External Relations Minister Ian Gorst has lodged two propositions which, if approved, would introduce a new regime that would see the establishment of a ‘resolution authority’ to deal with a crisis of this nature.
His proposals would also introduce a new ‘bail-in’ mechanism, among other features, designed to prevent the taxpayer from having to bail out any financial institutions that implode.
Under bail-in, creditors – those whom the bank owes money – would be required to ‘write down’ [reduce] the debt payable to them, sparing the government from using public funds for a rescue.
The report accompanying Senator Gorst’s proposals says: ‘Bail-in is a tool developed by policy makers to provide relief to a financial institution on the verge of failing.
‘It requires that creditors of banks write down their debt, in turn reducing the risk that taxpayer support will be called on to support the bank. In a number of respects bail-in is the opposite of a taxpayer bail-out – the bank’s creditors are required to support the bank rather than a bail-out being requested from the taxpayer.’
Senator Gorst’s new report on the resolution authority says that it would form a new part of the Island’s financial regulator.
In his proposition, Senator Gorst continued: ‘It is proposed to establish an independent Jersey Resolution Authority whose core operational functions, including the employment of staff, takes place within the Jersey Financial Services Commission.
‘Physical and operational proximity created by bringing work of the resolution authority within the JFSC should facilitate information-sharing between the functions.
‘This will in turn assist with effective resolution planning, and is likely to be vital to success in a pressurised resolution scenario.’
The initial members of the new authority would be chairman Mike Mitchell, Katherine Hitchins, Monique O’Keefe and Jill Britton, who is the acting director-general of he JFSC.
In 2017, Members approved the draft Bank Recovery and Resolution Law and the new legal framework has been developed since, based on international standards that were introduced following the global financial crisis of 2008.
The law was developed to enable Jersey to assist with any foreign jurisdiction rescuing banks operating in Jersey through a branch or subsidiary or in case the Island needed standalone powers due to local business being affected by a collapse.
The global financial crisis, prompted by the collapse of the US sub-prime mortgage market, damaged many high-profile finance firms and led to the collapse of several, including US investment bank Lehman Brothers.
If the proposals, which are due to be debated on 18 January, are approved the new framework will come into force at the end of next month.