Living Wills For Banks Get Boost From Darling

The idea of a “living will” being part of a more stringently regulated banking sector is something that’s been gathering pace recently, and the idea has had its latest boost via an interview with Alastair Darling in the FT today. “I think we need a timetable”, Darling said, “This is something you can’t just allow to drag on”. He’s set to announce this timetable in November.

A living will is a plan for banks to follow should they go the way of Lehman – “a forcing device for the clarification and simplification of legal structures”, according to Lord Turner, head of the Financial Services Authority (FSA) who Darling is tasking with making the banks get their act together (expect much harrumphing in the Mervyn King household this morning). As the various lawsuits against Lehman Brothers have demonstrated, trying to wind down a bank whose structure is more labyrinthine than a Brillo pad is not easy; the wills would force banks to iron out their tax-avoiding knots, so that it’s easier to prepare them for a crisis.

One look at Barclays’ tax avoidance flowcharts that the Guardian weren’t allowed to publish earlier this year, and you can see the levels of complexity and amount of colour-coding currently deployed in the name of saving a few bob; their indignation at the information being revealed shows that they’re not going to take any new regulations easily. Barclays, for example, runs their money through sun-dappled, tax-absorbing holding companies in the Cayman Islands, Luxembourg, Brazil and so on; the new rules would force them to make these channels a lot clearer, and potentially cut out these Hawaiian-shirted middlemen.

There’s already been a whole heap o’ beef after Lord Turner announced his plans for the wills a fortnight ago – the familiar chorus of Britain’s financial services industry being put at a disadvantage; lawyers saying tax issues weren’t even the FSA’s business; the idea of not allowing banks to generate as much money as possible, which amounts to a moral quandary in the banking world – witness financiers’ brains melting at the thought that capitalism and restrictions on wealth creation might actually have to coexist.

Barclays, to be fair, have actually been one of the few to be (grudgingly) accepting of the plans. “To break it up into living will elements is going to be very difficult,” said Group Finance Director Chris Lucas. “Nevertheless it is something we are going to have to do.”

It’s also worth pointing out, as Margaret Doyle does over at Reuters, that while Turner and Darling’s idea has to fight through domestic opposition from people of all stripes, from lawyers to bankers to the CBI, to implement it effectively on a global scale is going to be very difficult indeed. The idea, as has been mooted, of a global fund to protect against banking failures surely has diplomats waking up in cold sweats, and as Doyle notes, the nationalistic protection that kicks in during a banking crisis will be hard to balance out.

Obama’s speech on Wall St yesterday to mark a year since Lehman acknowledged these international challenges, segueing neatly into some self-promotion: “As the United States is aggressively reforming our regulatory system, we will be working to ensure that the rest of the world does the same”. He too hinted at a living will system: “If taxpayers ever have to step in again to prevent a second Great Depression, the financial industry will have to pay the taxpayer back – every cent”. Nevertheless, compared with the other international regulatory motions floating around – higher capital ratios, rules on compensation – this will undoubtedly be the hardest to persuade banks to sign up to, and the hardest to implement globally.

Posted by Ben Beaumont-Thomas in Hot Money | September 15, 2009 12:37PM |