For the firm, there can be time to adjust its balance sheet to make resolution easier. This might involve discreet steps to reduce trading, derivative portfolios and counterparty credit exposures. In parallel, Resolution Authorities should ensure that they are themselves as ready as can be. That might include engaging advisers needed to help determine the firm’s losses, and so the size of debt write-down and conversion that might be needed to recapitalise it; preparing options for winding down or transferring critical functions; and lining up replacement management and directors to run the firm following the resolution. This should be the bread and butter of preparing for any resolution. For a Purchase and Assumption transaction, the US FDIC typically start preparations around 90 days out. To make escalated preparation practical, supervisors and resolution authorities need to agree a framework for graduated intervention as a firm deteriorates. In the UK, the Prudential Regulatory Authority’s Proactive Intervention Framework is intended to provide a basis for just that.15  15  10  See Table A on the PRA’s Proactive Intervention Framework in Bank of England (2013), The Prudential Regulatory Authority’s approach to banking supervision. BIS central bankers’ speeches  Conclusion There is absolutely no question that effective, credible resolution regimes and plans are essential to overcoming the biggest problem in the international financial system: ‘Too Big to Fail’. Only with a credible mechanism to put losses to a failed bank’s creditors can we harness the forces of market discipline and take tax payers off the hook.

Take the case of a bank with plenty of bonds in issue, but also tiny amounts owed to each of hundreds of trade creditors or to hundreds or even thousands of market counterparties. In an emergency, it would not be remotely sensible operationally for the RA to have to pin down each and every tiny trade-credit or wholesale obligation on a Friday evening/Saturday morning so that they  14  See for example the testimony on cross-border resolution to the US Senate of Mike Gibson, Director of Banking Supervision and Regulation at the Federal Reserve Board, on 15 May. Available online at: http://www.federalreserve.gov/newsevents/testimony/gibson20130515a.htm. BIS central bankers’ speeches  9  could be bailed in, becoming part owners of the bank, alongside the bondholders. Precious time would be lost. The RAs need a degree of carefully constrained discretion to ensure that complex resolutions can be implemented in the real world. But there is a second, bigger point. The preferred path is not guaranteed by Heaven to work. For example, resolution of a group (or sub-group) by a top-down bailin would not work where, in the particular circumstances of its distress, the group’s problems proved to be so pervasive, so toxic and its business controls and information systems so hopeless, so chaotic that it was impossible to make a reasonable ex ante estimate of expected losses. In that absolutely disastrous but not unthinkable circumstance, the RA would need a fall-back plan. In the UK, the government’s plan for ring-fencing provides the basis for just such a back-up strategy.