NEWS

Laws dealing with the failure of investment banks are to be tightened, after the collapse of Lehman Brothers revealed serious shortcomings in the UK’s insolvency regime.

Alistair Darling, chancellor, will on Monday set out plans for improving the ability of clients to secure an early return of their assets and to allow counterparties to have a better idea of the status of outstanding trades when a group defaults.

Lehman legacy

The failure of Lehman Brothers is seen as the trigger that caused the near-collapse of the global financial system, writes Peter Thal Larsen.

But the decision by the US administration not to bail out the Wall Street bank had very different consequences on either side of the Atlantic.

In the US, Lehman Brothers’ main operating divisions filed for protection from its creditors under the country’s Chapter 11 bankruptcy laws. This allowed Lehman on Wall Street to carry on limited trading.

In Europe and Asia, however, Lehman’s subsidiaries were immediately placed into administration, freezing the assets of banks, fund managers and hedge funds that had trading relationships with Lehman.

When it collapsed, Lehman held about $40bn as collateral for trades with counterparties. Much of this was frozen.
The paper looks at whether “pre-failure” steps can be taken in the UK, an admission that the Treasury is prepared to countenance investment banks being allowed to fail in future, in spite of the severe systemic consequences of Lehman’s collapse.

Allowing clients speedy access to their assets would be an important element in minimising systemic risk in future collapses and the Treasury – advised by the Bank of England and Financial Services Authority – has proposed a number of remedies.

They include requiring groups to have full FSA-reviewed contingency plans and placing “continuity of service” obligations on the administrators of groups in insolvency proceedings.

The paper will argue that the UK’s insolvency regime is an attractive part of the City of London’s appeal, in particular that it does not discriminate between domestic and international creditors.

“The government is committed to maintaining these advantages and strengthening the existing insolvency regime,” the government official said.

The proposals are likely to draw accusations that the Treasury is acting after the event, and that further insolvencies of investment banks look less likely in the near future as some confidence returns to the sector.

Mr Darling argues that the Treasury must learn the lessons of the financial crisis to put the City on a sounder footing to deal with future upheavals and to bolster investor confidence.

A separate banking act has introduced a “special resolution regime” to protect bank depositors, including giving the FSA and Bank powers to step in to seize deposits in a failing bank and to try to sell on the business as a going concern. However, most observers believe the legislation is insufficient to deal with the failure of an institution with a large investment banking arm.

From:  Finantial Times