Dealing with failed and failing financial institutions

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During recent years there have been a number of financial institutions which have come close to failure and required financial assistance from the government. The collapse of Lehman Brothers and the subsequent effect on the US economy exemplifies the effect that a failing financial institution can have on a country, its population and its economy. In an attempt to learn from the collapse of financial institutions, the UK has been keen to impose regulations governing the financial instability of financial institutions.

The approach within the UK has been to ensure companies plan for financial difficulties as part of their business strategy. By ensuring that insolvency procedures are a company responsibility, businesses should have less reliance on the government in times of financial difficulty. According to this model, companies will face more responsibility and be less of a burden on the government and the taxpayers.

Earlier this year the European Commission published a draft proposal regarding the regulation of failed and failing financial institutions in Europe. The institutions which pose the greatest risk are the ones which have far-reaching global effect so widespread regulations are potentially beneficial.

In order to ensure that financial institutions face the cost of collapse rather than taxpayers, the directive states that the tax liability faced by financial institutions should be increased in order to fund the tools used by the EU regulators. However, critics have argued that this would limit the ability of the UK, and Europe as a whole, to be competitive on a global scale.

In addition to this, Art. 97 of the directive proposes that each country maintains a resolution fund and be willing to lend to other countries if their fund is insufficient. The concern regarding this proposal mirrors the criticism of the propositions for a European Banking Union as many believe the UK would be called upon to repeatedly bail out other countries.

Although universal regulations regarding the failure of financial institutions could benefit UK taxpayers and the UK as a whole, there is likely to be widespread outcry if we are faced with on-going financial obligations to other countries, particularly after opting out of the single currency. Prior to accepting any EU directives, we must ensure that we are satisfied with the obligations it places upon us. If the theory behind the regulation of failed and failing institutions is to encourage their self-sufficiency and limit their reliance on the government and taxpayers then the application of Art. 97 of the EU directive would merely alter the problem rather than eliminate it.

Osborne Clarke are a legal firm with a specialist team focussed on financial services and FSA regulation.

October 10, 2012 · Tim Kevan · Comments Closed
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