Very impressive indeed, I daresay. My sincere congratulations!

Transcription

1 The Hague, 28 January 2013 Today Frank Elderson, executive director of De Nederlandsche Bank, delivered an address during the annual conference of P.R.I.M.E. Finance, a dispute centre specialising in assisting judicial systems in the settlement of disputes on complex financial transactions. In his speech Mr Elderson focussed on the desirability and development of a resolution mechanism for financial institutions in trouble. The full speech Resolution of financial institutions: lessons learned and challenges ahead Speech Frank Elderson, Executive Director, DNB at the P.R.I.M.E. Finance Annual Conference, 28 January 2013, Peace Palace, The Hague Ladies and gentlemen, esteemed colleagues, It gives me great pleasure to be standing here again, one year after we celebrated the foundation of P.R.I.M.E. Finance in this very room. As you may recall, in my speech on that occasion I expressed my belief that P.R.I.M.E. Finance would rise to the challenges facing it. Well, you haven t proved me wrong, for you can already boast a list of impressive achievements, I would say. I ll name a few: In the past year: You launched your training and technical assistance programme for domestic courts and judges and started developing judicial training activities on no fewer than four continents; And together with the European Bank for Reconstruction and Development (EBRD), you conducted a one-day round-table session with the Supreme Arbitrage Court of the Russian Federation on derivatives instruments, trading, and regulation; You gave a presentation at the American College of Business Court Judges. 1

2 And you added 14 new appointments to its List of Experts, which now numbers 96 experts in total with collectively more than 2,500 years of relevant market and legal experience. Very impressive indeed, I daresay. My sincere congratulations! I m glad to be able to report here that we monetary and supervisory authorities haven t been idle either this past year.. Indeed, I m proud to report that we are making progress with a number of developments and in that process seem to be forging a role for arbitration and mediation experts as an indispensable party once all measures are enacted. In my address today, I will confine myself to discussing one of the developments underway; namely resolution. From the many lessons drawn from the unprecedented financial crisis that we still haven t quite overcome, I ll highlight the one regarding resolution of banks, particularly the systemic ones. The experience in 2008 brought home that most countries didn t have appropriate resolution regimes in place to resolve banks in financial difficulties. In most cases, such banks were subject to the same insolvency proceedings as were applied for regular companies. This certainly holds for the Netherlands. The old instruments available to DNB, adjudicating bankruptcy and declaring the emergency regulations applicable, proved inadequate for an orderly resolution of systemic financial institutions that came close to collapse in the fall of What s more, had these two instruments been deployed, they might have triggered at least two unwarranted outcomes: The first one would be grave social unrest, in response to the cessation of a financial institution s public function, such as managing savings and extending loans. The second undesirable effect would be impairment of assets and contagion, causing counterparty market, liquidity and credit risks to materialize. The need to avoid these outcomes becomes all the more urgent if a bank is large in proportion to the economy and/or if it is closely interwoven with the rest of 2

3 the financial system. Clearly, such is the case in the Netherlands. With a banking sector around 400% the size of Dutch GDP, failure of the largest banks may indeed undermine the stability of the Dutch financial system as a whole. So, for lack of effective tools to manage banks, the authorities saw themselves compelled to bail them out, in order to restore trust and prevent the financial stability and real economy from being severely impacted. I m sure, though, we all agree that these bail-outs were and are undesirable, particularly because they place a heavy financial burden on society as well as encouraging moral hazard. So, the first lesson is that the current toolkit of resolution instruments must be enhanced. The second lesson is that to be truly effective, the enhanced resolution mechanism calls for a supranational dimension. Put differently: given the sheer number of authorities involved in the resolution of cross-border banks each operating under a different legal framework and each focusing mainly on national interests a European (or perhaps even better: a global) regime is crucial for managing crisis situations as orderly, effectively and efficiently as possible. So, what s been done in terms of national and international reforms of resolution regimes? Generally, much progress has been and is being made on the national, European and the global levels. And basically, at all levels, the overall aim is the same: for banks, resolution should produce similar results as are realized with normal insolvency proceedings. This implies: that losses should be allocated to suppliers of risk-bearing capital, such as shareholders and unsecured creditors, while safeguarding financial stability and limiting taxpayer exposure to loss from solvency support, that legal certainty, transparency and predictability should be ensured regarding the treatment of shareholders and bank creditors; that moral hazard should be minimized by removing the implicit guarantee of a taxpayer-funded bail-out for institutions. On a national level, many countries, including the UK, Germany, Denmark, Belgium, the US and Canada have revamped their resolution regimes. In the Netherlands, the recently enacted Intervention Act is a significant step forward as it assigns new resolution powers to DNB and the Minister of Finance. As a result, DNB now has the additional power to draw up a transfer 3

4 plan, providing for the transfer of a problem institution s (i) shares, (ii) deposits and (iii) other assets and liabilities to a private party or bridge bank. The Dutch Minister of Finance has been given the power to intervene in the internal powers of a financial institution and, as a measure of last resort, the power to expropriate assets and/or securities issued by a financial institution. Although these powers mean a step forward, clearly a harmonized European legal framework would be preferable as this would create a level playing field. The so-called recovery and resolution directive currently underway for credit institutions and investment firms is crucial in this regard. In view of the time allotted me, I won t go into the details of this Directive. Suffice it to say at this point that the Dutch Intervention Act is largely in line with this Directive, although, clearly, differences remain. For instance, unlike the Directive, the Intervention Act doesn t yet provide for a bail-in tool. I ll come back to this issue in a minute. In the context of resolution, the Financial Stability Board should also be mentioned, for the FSB plays a leading role in fostering the development of adequate resolution regimes around the globe. Indeed, the FSB s Key Attributes of Effective Resolution Regimes for Financial Institutions are already turning into the international standard for resolution regimes. So, in sum, much progress has been made on the resolution front. But, being a central banker, let me highlight two challenges that remain. First, while the EU Directive I referred to is a step forward in terms of harmonization of national resolution regimes and coordination between authorities, more progress is needed. Following the agreement in December to introduce the Single Supervisory Mechanism (SSM), it is important and urgent to establish a single European bank resolution authority as an essential complement to the SSM. Leaving resolution powers at the national level could stand in the way of a cost-effective and swift resolution of banking problems. National authorities may have a natural tendency to avoid any costs to their taxpayers and may be reluctant to bail in domestic parties. To overcome these risks and the challenges surrounding resolution of cross-border banks, a European resolution authority is urgently required to align the incentives of the SSM and the resolution function. 4

5 The second challenge relates to the bail-in instrument as included in the proposed EU Directive. To begin with, let me stress that I support the development of a bail-in proposal, for bail-in powers are important from a resolution perspective. They enable a failing bank to be quickly recapitalized without risking tax payers money, while ensuring the continuity of a bank s critical economic functions. This considered, a bail-in makes for greater market discipline and promotes financial stability. However, for a bail-in regime to be effective, it is imperative that its design is solid, ensures legal fairness and promotes a stable banking sector. We believe that the regime as proposed by the Commission conflicts with these principles. For it treats creditors of equal ranking differently on the basis of maturity. And it doesn t require banks to hold an earmarked layer of bailed-in loss absorbing capacity and, hence, doesn t keep unsecured funders out of range. In short, creditors are not treated fairly and predictably and the availability and pricing of unsecured funding of European banks stand to be affected. For the sake of time, I won t go into the details, but to alleviate these concerns we favor a more targeted approach to bailin. Key in our proposal is that after cancellation or dilution of capital and subordinated debt, a new designated debt instrument called bail-inable bonds should be resorted to, to recapitalize a failing bank. We do hope this proposal will get a foothold in the current discussions on this issue in Brussels. I m going to conclude. As you see, major efforts are being undertaken in the world of resolution and rightly so! However, once they ve been brought to a successful conclusion, not all issues will have been addressed, and here comes the point where I start looking at P.R.I.M.E. Finance As, you ll understand, application of the new resolution instruments will inherently have a large impact on all stakeholders concerned. This will no doubt create many legal challenges, particularly when stakeholders are established in different jurisdictions. For instance, think of: 5

6 the need to adequately compensate shareholders; the need for equal treatment of creditors in the same credit ranking; the need to create adequate checks and balances in terms of judicial reviews, and, at the same time, the need to act quickly and to create legal certainty. In short, I m thinking of the sort of issues that will be safe in the hands of such experts as P.R.I.M.E. Finance seems to have in ample abundance! ;). When I look back at what you ve accomplished in a mere year, I feel confident that you ll be ready to help out by the time we ve established a new resolution regime (I m saying so for the sake of argument, for you ll probably be ready before we are ;). I ll continue to follow your achievements in the near future, and hope you ll be as successful as you were last year, if only for the sake of me, a central banker. Indeed, I would be happy to come back next year to conclude that PRIME hasn t proven me wrong once again! Thank you. 6