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The US and UK have issued a joint paper outlining an action plan for struggling banks. The plan hopes to protect the tax payer from costly financial bail outs.
The plans would involve the creation of one single regulator, which would be responsible for overseeing the insolvency of a big international bank.
The plan was inititated to reduce the responsibility for both governments if another banking crisis was to occur. The UK government previously bailed out Northern Rock, Bradford & Bingley and Alliance & Leicester between 2007/08, which led to widespread criticism from UK taxpayers. £66bn was pumped into RBS alone, during the recent financial crisis.
Under the plan, shareholders would be wiped out and unsecured debt holders would face writedowns.
The Bank of England and the U.S. Federal Deposit Insurance Corp said in a joint paper, “The FDIC and the Bank of England have developed resolution strategies that take control of the failed company at the top of the group, impose losses on shareholders and unsecured creditors – not on taxpayers — and remove top management and hold them accountable for their action”.
Paul Tucker, deputy governor at the Bank of England, said “The too big to fail problem simply must be cured. We believe it can be and that this joint paper provides evidence of the serious progress that is being made.’
The idea is that this would limit the cost to the tax payer and wider economy if another banking crisis should occur.
