Establishing a UK Rescue Regime for Failed Investment Banks

Abstract

The Global Financial Crisis has revealed that many advanced markets had poorly developed legal regimes and regulatory structures for dealing with banks and financial institutions that faced financial difficulties. This was especially so in regard to the “shadow banking system”; the failure of investment banks was a notable feature of the crisis, culminating with the collapse of Lehman Brothers. Legal systems are still grappling with ways of disentangling massive insolvency crises such as that involving Lehman.

The existence of poorly developed legal mechanisms was most graphically demonstrated in the UK by the urgent passage of legislation and regulations in early 2008 to allow for the rescue of Northern Rock plc. This eventually led to the passage of more detailed special resolution procedures in the Banking Act 2009 (UK).

Since that time governments have continued to seek suitable legal regimes for the regulation of crises in the shadow banking sectors. In the UK, HM Treasury issued a Consultation Paper in December 2009 that advanced proposals for the creation of special resolution arrangements for the handling of investment banks that encountered solvency difficulties; this set of proposals follows closely on the heels of provisions in the 2009 Act which had enacted special resolution proposals for dealing with failing banks which were seen to pose systemic risk to the market in the United Kingdom. This paper evaluates these recent Treasury proposals.

Keywords: Banking, Rescue, Insolvency, Special Resolution Regime, Global Financial Crisis, Regulation

JEL Classification: G32, G33, G34, H63