Transcript 110628_European Lawyer Roundtable_Bank Crisis Prevention

European Lawyer
Bank Crisis Prevention Recovery and
Resolution
Roundtable Paris, June 28, 2011
Hosted by De Pardieu Brocas Maffei
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Introduction

High Level approach

Participants

Measures taken in France in the context of the unfolding of the financial crisis

Description of the proposed framework for Bank crisis prevention and
recovery-resolution under consideration

Scope

Prevention and early intervention

Resolution tools and power

Group resolution

Financing arrangements
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High level approach of this roundtable
This roundtable:

Purports to highlight in high level terms French Authorities and industry views
and concerns regarding proposals tabled by:

The EU

The FSB

The Basel Committee on Banking Supervision

Others (IMF, G20, de la Rosière Report, etc.)

French Authorities and the FBF have responded to the working document of
the services of DG Internal Market and Services: “Technical Details of a
Possible EU Framework for Bank Recovery and Resolution”

The financial industry is complex and although a broad consensus has
emerged in the Paris market, French authorities views and some specific
industry concerns may lead to nuances and different focus all of which do not
purport to be reflected in this high level approach
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Participants
Name
Edouard Fernandez-Bollo
Christian Schricke
Jean-Louis Guillot
Position
Institution
Secrétaire Général Adjoint
Autorité de Contrôle Prudentiel
Conseiller du Président Directeur Général
Société Générale
et Secrétaire du Conseil d’Administration
Directeur Fiscal Groupe et Conseiller de
BNP PARIBAS
la Direction Générale
Georges Dirani
Directeur Juridique Groupe
BNP PARIBAS
Jean Tricou
Directeur de la Banque d'investissement
FBF
et de marché
Edouard-François de Lencquesaing
Managing Director
EIFR
Annie Bac
Directeur Juridique et conformité
FBF
Carole de Gaulle
Chargée de mission au département
juridique et conformité
FBF
Mary Heaney
Editorial director
European Lawyer
Jonathan Ames
Editor-in-Chief
European Lawyer
Charles-Henri de Pardieu
Partner
de Pardieu Brocas Maffei
Thierry Brocas
Partner
de Pardieu Brocas Maffei
Antoine Maffei
Partner
de Pardieu Brocas Maffei
Pierre Minor
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Measures taken in France in the context of the unfolding of the financial crisis
The French banking industry avoided exposure to major failures in the context of
the financial crisis:

Its universal banking model, coupled with a robust regulatory and supervisory
framework, facilitated weathering the storm

Government measures facilitated eased access to liquidity through:

Availability of SFEF funding

Equity funding made available by SPEP (subordinated securities or preference
shares)

DEXIA benefited from substantial State Guarantees provided by France, Belgium and
Luxembourg together with equity support

Ring fencing of certain assets by NATIXIS and DEXIA
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Framework under consideration

Enhanced focus on supervision with power of early intervention to pave the
way towards recovery for institutions facing difficulties

Where recovery through early intervention proves impossible, tools are
contemplated aiming at addressing the problems of a failing bank without state
support and focus on market support while avoiding systemic spillover or
development

Resolution planning
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Scope
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Should recovery plans and resolution plans apply to all institutions or only to
systematically important financial institutions (“SIFI”)?

What about prudential surcharges applicable to SIFI’s?

Difficulty in identifying a SIFI, but are all institutions not susceptible of creating
systemic risk situations?

Effect on possible distortion of competition
Pattern of distressed bank situations reflect a high degree of diversity and are
very fact driven in their diversity ; this calls for flexibility and pragmatism
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Resolution Authority
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Emphasis is made on promoting international cooperation
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Importance in having definition of resolution authorities being made identically throughout the
EU (the consolidated resolution authority is contemplated to be tripartite: Supervisor – Central
Bank – Ministry of Finance)?

The view has been expressed by French Authorities that:


Designation of the Resolution Authority is within the scope of authority of Member States

Such authority to comply with cooperation standards set by the EBA contemplating efficient
supervision and sufficient institutional capability

The concept of single resolution authority may not be relevant and flexibility may be appropriate

Implication in the resolution process of various authorities should be left to national authorities

European efforts should focus on defining specific rules and procedures applicable to resolution
authorities

Separation of supervision and resolution may not be desirable

Creation of a separate entity specifically in charge of resolution may not be desirable and could
result in additional reporting burdens
Role of EBA?
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Recovery plan
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Recovery plan is a toolbox and must be created on a consolidated group basis
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Link between recovery plan and resolution plan should be phased and clarified

Supervisor, consolidating supervisor or the college of supervisors?

In case of disagreement, should EBA mediation be sought?

Should the recovery plan remain confidential?

Flexibility in implementation or mandatory?
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Intra-group financial support (1)
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Consideration needs to be given to common law constraints regarding intragroup transfers which at the discretion of the parent are dictated by:

Taking into consideration, the common economic, corporate or financial interest
appraised with regard to group policy

The need to receive or provide a counterparty; and

The need not to exceed parent financial capability

Appropriate statutory measures to be considered to ensure a secure legal
regime offering legal certainty
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Transfers in that context should not be mandatory

Adjustment to capital requirements should be limited to Tier 1 capital where
support is provided at host country supervisor request?

Multiple plans to be avoided?
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Intra-group financial support (2)
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Discretion to be retained by the group to define the scope of financial support it
is seeking
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Support at the request of the regulator should exempt the parent of liability
under special statutory arrangements derogating from common law constraints
including in the criminal law context

Intra-group transfer protocols are likely to be bound to remain confidential in
view of adverse publicity on markets. Shareholders approval?
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Intra-group Financial support (3)
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Intra-group support arrangements likely to be downstream arrangements?
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But consolidated joint subsidiary support may enhance the prospect of
recovery of the parent and may prove to be decisive

Implication of supervisor expected to ensure compliance of the contemplated
arrangements with directive requirements

Implementation of pre-agreed arrangements does not require supervisor prior
clearance

A posteriori control may, however, be in order
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Resolution plan
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Should the supervisor be allowed to impose structural changes on healthy
entities as a preventive measure?
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Should resolution plans be required for all credit institutions or only those
which are systematically important?
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Should a plan identify on a mandatory basis preparatory measures which
address separation of the functions of the bank in the absence of
implementation of the resolution plan?
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Preparatory and preventive powers
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Supervisory power authority to impose operational or structural changes on a
healthy entity as a preventive measure should not be retained in the absence
of difficulties which are established

Limitation of intra-group guarantees?

EBA mediation?

Intrusive powers to be restricted to decisions by the consolidated resolution
authority?
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Early intervention
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Summary description of the French existing legal framework
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Banks in France are inter alia subject to:
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Minimum capital requirements and stringent prudential requirements including
prudential ratios
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Approval of their shareholding structure at the time of their application for a license

Obligation to report modifications in capital structure

Where the banking license is subject to certain conditions, any modification of such
condition is subject to prior approval of the Autorité de Contrôle Prudentiel (“ACP”)

In the context of its control and supervisory function, the ACP may either make
recommendations to a credit institution to take appropriate measures to strengthen its
financial condition and may issue injunctions to the effect of restoring or
strengthening its financial condition

The ACP may issue a formal demand to a credit institution to hold own funds at a
certain level as contemplated by regulations and to take measures to that effect
within a certain timeframe. Furthermore, the Governor of Banque de France may
invite shareholders of a credit institution to extend to that institution necessary
support if the financial situation of such credit institution so justifies
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Designation of a provisional administrator under the French legal framework (1)
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The ACP may, under the provisions of the French Monetary and Financial
Code (“MFC”) inter alia, designate a provisional administrator ("administrateur
provisoire"):

Either at the request of the directors of the financial institution concerned when they
believe they cannot exercise their functions under normal conditions

Or upon its own initiative when management of the relevant financial institution
cannot be pursued under normal conditions or when certain key executive officers
(“dirigeants”) are suspended

Such "administrateur provisoire" shall manage the activities of the financial institution
concerned with broad powers including the power to file for insolvency procedures, if
need be (subject to the provisions of the MFC)
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Designation of a provisional administrator under the French legal framework (2)
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Furthermore, where the situation of the credit institution so justifies, the ACP
may:

Prohibit either temporarily or permanently the carrying out of certain transactions and
restrict the carrying out of certain operations

Either temporarily or permanently suspend certain executives or impose their
resignation

Restrict payment of dividends

Impose financial sanctions
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Designation of a provisional administrator under the French legal framework (3)

Where an institution is subject to insolvency proceedings, where the interest of
depositor so justifies and a provisional administrator or liquidator has been
appointed, the ACP may, following advice of the Guarantee Fund, apply to the
lower court (“TGI”) to seek an order:

To dispose of shares of the relevant institution held by one or more executives, the
price of the shares to be established following a judicial expertise

To transfer to a “mandataire de justice” the power to exercise voting rights in respect
of those shares

To transfer all other shares other than those above
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Other Insolvency considerations applying to credit institutions
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Insolvency test applying to credit institutions

The insolvency test related to credit institutions is, however, defined as the inability to
meet payments either immediately or in the immediate future (“à terme rapproché”)

Credit institution which has been deleted from the list of credit institutions by order of
the ACP and whose liabilities vis-à-vis third parties, with the exception of debts
subordinated to unsecured creditors, are greater than its net assets minus provisions
to be constituted may be subject to Judicial Liquidation Proceedings
Prior ACP advice required to open insolvency proceedings against a
credit institution
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Early intervention

Appointment of a provisional administrator seems to be the break between
recovery and resolution when recovery measures have proved to be
insufficient?
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Is extension of provisions of Article 136 (d) (extended to cover circumstances
of likely breach) of the CRD desirable?

Should appointment of a special manager (provisional administrator) be
desirable as an early intervention measure (used twenty times in France) and
at what stage?
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Resolution tools and powers
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Criteria to set trigger events towards resolution
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Are insolvency related trigger events sufficient?
Point of non-viability and financial stability criteria?

Do those provide sufficient legal security?

Is added flexibility or a level of discretion required or desirable?
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Could insolvency procedures coexist with a resolution process or should
resolution have preeminence?
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What other criteria?
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Tools and powers guiding principle
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How and to what extent should unsecured creditors bear the risk of losses in
a resolution mode?
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Creditors of the same class should be treated equally including in the context
of a cross-border resolutions?

Creditor losses in a resolution mode should not exceed losses which would
have been incurred in a judicial liquidation process

To that effect, indemnification mechanisms should be considered together with
availability of recourse to judicial relief

Time is of the essence and shareholders approval should not be a prerequisite
as it would delay the process. No compelling requirement should be set other
than compliance with competition law

Liquidation of the entity should not be a preset mandatory requirement
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Tools
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Sale of business: - need for swift action and compliance with competitive
constraints - indemnification
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Bridge Bank: - need to insure continuity

Asset separation: competitive advantage considerations?
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Debt conversion

Need for harmonization and compatibility of tools among Member States

Need for flexibility in using those tools taking into consideration the compelling
need for swift action
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Debt write down (1)
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Need for coherent European approach and beyond an international approach
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Should the scope extend beyond SIFI’s?
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Need to distinguish going and gone concern (orderly liquidation) scenarios effect on senior debt market access of institutions seeking to recover going
concern status?

Intervention powers:


To be as wide as possible?

Comprehensive approach rather than a targeted approach?
Should certain senior debts be excluded in a comprehensive approach
scenario (deposits, interbank markets, counter-parties)
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Debt write down (2)
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In respect of bail-in:
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To be restricted to going concern recovery status or gone concern?
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To be restricted to statutory bail-in or contractual bail-in?

To be restricted to junior debt?

Availability of comprehensive approach in respect of statutory bail-in?
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Debt write down (3)
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In an orderly liquidation mode:

Bearing in mind that creditors should be no worse off than in a judicial liquidation
mode:

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A comprehensive bail-in approach: The most appropriate one?
Taking into account the need for financial stability, public interest and specific circumstances
should resolution authorities have the widest discretion to determine which classes or
categories should be targeted or affected and to what degree?
Should equal treatment of creditors of the same class be the aim bearing in mind
that:

Differences of treatment are in the current environment not inexistent (i.e. depositors)

Definition of creditor classes is not homogeneous throughout the union and insolvency law
distortions do exist

Recourse to indemnification to be considered subject to judicial review based on expert
valuation

Need to take into account the cooperative or mutual bank mode of operation
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Resolution powers

Transfer powers, as currently under consideration, seem to be adequate
subject to minor adjustments?

Resolution power under consideration may need statutory adjustment, so as to
be effective throughout the EU and to the extent, possible outside the EU in
third countries?

Legal certainty is of paramount importance including in the area of transfer of
assets free of any encumbrance
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Temporry suspension of rights including close-out netting

Temporary suspension of rights including close-out netting under the discretion of
the Resolution Authority would be appropriate for a short period (say 48 hours
subject to certain exclusions including in the DVP area)

In respect of close-out netting:

Suspension of close-out netting rights should be the subject of an overall comprehensive
review at the EU level leading ideally to a regulation

Should such directive be limited to treatment of suspension rights or address
harmonization of broader issues such as netting, valuation termination, mutuality, etc.

Should “resolution” be treated as an event of default or carved out?

Consideration may need to be given to special treatment or exemption of Central Banks,
DVP systems and CCP

Should suspension be limited to close-out or also extend to valuation, posting of collateral
etc.?

Capital treatment of suspension may need to be addressed

Consideration to be given to treatment of other events of default

Impact of stay on payment obligations

How is exercise of options to be addressed during the stay?

Need to harmonize suspension rights at both EU and international levels
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Safeguards

Further consideration may need to be given to the treatment of assets located
outside the EU

Should transfer of assets outside the EU under a resolution regime where a
portion of that transfer proves to be ineffective be treated as a partial transfer?

Concern that any form of cherry picking may weaken legal certainty under a
regime where individual agreements and transactions are split out

Consideration should be given to the need to define valuation principles which
may apply in a compensation framework in advance (prior to resolution) in
order to avoid mismatch between valuation principles under contractual
arrangements negotiated with counterparties and those agreed with the
resolution authority

What about multilateral arrangements with third countries?

What about firm specific arrangements?
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Group resolution

It is desirable that the Resolution Authority at the group level be responsible
for the decisions regarding composition of the resolution colleges

It would be further desirable that the Group Resolution Authority be
responsible to take such measures as may be required to achieve its
purposes. Decision to be reached within 48 hours

Joint decision within the group to be sought. Competent authorities for each
entity of the group to be bound by such measures?

Desirability to reinforce the legitimacy of Group Resolution Authority, for
instance by imposing the duty to comply with certain conditions which may be
put forward for instance by the IMF:


Adoption of legal framework governing local authorities cooperation within European
and International framework

Adhesion to fundamental cooperation principles

Adoption of principles and parameters governing losssharing among States
Would EBA involvement be desirable?
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Financing arrangements
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Desirability of a separate resolution fund with a target size defined as a
percentage of total eligible liabilities is a matter of debate

Risks are indeed not uniform among countries in terms of the characteristics of their
respective banking sectors and the quality of supervision

Financing needs are difficult to assess as those funds are expected to fund residual
costs and would be subject to the manner in which a crisis is managed and recourse
to market resources is available

Harmonized contribution levels may not be appropriate in view of differences among
banking systems throughout the EU
A general reference to available financing resources may be adequate

The resolution regime may take into account the fact that the deposit
guarantee scheme (DGS) may be taken into account for resolution purposes
in view of synergies

In France the DGS has certain resolution intervention features
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Derogation to company law directive

Modification of several statutes to be contemplated

Adoption of the resolution regime to permit public authorities to be vested with
powers normally within the scope of judicial authority in the context of
insolvency proceedings

Capital increase without decision of shareholders meeting to be contemplated,
such authority to be delegated to the provisional administrator
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