david clementi : current threats to global financial stability - a european view speech by mr david clementi, deputy governor of the bank of england, to the british - american chamber of commerce, new york, on 22 january 2001. * * * introduction it is a great pleasure to be here in new york. i was last at a british chamber of commerce meeting towards the end of 1998 when i talked about the readiness of london for the arrival of the euro. my message then - that while the uk might be outside emu, the city of london was very much part of the euro area - has been borne out by events. london remains by far the largest financial centre in europe and the most international. nowhere has a larger concentration of foreign banks, or greater daily turnover in foreign exchange and derivatives or trading in foreign shares. and much of the new business in euro is conducted through london. the majority of euro - denominated debt is issued in london ; and more than a third of deals on the london stock exchange take place in euro. us financial organisations, many of them represented here tonight, make a significant contribution to this success. this evening i would like to address two rather different subjects. the first is to reflect on recent developments in the us economy and the potential impact this has for the uk and for the stability of the financial system more generally. i would then like to say a few words about the proposed revisions to the capital requirements for international banks, announced last week by the basel committee ; not just because it is topical but also because these capital requirements are central to the stability of the system and its capacity to withstand shocks ; and as cautious central bankers it is important to take stock from time to time. us & uk economic ties as a very open economy, and one with close trade and investment links with the us, especially in the financial sector, the uk is a keen observer of events here. while much has been made in recent years of globalisation, the links between the us and uk are long - standing and deep - rooted, not least in the financial sector. for many years us financial institutions have been among the biggest players in the city. us firms take the top three positions in london as bookrunners in international bond and equity issues, and as arrangers of syndicated credits. through their dynamism and innovation, us firms also play a major role both in maintaining london's pre - eminence as an international financial centre and as a potent force for strengthening

a similar situation in the future. the brrd requires all banks and mortgage banks to prepare and update recovery plans and also requires the authorities to prepare resolution plans. these plans are the point of departure for the crisis management in the institutions and authorities. besides these two requirements, the brrd includes another key element : it lays down a framework for the authorities'management of a failing institution or an institution that is likely to fail. there are rules stating who is to bear the losses. institutions must observe a minimum requirement for own funds and eligible liabilities. this requirement is referred to as the mrel. the purpose of the mrel is to ensure that it is possible to resolve the individual firm in a crisis. the bail - in tool is of particular significance in this respect. i will get back to that. the mrel has two components : a loss - absorption amount and a recapitalisation amount. the loss - absorption amount corresponds to the losses the institution can be expected to have to absorb. the recapitalisation amount is to ensure that the chosen resolution strategy can be implemented. if the group is to continue as a viable business after having been distressed, it must be possible to recapitalise it at a level whereby it page 4 of 8 meets the capital requirements and enjoys sufficient trust in the market. by the way, that is the resolution strategy for the systemically important financial institutions in denmark. so we are no longer in a situation where we either save them all or do not save any. the brrd has introduced a new layer in the creditor hierarchy. this is non - preferred senior debt, which can be used for loss absorption and covers losses before senior unsecured creditors are affected. the price of this new type of debt is a sensitive indicator of the soundness of a bank. in that way, there is no risk that taxpayers, rather than investors and creditors, will bear the costs of handling a failing institution. the idea is that losses should be borne by those who incurred the risks and those who get the prospect of profit. that is known as bail - in. bail - in helps to ensure that the institutions have an incentive to run their businesses prudently and that investors and creditors monitor the activities of the institutions in order to prevent excessive risk - taking. the brrd is the most significant regulatory initiative in the financial area in europe in recent times. we now have a set of rules that reduces the risk that institutions will suffer serious financial problems,