The Bond Market Association is working to develop a "NewBank," which would act as a standby bank, activated if a credit, legal or other problem caused market participants to lose confidence in one of the two current clearing banks, JPMorgan and the Bank of New York, and no well-qualified bank stepped forward to purchase the existing bank's clearing business. A Federal Reserve document notes that $500 million in capital from the industry is needed to operate the bank and it is estimated that there will be about 20 to 25 owners.
"The idea of the new bank is that it will be a standby situation bank, ready to spring into action and replace one of the exiting banks for a period of time. That way the exiting bank can, in an orderly way, have its business moved elsewhere or more likely sell the entire business, but with no interruption in the operations of the markets," said Donald Layton, who has joined the BMA as a senior advisor to lead the implementation. He most recently retired as the vice chairman from JPMorgan and was a member of its office of the chairman. The "NewBank" is a working title and Layton anticipates that an official name will be decided upon when it is time to file applications.
Robert Toomey, v.p. and assistant general counsel of the BMA, said there are a number of issues that remain outstanding from the last working group document that still need to be addressed. "We need to validate some of the assumptions in the last working report, the capital size, the capital structure and exactly what business the standby entity will have," he said. He said the group needs to validate that $500 million will indeed be the standby capital and then determine specifically who the relevant constituencies will be, whether it is banks or investors, etc. The document anticipates the owners will stem from a broad group of market participants including dealer clients from both clearing banks. Its owners would elect a board of directors and the board would draw NewBank's senior executives from the ranks of senior management of its owners. No time frame has been set for that decision.
A December 2005 report to the Federal Reserve Board, by a working group formed to implement The Working Group on Government Securities Clearance and Settlement's suggestions for the standby bank, presented the group's suggestions. The report concludes that in planning for a sudden involuntary exit of a clearing bank as a result of financial or legal problems, it is reasonable to assume that the staff, data and equipment and systems of the existing bank would still be intact and capable of processing client requests. The group notes that this is important because it had not been asked to plan for a scenario where the clearing bank's problems were so severe that it threatened its existence either immediately or within a short period of time. If that were to happen, it is assumed that the FDIC would be required to intervene to help the institution through a bridge bank, a merger or purchase and assumption transaction with another institution or through liquidation. A Fed representative was not available for comment.