Bank Recovery and Resolution. Sven Schelo. 01 Wolters Kluwer Law & Business

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1 Bank Recovery and Resolution Sven Schelo 01 Wolters Kluwer Law & Business

2 Foreword Preface List of Abbreviations xiii xv xvii CHARTER 1 Bank Business Evolution of Size and Shape of Banks Capital Market Evolution: Investment Banking Type of Banks 5 [A] Commercial Banks 5 [B] Investment Banks 6 [C] Mortgage Bank 8 [D] Savings Banks 8 [E] Building Societies 9 [F] Credit Unions 10 [G] Global Systemically Important Institutions and the Banking Structural Reform 11 [H] Entities Covered by the Bank Recovery and Resolution Directive Prudential Regulation 15 [A] Reasons for Regulating 15 [B] Deposit Insurance 16 [C] Capital Adequacy 18 [D] Post-2008 Regulatory Trends Bank Balance Sheet 21 [A] Assets 23 [B] Liabilities 25 [C] Derivatives 27 [1] Interest Derivatives 28 vii

Important Institutions and the Banking Structural Reform 11 [H] Entities Covered by the Bank Recovery and Resolution Directive 13 1.

3 [2] Foreign Exchange Derivatives 29 [3] Credit Default Swaps 29 [4] Derivatives in Restructurings 30 [D] International Assets and Liabilities Capital Requirements in Europe 31 [A] Leverage Ratio 36 [B] Liquidity Ratios 37 [C] Capital Conservation Buffer and Countercyclical Capital Buffer 37 [D] Systemic Buffers 38 [E] Assessment 39 CHARTER 2 Bank Restructuring: What Have We Seen in the Past? Europe Emerging Markets Japan Nationalisation: State Taking Ownership 47 [A] What Is the Common Logic of a Bank Becoming Nationalised? Liquidity Measures 49 [A] European Central Bank and National Central Bank Financings 49 [B] European Stability Mechanism 51 [C] State Support in the 2008 Crisis Asset or Business Sale 54 [A] Facilitated Mergers 55 [B] Trust Structures ('Good Bank' - 'Bad Bank') 57 CHAPTER 3 Recovery Flanning Basic Distinction between Recovery and Resolution Flanning Which Potential Scenarios Should Be Created? 61 [A] System-Wide Events 61 [B] Example for Idiosyncratic Events The Structure of Recovery Plans Procedure Market Spill-Over Effects of the Recovery Flanning Group Recovery Flanning 69 CHAPTER 4 Intragroup Financial Support and Early Intervention Scope and Idea Structure of the Agreement Process of Granting Financial Support Early Intervention 75 viii

CHARTER 2 Bank Restructuring: What Have We Seen in the Past? 43 2.01 Europe 43 2.02 Emerging Markets 45 2.03 Japan 46 2.

4 CHARTER 5 Bank Resolution Introduction General Principles of Resolution Shareholder Subordination and Creditors' Ranking Determination of Losses and Cuts Thereof: Capital versus Liquidity Effect No Creditor Worse-Off Creditors of the Same Class Are Treated in an Equitable Manner 84 [A] Different Treatment of Creditors: Chapter 11 Lessons 84 [B] Exceptions under BRRD Covered Deposits Are Fully Protected Management Body Trigger Points for Resolution Failure or Likelihood to Fail 92 [A] Withdrawal of Authorisation or of the Banking License 92 [B] Over-Indebtedness 93 [C] Illiquidity 95 [D] Public Financial Support No Reasonable Prospect of Measures to Prevent Failure Public Interest The Resolution Tools Valuation Principles 102 [A] Purpose of Valuation 103 [B] Applicable Standards 105 [C] Derivatives 106 [D] Depositors 107 [E] Hypothetical Insolvency Quota Ancillary Resolution Powers 109 [A] Contracts Terminate Automatically 110 [B] Creditors Enforce Their Security Interests 112 [C] Payment Obligations Become Due 112 [D] Foreign Law Contracts and Assets 113 [E] Power to Amend Terms of Contract Bail-In 116 [A] Objective and Scope of the Bail-In Tool 116 [B] Liabilities Subject to Bail-In 117 [C] Exceptions: Do They Devaluate the Tool? 119 [D] The Eight-Percent Rule 120 [E] The Twenty-Percent Minimum 121 [F] A Practical Example Minimum Requirement for Own Funds and Eligible Liabilities (MREL) Write-Down of Capital Instruments 132 ix

06 Creditors of the Same Class Are Treated in an Equitable Manner 84 [A] Different Treatment of Creditors: Chapter 11 Lessons 84 [B] Exceptions under BRRD 86 5.

5 [A] Prerequisites Implementation of the Bail-In Tool 134 [A] Sequence 134 [B] Only Reduction or Also Conversion into Equity? 135 [C] Which Conversion for Which Value? 136 [D] What Happens If Equity or Debt Is in Public Ownership? The Bridge Bank Tool 140 [A] Scope and Idea 140 [B] Partial Transfers 142 [1] Safeguards in Partial Transfers 144 [C] Retransfer and Structural Issues Sale of Business Tool 147 [A] Scope and Idea 147 [B] Specific Requirements on the Sale of Business Tool Asset Separation Tool Resolution Financing 152 [A] Scope of Resolution Financing 152 [B] National Financing Arrangement and Single Resolution Fund 153 [C] National Financing Arrangements 153 [D] External Financing 154 [E] Deposit Guarantee Sehernes 154 [F] Borrowing between Financing Arrangements 154 [G] The Single Resolution Fund Group Resolution 157 [A] General Background 157 [B] Trigger Points in a Group Resolution 158 [C] Single or Multiple Point of Entry 158 [D] Authorities Responsible for Group Resolution Measures 160 [E] Write-Down of Capital Instruments in a Group Context 161 CHAPTER 6 Resolution Flanning Scope and Background Contents of Resolution Plan Impediments for Resolvability 165 CHAPTER 7 Epilogue by Mariana de Oliveira Leite de Castro - Comparative Bank Recovery and Resolution: The Swiss Legal Framework Banking Regulation in Switzerland Scope of Application of BIO-FINMA 168 [A] Covered Institutions 168 [B] Covered Assets 170 x

20 The Bridge Bank Tool 140 [A] Scope and Idea 140 [B] Partial Transfers 142 [1] Safeguards in Partial Transfers 144 [C] Retransfer and Structural Issues 146 5.

6 7.03 General Overview of Restructuring Proceedings 170 [A] Principles 170 [B] Confidentiality 170 [C] Trigger Points for Restructuring Restructuring Plan 172 [A] Ex Ante Flanning 172 [1] Capital Requirements 173 [B] Ex Post Flanning Restructuring Tools 176 [A] The Transfer Tool 176 [1] General Overview 176 [2] Stay of Early Termination Rights 177 [B] Bail-In 178 [1] Objective and Scope 178 [2] Implementation Deposit Guarantee Scheines Cross-Border Restructuring 180 APPENDIX: Secondary Legislation and Technical Standards Still to Come 183 Bibliography 199 Index 215 xi

05 Restructuring Tools 176 [A] The Transfer Tool 176 [1] General Overview 176 [2] Stay of Early Termination Rights 177 [B] Bail-In 178 [1] Objective and

11 November 2014 EBA/CP/2014/39. Consultation Paper. Draft Guidelines on the rate of conversion of debt to equity in bail-in

11 November 2014 EBA/CP/2014/39 Consultation Paper Draft Guidelines on the rate of conversion of debt to equity in bail-in 1 Contents 1. Responding to this Consultation 3 2. Executive Summary 4 3. Background