Top managers would be fired, shareholders would be wiped out and bondholders could expect to lose massively in any future meltdown of a major bank, according to a UK and United States plan revealed yesterday.
Paul Tucker, deputy governor of the Bank of England, and his counterpart on regulation in America, Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation, outlined the tough measures they will take if one of the top dozen banks in the UK and US were on the brink of failure.
"The 'too big to fail' problem simply must be cured," said Mr Tucker. "We believe it can be, and that this joint paper provides evidence of the serious progress being made."
Although the US and European Union are developing separate legislation to deal with major banks, the announcement makes it clear that the UK believes it must work equally closely with the US because so many of the dozen banks covered by them are big in both countries.
Of the 28 "globally active systemically important financial institutions", as they are known in the jargon, four are UK-based; HSBC, Barclays, RBS and Standard Chartered. The majority of the eight US banks, Citigroup, JPMorgan Chase, Bank of America, Bank of New York Mellon, Goldman Sachs, Morgan Stanley, State Street and Wells Fargo, also have large operations in London. That was the case when Lehman Brothers collapsed in 2008.
In their paper Mr Tucker and Mr Gruenberg state: "Culpable senior management of the parent and operating businesses would be removed, and losses would be apportioned to shareholders and unsecured creditors."