LONDON, June 2 (Reuters) - Central bank forum the Bank forInternational Settlements laid out a blueprint on Sunday for howto recapitalise a major lender in the event of a failure,seeking to avoid the sort of chaotic ad hoc rescues seen since2008's financial crash.
Authorities have been grappling since the collapse of U.S.investment bank Lehman Brothers five years ago with the questionof how banks regarded as systemically important - or too big tofail (TBTF) - can be recapitalised without causing panic andwithout needing taxpayer cash.
The BIS paper released on Sunday said its plan would allowbanks to be recapitalised quickly and easily and would allowauthorities to give an unequivocal guarantee that insureddepositors would not lose savings.
"(It) proposes a simple recapitalisation mechanism that isconsistent with the rights of creditors and enablesrecapitalisation of a TBTF bank over a weekend without the useof taxpayers' money," the paper said.
Under the template laid out by BIS, which is termed acreditor-funded recapitalisation mechanism, the bank wouldundergo a forced recapitalisation by its creditors when itreaches the point of failure.
The ownership of a bank would be transferred to a newlycreated temporary holding company over a weekend. The bank isthen immediately recapitalised by writing off the claims ofcreditors.
The authors suggested the blueprint could be the only way torespect the pecking order for the repayment of creditors,achieve a quick recapitalisation and prevent risk from moralhazard, when expectations of government help can encourage banksto take more risks.
The creditor hierarchy would be observed, with subordinatedcreditors written off and some losses imposed on seniorunsecured creditors - enough to give the bank capital to easilywithstand future losses and restore market confidence. Thatwould include losses for deposits above the guarantee.
"On Monday morning, the authorities re-open the bank and canprovide it with any necessary and appropriate liquidityassistance because it is now well-capitalised," the report said.
The holding company would sell the recapitalised bank in thefollowing months at market prices, and proceeds would bedistributed to the written-down creditors.
Management and board members could be replaced between therecapitalisation and sale of the bank, if required.
The plan includes elements of other resolution methods,particularly the bail-in of creditors and a holding companyresolution.
Europe is pushing ahead with plans to implement a "bail-in"regime that would see bondholders and big depositors take hits.
But the bail-in model does not fully respect the creditorhierarchy, as it can inflict losses on bondholders beforeshareholders have been fully wiped out, said the BIS report'sauthors, Paul Melaschenko and Noel Reynolds.
Barclays (BARC)
HSBC Holdings (HSBA)
