the ability to set internal TLAC is key. By turning debt into equity in the event of stress, internal TLAC gives host supervisors the ability to upstream losses in bad states of the world and so creates a binding commitment to downstream capital from the group when it is needed. Together with supervisory cooperation internal TLAC ensures the home regulator is fully sighted on and committed to act to mitigate financial stability risks inside the host country.

BIS central bankers’ speeches  will be moveable in a stress to where it is needed rather than needing to be prepositioned in case stress arises. Resolution is also supported by additional total loss absorbing capacity (TLAC) requirements on firms to absorb losses and recapitalise as needed in the event of a resolution. The balkanisation that was the initial response of regulators to the crisis supports locally-led, uncoordinated resolution. Strong local requirements are in place to ensure multiple local resolutions of failed entities. However, this is likely to be a suboptimal outcome for all concerned. Local entities and the critical functions they provide may not in reality be able to survive resolution separated from their parent. Furthermore, uncoordinated actions by authorities increase the risk of “asset grabs” and a general need for more resources across the group as a whole. Coordinated resolution, and for highly integrated groups an SPE strategy, can better support international banking and international capital flows. With coordinated resolution, the need for regulatory balkanisation can be reduced, with host supervisors reassured by an internal TLAC requirement that transforms debt into equity and so ensures capital resources can be downstreamed from the parent group in a stress when needed, rather than pre-positioned “just in case”. Let me return now to the key lesson we took as host supervisors from the crisis – that of our greater appreciation of the connectivity between the entities we supervise and their parent groups. This is present in franchises and business models, in financial exposures and in operational support.