Banking industry lobbyists are calling for a global resolution regime for failing financial firms, and arguing against bank taxes or other measures intended to mitigate systemic risk by restricting banks’ activities.

The Institute of International Finance said Monday that a new international resolution regime is essential to address the moral hazard created by the existence of financial institutions that are seen as “too big to fail” by national governments. It opposes proposals such as breaking up large financial firms, restricting their activities, taxing or imposing additional capital requirements on systemically important institutions.

The IIF recommends that in order to establish an effective cross-border resolution framework, all major national jurisdictions should have in place special resolution regimes with key common features that:

– allow losses to be borne by shareholders and unsecured, unprotected creditors;

– avoid moral hazard;

– give the authorities the appropriate range of powers of early intervention;

– include well-designed recovery and resolution planning;

– operate effectively in the context of an international resolution framework; and

– help to minimize the need for taxpayers’ money to be used to forestall failures or pay for the consequences.

The IIF proposes that authorities need powers to:

– replace the senior management of the firm;

– order an increase in capital and financial restructuring with instruments such as forced debt-equity swaps;

– identify any parts of the firm which remain systemically vital (such as payments operations) and transfer those to third party acquirers or, if necessary to a bridge bank;

– delay the operation of termination clauses in favor of counterparties for a short period;

– require the maintenance of outsourced services; and

– coordinate strongly and effectively with resolution authorities of other jurisdictions in which the group is active.

“The top priority has to be to strengthen the global system’s ability to avoid failures. We need to build a more robust system and this demands continued further improvements in risk management and governance in banks, enhanced well-balanced regulation, a renewed focus on effective supervision, and sound macro-prudential oversight. Authorities need to be provided with the full range of powers necessary to protect the public interest and this includes the power to intervene at an appropriately early stage when a firm is in difficulty,” said Peter Sands, group chief executive of Standard Chartered, plc who chaired the IIF’s Special Committee on Effective Regulation.

The group acknowledged that even after losses are attributed to equity holders and creditors there may well be additional costs associated with the resolution of a firm, and they advocate funding this fater the fact, rather than taxing banks ahead of time to build up reserves for such an event.

“We are advocating an ex post funding approach that can minimize potential moral hazard problems, maximize fairness, be practical and so achieve efficient results,” said IIF managing director, Charles Dallara. “In addition, we have concluded that an ex post approach is likely to be more effective in aligning the source of the systemic threat that a particular firm’s failure may produce and determine payment responsibilities. We are intent on working with the regulators to define the mechanisms needed for this purpose.”

IE