Transcript Lessons from Finacial Crisis for Bank Resolution – Presentation on Europe

Lessons from Finacial Crisis for Bank
Resolution – Presentation on Europe
and Germany
Role of Deposit Insurance in Bank Resolution
Framework – Lessons from the Financial Crisis
November 13-16, 2011
JODHPUR, INDIA
Dirk Cupei
Director Deposit Protection
Association of German Banks
Vice Chairman
European Forum of Deposit Insurers (EFDI)
Contents
I. E U R O P E
II. Germany
- Crisis management
- Restructuring fund
Lessons from Finacial Crisis for Bank Resolution
– Presentation on Europe and Germany
I.
EUROPE
Overview of the EU framework for
cross-border crisis management in the banking
European Union
October 2009
Public Consultation regarding an EU framework
for Cross-Border Crisis Management in the
Banking Sector
May 2010
Communication on bank resolution funds
October
2010
Communication on a new EU framework for
crisis management in the financial sector
December 2010/
January 2011
Consultation on technical details of a
possible European crisis management
framework
End 2011
Expected: Com Proposal for a directive on
Crisis Resolution and Bank Resolution Fund
Deutschland
Overview of the EU framework for
cross-border crisis management in the banking
According to the available working version of the
proposal for a directive, the EU framework is
currently more or less as follows:
• Scope: (Deposit-taking) credit institutions,
investment firms and financial holding companies.
• Resolution authority: Member states will be
required to set up a resolution authority that may be
part of the banking supervision set-up if
arrangements have been made to avoid conflicts of
interest.
Recovery plans
• The content of recovery plans will be proportionate to the size and
complexity of institutions.
• As part of the risk management process called for in the directive,
institutions will be required to draw up recovery plans that have to be
updated on at least on annual basis.
• Supervisors will provide institutions with different scenarios, requiring
them to draw up a recovery plan for each of these.
• Recovery plans should not assume access to any public financial support.
• Detailed requirements for content of recovery plans (e.g. with regard to
preparatory arrangements to facilitate the sale of business lines).
• Supervisors will be required to assess the effectiveness of recovery plans
and to request modifications if necessary. They may instruct institutions to
remove obstacles to implementation (e.g. by making changes to their
business strategy or governance structure).
Intra Group Financial Support
• Parent and subsidiaries may enter into an agreement on
financial support arrangements.
• The agreement will be reviewed by supervisors and presented
to the shareholders’ meeting for approval.
• The management body will be authorised by the
shareholders’ meeting to provide financial support under the
agreement, but only if it can be assumed that the support will
be repaid and it is justified by a superordinate “common
interest of the group” as a whole.
• Financial support must be notified to supervisors, who may
prohibit or restrict it within 48 hours after receiving
notification.
Resolution plans – Preparatory and
preventative powers
• Resolution authorities will be required to draw up resolution
plans, to update these at least on an annual basis and to
review them on the basis of predefined criteria.
• Proportionality principle will apply like with recovery plans,
but resolution authorities may waive resolution plan
requirement if an institution is not considered to be
systemically relevant.
• Institutions will be required to provide highly detailed
information for development of resolution plans, e.g. to
identify major or most “critical” counterparties and analyse
the impact of their failure on them (should ultimately be
equivalent to workload imposed by recovery plans).
Resolution plans – Preparatory and
preventative powers
• Resolution authorities will assess resolvability of institutions
and inform them of any obstacles to implementation of
resolution plans they have identified. Institutions must
propose measures for removing these obstacles.
• Positive: no justification for intervention if obstacles to
resolution lie outside institutions.
• Negative: resolution authority does not share plans with
institutions.
• For groups, resolution colleges will be set up.
• If necessary, resolution authorities may order measures
themselves, e.g. to make changes to the structure of an
institution, restrict business activities, issue CoCos.
Early Intervention
• In cases where there is a significant deterioration in the
financial situation of an institution, supervisors may require
the institution to, among other things, implement the
recovery plan, adopt measures to improve its financial
situation or present plans for reaching an agreement with
creditors.
• Appointment of a special manager (≈ “special representative”
within the meaning of Section 45c of the German Banking
Act) for a period of not more than one year.
• Special manager must have same rights as senior
management of the institution (e.g. right to convene
shareholders’ meeting).
Early Intervention
• Will also be empowered to initiate “rescue measures” against
the will of senior management.
• In the case of groups, joint decision is to be taken by the
resolution college within one week; in the absence of a joint
decision within 10 days, the consolidating supervisor may take
a decision; the EBA will take a conciliatory decision on cases
referred to it within 5 days.
Resolution
• Last resort – presupposes, in addition to a situation in which an institution
“is failing or likely to fail” (e.g. insufficient own funds), that resolution is in
the “public interest”
• General principles include the following: shareholders and creditors must
bear an “appropriate” share of losses; senior management must be
replaced
• Resolution tools specified in the directive are:
- the sale-of-business tool
- the bridge institution tool
- the asset separation tool (bad bank)
- the debt write-down tool (haircut, bail-in) – further details of this
are missing in the proposal (Articles 32 – 35)
• Detailed provisions dealing with international cooperation on resolution of
groups within the EU and with third countries.
Suspension powers/netting agreements
Resolution authorities will have three different
intervention/suspension powers:
• the power to suspend payment or delivery obligations for a
period of not more than 48 hours;
• the power to restrict the enforcement of security interests for
a period that they may determine;
Suspension powers/netting agreements
• the power to suspend close-out and set-off rights under
netting agreements for a period of not more than 48 hours,
subject to the following restrictions:
- covers only termination rights due to/in relation to
prudential reorganisation measures
- suspensive effect is removed if no transfer takes place
- termination right comes into existence again where transfer
takes place if termination right exists in relation to the
acquirer
- protection of the inseparability of transactions concluded
under a netting agreement (no cherry picking – Art. 62)
Suspension powers/netting agreements
• Further definition and requirements/exemptions for:
- Restrictions with regard to security interests: exemptions
from scope for certain types of security interest and
requirements for the period in which restriction applies
- Netting agreements: definition of the netting agreements
covered and exemptions from the protection provided by
Articles 48 and 62
Resolution tool financing arrangements
(bank levy)
• e.g. by providing guarantees, purchasing assets or making loans;
any losses and costs incurred by the use of financing arrangements
must first be borne by shareholders and creditors.
• Arrangements must be financed by domestic credit institutions.
• Target level of funds: will be based on whichever amount is higher –
0.6 % of the covered deposits as defined under the Deposit
Guarantee Schemes Directive or 0.12% of the non-equity liabilities
of all institutions.
• Fund-raising period: target level of funds is to be achieved within a
period of no longer than 10 years after the entry into force of the
directive. 10% of target level may be made up of payment
commitments by institutions.
Resolution tool financing arrangements
(bank levy)
• Contributions will be levied annually; assessment must be
based on at least one of the seven specified elements
(including an institution’s systemic importance, the amount of
its liabilities excluding own funds and deposits guaranteed
under the deposit guarantee scheme, and the extent to which
the institution has previously benefited from state support.
• Extraordinary contributions will be raised where necessary.
• Deposit guarantee schemes, provided they are used by
member states for financing resolution measures, will be
considered as financing arrangements for the purposes of the
directive.
Lessons from Finacial Crisis for Bank Resolution
– Presentation on Europe and Germany
Germany
I. Crisis management
Regulatory consequences of the
financial crisis
The regulatory approach to certain areas has changed, sometimes fundamentally,
in response to the financial crisis.
Major changes:
•
•
•
new capital and liquidity standards (Basel III)
reform of deposit guarantee schemes
new rules on restructuring “systemically important financial institutions”
Restructuring rules are needed because
•
•
•
•
entrepreneurial failure should ultimately lead to exit from the market,
state aid to ensure financial market stability should be phased out,
an instrument is needed for the orderly resolution of systemically important
market participants,
competitive distortion must be avoided.
Approach of the German Restructuring Act
New rules took
effect end of
December 2010/
beginning of 2011
Two-tier restructuring procedure
Objective
Financial market
stability: no bank should
be “too big to fail” or
“too connected to fail”
Early intervention and crisis
management tools for supervisors
Restructuring fund financed by
special bank levy
Restructuring procedure
 crisis management by the bank itself
1st tier: restructuring procedure
• Bank deemed in need of restructuring
if capital and liquidity position has
deteriorated as described in Section 45
(1) of the revised German Banking Act
(KWG).
 Bank drafts restructuring plan
• May not curtail third-party rights
• But restructuring loans senior to other
creditors in the event of insolvency
2nd tier: reorganisation procedure
• Existence of the bank is threatened
(Section 48b (1) KWG) and this could
jeopardise the stability of the system
(Section 48b (2) KWG).
 Bank drafts reorganisation plan
• Curtailment of creditors’ rights possible,
e.g. by reducing or deferring claims
• But no curtailment of claims covered by
deposit guarantee schemes
• Curtailment of shareholders’ rights possible
(e.g. by hiving off parts of the company).
• Debt for equity swaps with the approval of
creditors
German Restructuring Act
Application
BaFin
Court
Reports need for restructuring
Restructuring plan
Orders
implementatio
n
Proposes special manager
Appoints
Impending
difficulties:
Restructuring by
bank itself
Affected Bank
Oversees
restructuring
Restructuring
Restructuring

Special
manager
Reorganisation
German Restructuring Act
Application
BaFin
Court
Threat to existence of bank
threatens financial market stability
Reports need for reorganisation
Reorganisationplan
- Curtailment of creditors´ rights
- Dept-Equity-Swap
- Reorganisation/Living Off
of units
Orders
implementatio
n
Acceptance of
reorganisation plan
requires
- Approval of all creditors and
shareholders
Restructuring has
failed or likely to fail:
Appoints
- Endorsement by works (courts
examine if necessary whether
approval of individual groups
of creditors may be waived)
Bank draws up
reorganisation plan
Affected Bank
Overses
reorganisation
Restructuring
Restructuring

Reorganisation manager
Reorganisation
New supervisory tools
Section 45
KWG
Revision of prerequisites for intervention if
bank’s capital / liquidity position deteriorates and
new powers of intervention
Power to appoint a special manager
 Early intervention:
supervisors will be able to
instruct a bank to
implement restructuring
measures at an early stage.
Section 45c
KWG
Sections
48a – 48s
KWG
Introduction of measures in the event of a threat
to the stability of the financial system
 Crisis management:
additional tools with which
to restructure and wind up
an ailing bank.
Threat to a bank’s existence and the system
as a whole
(Section 48b KWG)
Threat to bank’s
existence
Threat that the bank will collapse unless corrective action is
taken
• Indications of concrete impending default or overindebtedness not
necessary.
threatens
financial market
stability
• Threat is assumed to exist in the event of a qualified breach of capital
and liquidity requirements.
If there is a danger of the threat to the bank’s existence will
have a seriously adverse effect on
• other firms in the financial sector,
• the financial markets or
• the confidence of investors and other market .
Regulatory instruments for
crisis management
Restructuring
fond
BaFin
administers
FMSA
e.g.:
- Establishment of bridge bank
- issues guarantees
- recapitalisation measures
Orders
Threat to existence of
bank threatens financial
market stability
Sale
Systemically
important units
Bridge Bank
Non-systemically
important units
Affected Bank
Old Bank
Restructuring
Restructuring / Resolution
Resolution insolvency
Lessons from Finacial Crisis for Bank Resolution
– Presentation on Europe and Germany
Germany
II. Restructuring fund
Restructuring fund (bank levy)
• Objective: to stabilise the financial markets
• Targeted size of fund: 70 billion euros
• Contributors to fund:
–
Principle:
all domestic banks plus branches of foreign banks headquartered
outside EU/EEA
–
Exceptions:
KfW, Deutsche Bundesbank and regional development banks
• Financing: annual contributions, first contributions due 30 September 2011
• Basis of contribution: amount of bank’s systemic risk
• If additional resources needed: special levy
• Tax implications: annual contributions non tax-deductible
Method of calculating contributions
(Section 12 (10) of the Restructuring Fund Act)
 Annual contributions depend on bank’s business volume, size and
degree of integration in financial market; determined by total
liabilities and unsettled derivatives.
 Following balance-sheet liabilities will be deducted:
1.
2.
3.
4.
liabilities to customers, except for liabilities to legal entities in which the
bank holds an interest,
participatory capital, except participatory capital with a maturity of under
two years,
funds for general bank risks and
regulatory capital.
 Progressive scale for annual contributions
 German government issued a regulation to clarify details.
Total raised by annual contributions to
restructuring fund
Federal Ministry of Finance estimate in 2010*
(figures are not actual anymore!)
o
Private banks
690 million euros
o
Landesbanken
319 million euros
o
Savings banks
60 million euros
o
cooperative banks
27 million euros
Annual total approx. 1.3 billion euros (new estimation total 800
Mio.)
* Source: German Council of Economic Experts, 2010/2011 annual report, published November 2010, p. 168.
Many thanks for your attention!
Dirk Cupei
Director Deposit Protection
Association of German Banks
Vice Chairman
European Forum of Deposit Insurers (EFDI)