From Crisis to Crisis: The Transformation of Merchant Banking, 1914–1939
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Transcript of Banking Union: running a banking crisis in the new EU ... · PDF fileBanking Union: running a...
Banking Union: running a banking
crisis in the new EU environment
May 2014
May2014
CONTENT
SSM, SRM, BRRD: who does what in banking crises?
Implementing resolution instruments: what to do, which challenges?
May2014
Three pilars (reminder)
► A single supervision
Single Supervision Mechanism Directive (SSM)
► A mechanism for resolving banking crises
Banking Recovery and Resolution Directive (BRRD) +
Single Resolution Mechanism (SRM)
► An integrated deposit guarantee scheme
Deposit Guarantee Scheme Directive (DGSD 2)
Towards a Banking Union in the EU
May2014
► Participating member states
► Eurozone
+ ► other voluntary EU members
► Within the European Central Bank (ECB), SSM creates a new institution, the Supervisory Board (SB)
► a supervisory authority
► a chair, a vice-chair, 4 representatives of the ECB, one representative of each national supervisory authority
► a representative of the European Commission as an observer, upon invitation
► decisions by a simple majority; qualified majority for adopting regulations
► monetary functions and supervision are completely differentiated and separated
SSM - institutional framework - 1
May2014
Responsibilities transferred to ECB
► Scope
► All credit institutions established in the participating members states
► Tasks
► License and withdrawal of license
► Prudential requirements (solvency, liquidity, risks)
► Governance and risk management requirements
► Reviews and stress tests
► Supervision on a consolidated basis over credit institutions’ parents
► Supervisory tasks in relation to recovery plans and early intervention
i.e. all supervisory tasks, including early intervention
SSM - institutional framework - 2
May2014
Responsibility sharing with national supervisory authorities
► ECB has direct supervision on
► All three most significant credit institutions in each participating member state
► All significant credit institutions in participating members states, including those:
► with a balance sheet over € 30Bn
► or with a balance sheet over 20% of national GDP
► or upon national authorities’ request, given significance with regards the national economy
► Or upon ECB initiative, institutions with cross-border subsidiaries and significant cross border activities
► National supervisory authorities have responsibility for the supervision over
► All other institutions (“less significant”)
► Within the regulations, guidelines and instructions issued to them by ECB
SSM - institutional framework - 3
May2014
► Participating member states
Member states participating to the Single Supervision Mechanim (SSM), i.e.: ► Eurozone
+ ► other voluntary EU members
► SRM creates two new EU entities:
► the Single Resolution Board (SRB), a resolution authority,
► the Single Resolution Fund (SRF), a resources pooling instrument owned by the Single Resolution Board
NB: if SRF aid is needed (or State aid), the adoption of the resolution scheme requires a positive or conditional decision by the Commission as for its compatibility with internal market rules
SRM - institutional framework - 1
May2014
Responsibility sharing between SRB and national resolution authorities
► The Single Resolution Board (SRB) is in charge of resolution plans and resolution:
► for all “significant institutions” or other institutions which are subject to ECB’s direct supervision (through SSM);
► for “cross-border groups” (meaning groups of entities covered by the SSM and established in more than one SRM participating member state);
► as well as, optionally, for other institutions for which member states decide to transfer to SRB the responsibility of their resolution;
► or when the resolution action requires the use of the resources of the SRF
► National resolution authorities:
► should implement the resolution actions decided by SRB
► are also fully in charge of resolution plans and resolution for other institutions/ situations.
SRM - institutional framework - 2
May2014
WDCI Bail-in
MONEY
BRRD
+ cross border groups etc.
Who does what?
Supervision Early Intervention Resolution
Nat ional le vel
EU level
National Resolution Fund
Single Resolution Fund (SRF)
Single Resolution Board (SRB)
Implementation
Decision
National Resolution Authorities
MONEY
SSM SRM Supervisory Board
(ECB)
National Supervisory Authorities
Less significant credit
institutions
Direct
Significant credit institutions
(SSM wise)
Indirect
Decision +
Others (eg single invest.
companies)
Implementation
May2014
► Conclusion
► National supervisory authorities and national resolution authorities (and, with them resolution funds/ DGSs) still have a role to play in banking crises
► They participate to the decision making process
► They are in charge of implementing the early intervention process and the resolution process, under SRB control and guidance
► They have to get prepared to make use of the resolution instruments and manage the implementation risks
► Let’s talk about implementation…
Who does what?
May2014
CONTENT
SSM, SRM, BRRD: who does what in banking crises?
Implementing resolution instruments: what to do, which challenges?
May2014
► Resolution tools: ► Sale of business tool
The Resolution Authority (RA) may force the selling or transfer of shares, assets and liabilities of the failing institution to the market
► Bridge institution tool
The RA may force the selling or transfer of shares, assets and liabilities of the failing institution to a public entity designed for that purpose
► Asset separation tool
The RA may force the selling or transfer of shares, assets and liabilities of the failing institution to a public or partially public asset management vehicle designed for that purpose
► Bail-in tool
The RA may write down or convert capital and debt instruments so as to pass expected losses to existing risk holders, reduce the liabilities of the bank, rebuild the capital base
► Government financial stabilisation tool (BRRD only)
When applying other resolution tools to the maximum extent practicable is not sufficient to maintain financial stability or protect public interest, the State member could, as a last resort, offer public equity support or take under temporary public ownership
► Write-down and conversion of capital instruments ► Independently of or together with a resolution action
Implementation: instruments in resolution
May2014
► Definition
The resolution authority may force the selling or transfer of shares, assets and liabilities of the failing institution to a public or partially public entity designed for that purpose
► Constraints
Wholly or partially owned by one or more public entities (including the resolution authority and the resolution fund) and controlled by the resolution authority
► Target/ Needs (illustrative preliminary list)
► Having an entity/ shell ready and pre-agreed (or a detailed process predefined so as to create it quickly)
► Having pre-identified key people and core teams to manage the entity when time comes
► Having identified and built key processes, reporting requirements, risk controls, governance arrangements etc.
► Having worked out financing requirements: capital instruments, but also liquidity
Getting prepared for the bridge institution tool
May2014
► Definition
The resolution authority may force the selling or transfer of shares, assets and liabilities of the failing institution to a public or partially public asset management vehicle designed for that purpose ( = defeasance)
► Constraints
Wholly or partially owned by one or more public entities (including the resolution authority and the resolution fund) and controlled by the resolution authority
► Target/ Needs (illustrative preliminary list)
► Working out on a target structure (JV or publicly owned vehicle?), having it ready or a detailed process to create it
► Working out on the desired performance fee structure
► Having a ready-to-launch request for proposal to select professional managers in the concerned assets able to provide management services to the defeasance structure (and even to take a share in the JV)
► Having pre-identified key people/ professionals (depending on the assets) etc
Getting prepared for the asset separation tool
May2014
Getting prepared for the bail-in tool
Ranking of bail-inable debt/
Hierarchy of creditors
Tier 1
Bail in
Resolution
Write down of capital instruments
(WDCI)
Early intervention Tier 2
Subordinated debt
Uncovered senior debt, incl
eligible deposits (except above)
SMEs’ and individuals’ deposits (except above)
Covered deposits (<100k€) - through the DGS -
Secured instruments/ Tax claims/ salaries etc.
May2014
► Definition
The resolution authority may write down or convert capital and debt instruments so as to pass expected losses to existing risk holders, reduce the liabilities of the bank, rebuild the capital base
► Constraints
► The resolution authority should go up the hierarchy of shareholders/ creditors
► Possible exclusions of the bail-in scope “in exceptional circumstances”:
► liabilities not bail-inable in a reasonable time
► liabilities needed for the continuity of critical functions and key operations
► avoiding widespread contagion, especially for natural persons, SMEs or the functioning of financial markets
► avoiding a destruction of value for other creditors higher than otherwise
► Open issue
► What could be the impact on the market?
Getting prepared for the bail-in tool
May2014
Key success factors in resolution
Central Bank money
Market money Going concern
Liquidity
Key Success Factors
Resolution funds
DGS money
Tax payers money Shareholders
money
Bail-ined creditors money
Covered depositors
money Bail-in
WDCI
May2014
Uncharted territories
► Which institutions?
► SIFIs or also smaller banks?
► Legal / constitutional issues given the extraordinary powers given to an administrative authority before any failure and without any judicial decision – litigation risk ahead
► Moral hazard risk still to be mitigated: failures should still be the preferred option in some cases
► Market uncertainty – doctrine of use to be clarified without strengthening moral hazard
► The valuation issue
► Need for a quick and appropriate valuation of assets/ liabilities/ losses so as to ground adequate and “definite” decisions
► Risk of not going far enough (markets), risk of going too far (markets)
► Valuation depends also on market reactions – iterative process rather than a once-and-for-all job
► BRRD post valuation and NCWOL bring some comfort; but might be better working on better fortune clauses
Implementation challenges
May2014
Uncharted territories
► Timing, the essence
► Is the over-a-weekend resolution a credible target or a myth?
► Is the decision-making process clear enough, especially for cross border crises?
► Efficiency of the new framework
► Reluctance over bail-out, but will bail-in work as well?
► New instruments, complex situations, hastily drafted regulation, governance challenges: “proof of concept” needed
► Cross border implementation
► Most difficult piece of legislation/ implementation
► Within the EU, with non EU jurisdictions as well
► Will national interests/ approaches re-emerge on day D?
► The level playing field issue
► Gone concern or going concern?
► i.e.: what will be the impact for the banking sector in terms of 1/ competition or remaining competition; 2/ financial contribution?
► Adequate balance to be found when time comes
Implementation challenges
May2014
Uncharted territories
► Bail-in and WDCI implementation: too few and too specific cases for being comfortable with those instruments at this stage
► Cyprus crisis (2013): bail-in that encompassed non-covered deposits
► SNS Real (Netherlands, 2013): bail-in limited to equity and junior debt (=WDCI?)
► MB Bank (Italy, 2011): voluntarily bail-in to interbank creditors and the FITD
► Real Bank (Hungary, 1998-99): equity wiped out, before a recap by NDIF
► Bail-in and WDCI implementation: challenges
► Scope: what use should be made of the possible exclusions?
► WDCI or bail-in? Will we dare bailing-in senior debts? non covered deposits?
► Possible disruption on markets and economy due to the bail-in itself/ contagion effects
► Parameters of write-down and conversion, also depending on the initial funding structure and MREL
► How will new shareholders behave (after conversion of their claims)? Will they vote with their feet or will they stay?
Implementation challenges
May2014
Uncharted territories
► Liquidity as a key success factor
► Solvency issues have to be solved, but liquidity comes first – no liquidity, no solution
► Do new pieces of EU regulation address liquidity issues enough?
► Also depends on the situation: open bank bail-in versus closed bank bail-in
► Resolution funds may guarantee the failing bank’s assets and liabilities - to be further explored
► Market reaction
► Credibility of the reorganisation/ resolution plan – accompanying measures, business perspectives
► At the end of the day, will the market « buy » a going concern?
► Single/ multiple point of entry issue (“SPE/ MPE question”)
► US have opted for a SPE approach on financial holdings
► EU legislation and regulation leave the question open
► For “significant resolutions, will it be: ► a matter of national discretion under SB and SRB guidance?
► or in the hands of new European authorities?
► Need for pragmatism, probably
Implementation challenges
May2014
Uncharted territories
Some conclusions
► Need for appropriate bank resources on recovery and resolution plans
► Need for advanced and thoroughful preparation by (all) authorities
► Need for pragmatism in implementation phases
► Probably just a starting point…
Implementation challenges
PRESENTATION 23