PRESENTATION TO THE COMMITTEE ON ECONOMIC AND MONETARY AFFAIRS OF THE EUROPEAN PARLIAMENT

Brussels, 16th March 2010

CARMINE LAMANDASENIOR EXECUTIVE VICE-PRESIDENT, UNICREDIT GROUP

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SUPERVISORY STANDARDS IN THE EUROPEAN SYSTEM

NEITHER MEMBER STATES NOR BANKING GROUPS WILL SUBSIDISE SUPERVISORY FAILURE.

SUPERVISORY STANDARDS IN ALL MEMBER STATES AND AT EU LEVEL MUST BE GUARANTEED AS A PRE-CONDITION TO ANY AGREEMENT ON CRISIS MANAGEMENT.

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CONTENTS

EUROPEAN BANKING GROUPS

OVERSIGHT OF EUROPEAN BANKING GROUPS

DEFINING A CRISIS AND THE PUBLIC POLICY RATIONALE

THE PRIMARY TOOL FOR CRISIS MANAGEMENT

EMERGENCY MEDIUM-TERM FUNDING

A EUROPEAN RECOVERY AND RESOLUTION FUND

AN ORDERLY RESOLUTION

CONCLUSION

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EUROPEAN BANKING GROUPS

EUROPEAN BANKING GROUPS ARE POSITIVE FOR FINANCIAL INTEGRATION, ECONOMIC GROWTH AND SHELTERED THE CEE REGION DURING THE CRISIS.

A EUROPEAN BANKING FRAMEWORK IS COMPLEX BUT: NOT A REASON TO DESTROY THE BENEFITS OF EUROPEAN BANKS NEITHER A REASON TO ROLL BACK THE SINGLE MARKET AND

REVERT TO RING-FENCING AND NATIONAL BARRIERS.

NOTE: For more on European banking groups providing CEE stability see the EBRD Transition Report 2009

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OVERSIGHT OF EUROPEAN BANKING GROUPS

THE EUROPEAN COMMISSION HAS MADE A POSITIVE PROPOSAL FOR A EUROPEAN SYSTEM OF FINANCIAL SUPERVISION.

IF THE EUROPEAN PARLIAMENT BELIEVES A MORE AMBITIOUS PROPOSAL IS POSSIBLE, IT SHOULD BE COURAGEOUS IN ITS VISION.

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DEFINING A CRISIS AND THE PUBLIC POLICY RATIONALE

THE DEFINITION OF A CRISIS IS: WHEN THE MARKET HAS LOST CONFIDENCE IN A SOLVENT BANKING GROUP.

ALL AUTHORITIES – THE EUROPEAN BANKING AUTHORITITY AND THE HOST AND HOME AUTHORITIES TOGETHER - NEED THE POWER TO APPOINT A SPECIAL ADMINISTRATOR TO TAKE CONTROL OF THE PARENT COMPANY’S POWERS AND RESOURCES AND DIRECTLY MANAGE THE CRISIS.

THE RATIONALE FOR CRISIS MANAGEMENT IS BASED ON THE PUBLIC INTEREST OBJECTIVES:

Maintaining financial stability

Ensuring public confidence in the banking system

Minimising the impact of a crisis on the real economy

Avoiding the use of taxpayer money

THIS GUIDES THE TRADE-OFF BETWEEN: STABILITY, COMPETITION AND STAKEHOLDER RIGHTS.

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THE PRIMARY TOOL FOR CRISIS MANAGEMENT

THE PARENT COMPANY IS THE PRIMARY TOOL TO ACCESS AND MANAGE A CRISIS:

POWERS INFORMATION KNOWLEDGE DATA

THE PARENT COMPANY UNDERSTANDS BEST THE GROUP’S BUSINESS MODEL AND SYSTEMICALLY IMPORTANT BUSINESS ACTIVITIES.

A SPECIAL ADMINISTRATOR, USING THE PARENT COMPANY, CAN BE SUFFICIENT TO REASSURE THE MARKET.

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EMERGENCY MEDIUM-TERM FUNDING

MARKET CONFIDENCE MAY ALSO REQUIRE ADDITIONAL TIME AND TOOLS FOR AUTHORITIES.

DURING THE LAST CRISIS, BANKING GROUPS HAD SUFFICIENT ASSETS AS COLLATERAL FOR THEIR MEDIUM-TERM FUNDING.

CENTRAL BANKS COULD ONLY PROVIDE SHORT-TERM LIQUIDITY. EXCESS LIQUIDITY IN THE MARKET DID NOT SUCCEED IN RE-STARTING FUNDING TO THE BANKS.

EXTRAORDINARY GOVERNMENT INTERVENTION RAISED FINANCE ON THE MARKETS AND PROVIDED GROUP-SPECIFIC SUPPORT.

DAMAGE TO THE PUBLIC FINANCES, THE TAXPAYER BURDEN STILL NOT KNOWN, BANKING GROUPS’ REPUTATIONS SUFFERED.

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A EUROPEAN RECOVERY AND RESOLUTION FUND (1/2)

A TOOL IS NEEDED: TO PROVIDE EMERGENCY MEDIUM-TERM FUNDING TO PREVENT THE FIRE-SALE OF ASSETS

A EUROPEAN RECOVERY AND RESOLUTION FUND BASED ON A PRIVATELY FUNDED EQUITY BASE AND PUBLIC GUARANTEES TO ISSUE DEBT ON THE INTERNATIONAL MARKETS.

FUNCTIONING OF THE FUND: Provides: finance and covered loans, guarantees and recapitalisation.

Collateral can be accepted. All assistance should be provided at market rates. If a more favourable

rate is necessary, measures to prevent shareholders from benefitting from the intervention can be taken.

A first loss in the Fund is covered by the equity from the banks.

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A EUROPEAN RECOVERY AND RESOLUTION FUND (2/2)

THE EUROPEAN RECOVERY AND RESOLUTION FUND PROPOSAL IS SIMILAR TO THE SPANISH BANK RESTRUCTURING FUND AND FRENCH SOCIÉTÉ DE FINANCEMENT DE L'ECONOMIE FRANÇAISE.

A EUROPEAN FUND IMPLIES RISK-SHARING BETWEEN MEMBER STATES AND ALSO BANKS. A PRE-REQUISITE IS THAT MEMBER STATES CAN TRUST THAT SUPERVISORY STANDARDS WILL BE HIGH IN ALL PARTS OF THE EUROPEAN SYSTEM OF FINANCIAL SUPERVISION.

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AN ORDERLY RESOLUTION (1/3)

AN ORDERLY RESOLUTION AND PARTIAL BAIL-OUT CORRECTS MORAL HAZARD.

A PARTIAL BAIL-OUT: PRESERVES SYSTEMICALLY IMPORTANT FUNCTIONS DISCIPLINES UNSECURED STAKEHOLDERS.

IN THE USUAL COMPANY INSOLVENCY PROCESS STAKEHOLDERS HAVE TIME TO REACH AGREEMENT. AGREEMENT CAN INCLUDE PUBLIC SUPPORT.

WITH ENOUGH TIME A PARTIAL BAIL-OUT IS EASIER TO REACH.

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AN ORDERLY RESOLUTION (2/3)

THE BANK INSOLVENCY PROCEDURE IS DIFFERENT FROM THE USUAL COMPANY INSOLVENCY PROCESS:

BANKS’ LIABILITIES ARE SHORT-TERM AND HIGHLY LIQUID

BANKS’ ACTIVITIES ARE ESSENTIAL TO THE ECONOMY

THE NUMBER OF BANK CREDITORS MAKES COORDINATION DIFFICULT.

BANK INSOLVENCIES REQUIRE SPEED BUT REACHING A CREDITOR INSOLVENCY AGREEMENT IS SLOW.

THE RESULT IS EITHER: A BANK GOES INTO LIQUIDATION OR THE BANK IS TOTALLY BAILED OUT.

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AN ORDERLY RESOLUTION (3/3)

BANK INSOLVENCY AGREEMENTS COULD BE SPEEDED UP USING A LEGAL TOOL:

Different creditor claims are automatically repaid up to a threshold based on the risk level of liabilities.

Unsophisticated, non-institutional investors (e.g. families and SMEs) are automatically guaranteed full coverage.

After a temporary moratorium, during which creditors can reach agreement, the remaining liquidated assets can be distributed.

ANOTHER APPROACH IS TO COORDINATE CREDITORS TO REACH A RAPID INSOLVENCY AGREEMENT, FOR EXAMPLE THROUGH A COLLECTIVE ACTION CLAUSE.

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CONCLUSION

EUROPEAN BANKING GROUPS ARE PART OF THE EU’S SUCCESS STORY. BANKING GROUPS IN THE SINGLE MARKET SHOULD NOT BE CONSIDERD “CROSS-BORDER”.

EUROPEAN SUPERVISION AND CRISIS MANAGEMENT REQUIRES EQUIVALENT STANDARDS, POWERS, TOOLS AND PROPER COORDINATION.

A SPECIAL ADMINISTRATOR CAN RESTORE MARKET CONFIDENCE. A NEW TOOL FOR EMERGENCY MEDIUM-TERM FUNDING IS NEEDED.

AN ORDERLY RESOLUTION NEEDS TO BE POSSIBLE. RECOGNISING WHY BANK INSOLVENCIES DIFFER FROM USUAL COMPANY INSOLVENCY PROCEDURES CAN HELP TO REACH THIS GOAL.

THE EUROPEAN INSTITUTIONS AND THE PRIVATE SECTOR CAN PUT IN PLACE A GLOBAL BENCHMARK IN BANKING REGULATION, SUPERVISION AND CRISIS MANAGEMENT.