andrew bailey : recovery and resolution plans remarks by mr andrew bailey, executive director for banking services and chief cashier of the bank of england, at the santander international banking conference, madrid, 17 november 2009. i am grateful to victoria cleland, chris daniels, iain de weymarn, andrew hauser, andrew hewitt, tony lomas, orla may, maggie mills, sally reid, paul tucker and andrew wardlow for their comments and advice. * * * it is a pleasure to be in madrid today, not least because finding time to reflect on the future of the banking system means that we are at some distance from the urgent fire - fighting that has characterised the past two autumns. but i would not wish thereby to downplay the importance and urgency of the rebuilding task. the past two autumns were in many ways taken up with doing what had to be done in crisis conditions. and what had to be done involved the use of public money on a scale that has been unprecedented and was previously unimaginable. there was nothing easy about that task, and from the perspective of resolving the problems of the system too often we have had to grit our teeth, accept that “ we are where we are ” and get on with the job in hand. fire - fighters don ’ t get to choose the fires they fight, or even sometimes how they fight them. but fire prevention is better than fire - fighting. we cannot justify having a banking system that depends on the use of public money to douse the fire when the crisis comes. and we also cannot allow conditions to exist where risks are taken on the basis that this backstop exists. “ too big ” or “ too important to fail ” are shorthand for institutions that exist in their chosen form as a result of underwriting with public money. i don ’ t believe that there is anything controversial about a statement that no industry can take on a form which is a consequence of such a massive potential, and of course recently actual, call on public money. the big issue is therefore what to do to correct the situation. there are three elements to the debate : regulation, structure and resolution. we can re - design and re - build the fire prevention systems in the existing landscape. this is the regulation element. at the heart of this is action on capital requirements, including a role for contingent capital and larger liquidity buffers. but we may also conclude that we want to prevent fires by having a different landscape of

funding model where the bank was excessively dependent on cash deposits from the securitisation master trust but with a hard rating agency trigger linking that funding to the position of the bank, thus creating a severe amplification of any stress? finally on northern rock, how would the bank deal with a funding stress when it was having to encumber such a high proportion of its good quality assets in order to over - collateralise its securitisation master trust? a very good example of the need for resolution plans is the case of lehmans in europe. two questions are relevant here : what should the resolution plan have contained ; and what changes to its organisation and operations might have made the massive task of dealing with lehmans more straightforward? you will, i hope, appreciate that i can only scratch the surface of the lehmans case in the time available so i apologise for the laundry list approach. starting with the useful content of a resolution plan : a detailed balance sheet for all relevant corporate entities in the group at the most recent month end ; a clear mapping of financial and operational interdependencies between affiliates ; wind - down plans for all business areas linked to a comprehensive information data room ; and a contact plan for major stakeholders. now, listing the changes to lehmans ’ organisation and operations that should have resulted from drawing up robust rrps : corporate entity based accounts and management information to supplement the business - line version ( because corporate entities fail ) ; clear segregation of handling client asset activities ; controls over depositing client money with affiliates ; employees hired by the entity for whom they work ; a clear record of each entity ’ s title to business and associated intellectual property ; robust risk systems that allow ready provenance of the balance sheet ; contracts for the provision of key business services ( eg banking systems ) that allow continuity of provision of services in the event of a resolution ; and arrangements for continuity of access to payment and settlement systems. this has been a very brief run through some very relevant case studies. but i hope it has illustrated the role that rrps should play and the pressing need to have them in place. rrps have come a long way in a short period of time, which is both essential and gratifying. but, of course, we haven ’ t actually produced any yet. this situation will not last much longer, certainly not in the uk, because the authorities are very keen to see real implementation of rrps, alongside the continuing international work on