October 10, 2014 / 10:14 PM / 3 years ago

U.S. and UK to test big bank collapse in joint model run

U.S. Federal Reserve Chair Janet Yellen (L) and Treasury Secretary Jack Lew (R) confer after a meeting of the Financial Stability Oversight Council at the Treasury Department in Washington October 6, 2014. REUTERS/Jonathan Ernst

WASHINGTON (Reuters) - Regulators from the United States and the United Kingdom will get together in a war room next week to see if they can cope with any possible fall-out when the next big bank topples over, the two countries said on Friday.

Treasury Secretary Jack Lew and the UK’s Chancellor of the Exchequer, George Osborne, on Monday will run the first-ever joint exercise simulating how they would prop up a large bank operating in both countries that has landed in trouble.

Also taking part are Federal Reserve Chair Janet Yellen and Bank of England Governor Mark Carney, and the heads of a large number of other regulators, in a meeting hosted by the U.S. Federal Deposit Insurance Corporation.

“There is no doubt that in 2008 the judgment taken by my predecessor and others was that banks ... like the Royal Bank of Scotland (RBS.L) and others were too big to fail,” Osborne said.

“Now I want to make sure that ... we have real options, and that we are able to avoid bailing in taxpayers with a bailout. And I’m pretty confident that’s the case now,” he said.

Six years after the financial crisis, politicians and regulators around the globe are keen to prove they have created rules that will allow them to let a large bank go under without spending billions in taxpayer dollars.

They have forced banks to ramp up equity and debt capital buffers to protect taxpayers against losses, and have told them to write plans that lay out how they can go through ordinary bankruptcy. The plans are so-called living wills.

Yet salvaging a bank with operations in several countries - which is the norm for most of the world’s largest banks such as Deutsche Bank (DBKGn.DE), Citigroup Inc (C.N) and JPMorgan (JPM.N) - has proven to be a particularly thorny issue.

Regulators may not be used to talking to each other, and there have also been suspicions that supervisors would first look to save the domestic operations of a bank, and would worry less about units abroad.

One scenario would test the hypothetical failure of a U.S. bank with UK operations, and a second the demise of a large UK bank with U.S. operations, the countries said. Results would be communicated after the exercise.

The exercise comes as regulators are about to bring to fruition further initiatives to make banking safer.

The first would force banks to have more long-term bonds that investors know can lose their value during a crisis, on top of their equity capital, to double their so-called Total Loss-Absorbing Capacity (TLAC).

A second measure, expected to be announced this weekend, will force through a change in derivative contracts, which in their current form protect investors, and complicate the winding down of a bank across borders.

Reporting by Douwe Miedema and Randall Palmer; Editing by Matthew Lewis and Andrea Ricci

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