Resolution Authority Research Articles

Overlapping Legal Rules in Financial Regulation and the Administrative State

Reforms which seek to overhaul the Dodd-Frank Act have begun to gain support within the Trump Administration and Congress. The leading proposals go beyond technical matters and reflect a wholesale critique: financial regulation has become too burdensome, too complex, and grants too much discretion to regulators. This article argues that what is really at stake in these debates is the distinct issue of “regulatory overlap”—meaning the joint use of multiple legal rules to address a common market failure. It begins by developing a general framework for analyzing overlapping legal rules of all kinds. That framework is then applied in case studies of the two cornerstones of financial regulation: capital adequacy requirements and resolution authority procedures. The most direct contribution of this article is to substantive issues in financial regulation. Each case study yields insights about particular portions of the Dodd-Frank Act that pending reforms attempt to eliminate, as well as the big picture problems of systemic risk and banks that are Too Big to Fail. On a more theoretical level, it also situates the concept of regulatory overlap within the law-and-economics literature on the optimal design of legal rules, where it is otherwise conspicuously absent. Lastly, the article shows how an analysis of overlapping rules in finance carries lessons for the regulatory process as a whole. It thereby adds to scholarship on administrative law, especially to research in that area that deals with a related set of problems concerning the structure of agency jurisdiction, regulatory cost-benefit analysis, and the role of uncertainty in the policymaking environment.

Enfrentando a crise financeira: como constrangimentos jurídicos causaram a fragmentação institucional do poder monetário brasileiro no pós-2008

Resumo O prestamista de última instância é o agente financeiro, que tem a capacidade econômica e está disposto a emprestar liquidez, no momento em que outros agentes se recusam a fazê-lo. Autoridades de resolução estão legalmente habilitadas a empregar ferramentas técnicas para conter crises de solvência. Diferentemente de países desenvolvidos, em que bancos centrais criaram diversas modalidades de operações de liquidez emergencial e, ocasionalmente, desempenharam o papel de autoridades de resolução bancária, o Banco Central do Brasil (BCB) foi legalmente impedido de aumentar suas ações devido à Lei de Responsabilidade Fiscal. Este artigo argumenta que, devido a constrangimentos legais, a gestão da crise causou a fragmentação institucional do poder monetário no Brasil: as funções do BCB e também do Fundo Garantidor de Créditos (FGC) precisaram ser reestruturadas. Define-se poder monetário como a capacidade econômica, combinada ou não com a competência legal, para influenciar a criação de moeda-crédito na economia. Um modelo analítico é proposto para identificar a extensão do rearranjo institucional no pós-2008 e seus limites inerentes. É possível identificar problemas significativos de eficiência econômica e de legitimidade. A estrutura legal, criada principalmente por regras ad hoc do Poder Executivo, parece ser ainda incapaz de responder efetivamente a crises financeiras mais profundas.

CCP recovery and resolution: preventing a financial catastrophe

Purpose This paper aims to discuss the European Commission’s proposal for a central counterparty (CCP) recovery and resolution regulation. In this respect, the paper comments the consequences, risks and attention points for CCPs and their authorities. Design/methodology/approach This paper focuses on the proposed rules surrounding CCP recovery and resolution. The paper first familiarizes the reader with the risk management procedures currently obliged before discussing the resolution and recovery provisions foreseen in the proposal. Findings The proposed regulation commands significant requirements for CCPs and for their regulators. Not only will CCPs have to draft a recovery plan but also a resolution authority will need to be assigned. The latter will have the task, in consultation with a resolution college, to draft a resolution plan. When a resolution is inevitable, authorities will need to assure the continuation of the CCP’s critical functions, thereby warranting financial stability and investor protection. Originality/value To the best of the author’s knowledge, there are no other papers that provide a holistic overview of the newly proposed regulation and describe the choices to be made during a CCP’s resolution. This paper will be of interest to all CCPs and their stakeholders, such as their regulators, clearing members and their clients and other linked financial market infrastructures.

Legal Protection against Decisions of the Single Resolution Board pursuant to Article 85 Single Resolution Mechanism Regulation

The Single Resolution Board is a powerful authority in the European Union – perhaps even one of the most powerful. The system for legal protection against decisions of the Single Resolution Board based on Article 85 of the Regulation (EU) No 06/2014 is complex. The competent Appeal Panel has rejected more than 80 percent of all cases up to now and decided that the large majority of all appeals were not even admissible. Nevertheless, the legal literature on legal protection against decisions of the Single Resolution Board is minimal. As far as can be seen, no in-depth examination of the appeal procedure has been published yet. Case law of the General Court is not (yet) available. This study examines Article 85 of the Single Resolution Mechanism Regulation and presents an interpretation of the legal protection system that balances the interests of credit institutions as well as the interests of the European financial market and the European taxpayers in a powerful European resolution authority. The results are summarised in 10 theses at the end of this paper for further discussion.

Continuous and smooth access to payment systems for banks in resolution

One of the main objectives of resolution authorities is to ensure, to the maximum extent possible, the continuity of critical functions for a firm in resolution. The continuity of critical functions, in most cases, requires continuous access to the clearing, payment and settlement services that underpin them. This paper focuses on payments-specific aspects deriving from experience gained in relation to bank resolution in Italy. Drawing on these events, the paper shares some lessons learned with respect to ensuring continuity of access to payment systems in the resolution phase, proposes some practical approaches to reducing operational risk during the resolution phase, and highlights some areas for improvements with possible follow-up actions.

Cross-Border Resolution of Financial Institutions: Perspectives from International Insolvency Law

This paper examines the issues regarding the cross-border resolution of financial institutions, focusing on the power allocation between the home and host resolution authorities, i.e. the jurisdiction rule. The research is conducted from the international insolvency law perspective. A modified universalism approach is chosen, taken into account the balance of conflict of interests between effective resolution and protection of local interests. Regarding the parent-branch resolution, the home authority should be able to commence a main resolution proceeding, while the host authority should be able to commence either a supportive secondary resolution proceeding or an independent secondary resolution proceeding. Regarding the parent-subsidiary resolution, in spite of the desire to take a global resolution action, the current legal framework only allows a host resolution proceeding for foreign subsidiaries. This paper continues to propose the application of the head office functions test developed in the international insolvency law, so that foreign subsidiaries can be subject to the home main resolution proceeding.

The systemic implications of bail-in: A multi-layered network approach

One of the most important elements of the post-crisis financial reforms was to establish credible resolution frameworks allowing for creditor bail-in when banks are entering resolution. Despite the obvious benefits of shifting the burden of resolution from taxpayers to bank creditors, bank bail-ins may also give rise to costs as the financial consequences for bank shareholders and creditors being bailed in could endanger their own financial situation and potentially entail systemic implications. Using granular data on the securities cross-holdings among the largest euro area banking groups, we construct a multi-layered network model where each layer represents bail-inable securities of a specific seniority layer of the creditor hierarchy. The model can be a useful tool for resolution authorities to inform the policy discussion on both the composition and level of loss absorbing capacity of banks and the direct contagion risk following a bail-in. We find that due to low levels of securities cross-holdings in the interbank network there is no direct contagion in terms of creditor banks failing as a result of another bank being bailed in. At the same time, we document that a bail-in will have pecuniary consequences on the different liability holders and our framework allows for an exact quantification of those effects. In addition, we show that recapitalisations following a bail-in will change the network structure and hence the embedded contagion risk.

Resolution of Too-Big-To-Fail Institutions Under Dodd-Frank: America First, GATS Second?

The recent financial crisis showed that financial instability transcends national borders. In the wake of the crisis, many WTO Members adopted new prudential measures, including regulatory instruments to resolve too-big-to fail institutions. The Dodd-Frank Act embodies the US postcrisis response. Dodd-Frank introduced a Resolution Authority, aimed at preventing future government bailouts and bankruptcies of too-big-to-fail institutions. From an international trade perspective, the Most-Favoured-Nation (MFN) and National Treatment (NT) principles of The General Agreement on Trade in Services (GATS) may limit certain applications of the Resolution Authority. US subsidiaries with a foreign parent are not to be treated less favourably than domestic companies or competitors from third countries providing like services. The US could thus fall short of its MFN and NT principles if it uses the Resolution Authority in a selective manner. The Panel Report in Argentina-Financial Services makes it clear that the Prudential Carve-Out will not provide unlimited justification in such cases. In a broader context, it is argued that the GATS’s MFN and NT principles should be seen as a stabilizing force in maintaining financial stability across borders.

CCP Recovery and Resolution: Preventing a Financial Catastrophe

This paper discusses the European Commission’s proposal for a CCP Recovery and Resolution Regulation. In this respect, the article comments the consequences, risks, and attention points for central counterparties and their authorities. This paper focuses on the proposed rules surrounding CCP recovery and resolution. The article first familiarizes the reader with the risk management procedures currently in place before discussing the resolution and recovery provisions foreseen in the proposal. The proposed regulation commands significant requirements for central counterparties and for their regulators. Not only will CCPs have to draft a recovery plan, each member state will also need to assign a resolution authority. The latter will have the task, in consultation with a resolution college, to draft a resolution plan. When an orderly resolution of the CCP is inevitable, authorities will need to assure the continuation of the CCP’s critical services, thereby warranting financial stability and investor protection. To the best of the author’s knowledge, there are no other articles that provide a holistic overview of the newly proposed regulation and discuss the choices to be made during a CCP’s resolution. This paper will be of interest to all parties facing consequences, namely CCPs, their regulators, clearing members and their clients, and other linked financial market infrastructures.

The Banking Union and National Authorities 2 years down the Line—Some Observations from Germany

With the institutional setting for the Banking Union having been established and become fully operational, market participants, supervisory staff, and academics are gradually getting to terms with the reality of the new two-tier system of supervisory and resolution authorities within the Eurozone. Drawing from media coverage, input from practitioners and the on-going academic debate, the present article seeks to present an—inevitably provisional—assessment of the new regime from a German perspective. While regulatees and their advisers within the country appear to have got used to the new reality, the paper also identifies a number of residual concerns, some of which are attributable to the specific characteristics of the German financial sector, others indicative of broader problems.

De/centralized Decision Making Under the European Resolution Framework: Does Meroni Hamper the Creation of a European Resolution Authority?

The EU Bank Recovery and Resolution Directive (BRRD) shifts the focus from reacting in the face of a crisis, to planning and preparing to avoid uncoordinated, ad hoc measures and aims to ensure banks resolvability; it strengthens and harmonizes early intervention measures and gives supervisors new tools and powers for managing failing banks while continuing part of their business, i.e. critical functions. The BRRD was conceived out of a need to reduce public funds being used to bail out banks considered ‘too big to fail’ and strengthen cooperation and coordination between Member States. The first part of this paper sets out how key resolution decisions, including during recovery and resolution planning, are taken for cross-border banking groups within the EU, and within the Single Resolution Mechanism (SRM) of the euro area. It also considers the impact of the BRRD on cooperation with third countries (small host countries). The second part of the paper offers a legal analysis of why no autonomous centralized decision-making powers were delegated to the Single Resolution Board (SRB). It considers whether legal judgements made in 1956 and enshrined as the ‘Meroni doctrine’ actually prohibit delegation of fully autonomous resolution powers to the SRB and more broadly prevent the creation of a centralized resolution agency for the whole EU.

Why MREL Won't Help Much

The bail-in tool as implemented in the European bank resolution framework suffers from severe shortcomings. To some extent, the regulatory framework can remove the impediments to the desirable incentive effect of private sector involvement (PSI) emanating from a lack of predictability of outcomes, if it compels banks to issue a sufficient minimum of high-quality, easy to bail-in (subordinated) liabilities. Yet, even the limited improvements any prescription of bail-in capital can offer for PSI’s operational effectiveness seem compromised in important respects. The main problem, echoing the general concerns scholars voiced against the European bail-in regime, is that the specifications for minimum requirements for own funds and eligible liabilities (MREL) are also highly detailed and discretionary and thus fail to fully alleviate the predicament of investors in bail-in debt. Quite importantly, given the character of typical MREL instruments as non-runnable long-term debt, even if investors are able to correctly gauge the relevant risk of PSI in a bank’s failure at the time of purchase, subsequent adjustments of MREL prescriptions by competent or resolution authorities potentially change the risk profile of the pertinent instruments. Therefore, original pricing decisions, and the market discipline that follows from them may prove inadequate and so may. The pending European legislation aims to implement the already complex specifications of the Financial Stability Board (FSB) for Total Loss-Absorbing Capacity (TLAC) by making very detailed and case-specific amendments to both the regulatory capital and the resolution regime with an exorbitant emphasis on proportionality and technical fine-tuning. Omitted from this approach, however, is the key policy objective of enhanced market discipline through predictable PSI: it is barely conceivable that the pricing of MREL instruments reflects an accurate risk assessment of investors because of the many discretionary choices a multitude of agencies are supposed to make and revisit in the administration of the new regime. To prove this conclusion, this paper looks in detail at the regulatory objectives of the BRRD’s prescriptions for MREL and their implementation in the prospectively amended European supervisory and resolution framework. It concludes with policy recommendations based on the prior analysis.

European Union Bank Resolution Framework: can the objective of financial stability ensure consistency in resolution authorities\u2019 decisions?

The Bank Recovery and Resolution Directive (BRRD), agreed in 2014 and transposed into national law by now, equipped EU resolution authorities with a number of tools and powers to deal with EU failing institutions. To use these tools and powers, and to act swiftly prior to institutions reaching the state of insolvency, resolution authorities must undertake appropriate planning (resolution planning) in accordance with a number of rules and processes under the Directive.Resolution planning should enable authorities to “handle situations involving both systemic crises and failures of individual institutions”. The resolution plan must take into consideration the resolution scenarios “including that the event of failure may be idiosyncratic or may occur at a time of broader financial instability or system wide events”. The protection of financial stability has a central place in the BRRD, albeit in some instances it should also be balanced against other considerations, for example the other ‘resolution objectives’. The term ‘financial stability’ is not defined in the Directive; it is further qualified, however, in the context of a number of assessments that the resolution authorities must undertake.The paper discusses the notion of ‘financial stability’ through the lenses of a number of tasks that EU resolution authorities must perform. It argues that although the financial stability objective should be necessarily broad to provide discretion to resolution authorities, it is hard to ensure consistency in resolution decisions and actions.

Banking Crisis and the Japanese Legal Framework

This paper presents an overview of the Japanese system to deal with the distress of banks, providing a classification of the regulation and remedies based on the level of systemic risk of the troubled entity. The paper differentiates between the types of actions available and analyses in detail the instruments and their application. While the regulation is disperse and its apprehension is complicated for a foreign reader, Japan counts on a modern, thorough and adequate group of institutions and instruments to tackle bank distress. Its most notable feature is the proportionality of measures and the flexibility enjoyed by a resolution authority that may accommodate its intervention to the characteristics of the case and the degree of contagion risk. Although mainly inspired by the American model, the system is compared with the new European framework and FSB recommendations are considered. Although a few elements could be reconsidered, its high institutional level and flexibility make the Japanese system one capable of dealing with financial crises at both national and international levels.

Legal Protection against Decisions of the Single Resolution Board Pursuant to Article 85 of the Regulation (EU) No 806/2014 (Single Resolution Mechanism)

The Single Resolution Board is a powerful authority in the European Union – perhaps even one of the most powerful. The system for legal protection against decisions of the Single Resolution Board based on Article 85 of the Regulation (EU) No 806/2014 is highly complex. The competent Appeal Panel has rejected more than 80 per cent of all cases up to now and decided that the large majority of all appeals were not even admissible. Nevertheless, the legal literature on legal protection against decisions of the Single Resolution Board is minimal. As far as can be seen, no in-depth examination of the appeal procedure has been published yet. Case law of the Court of the European Union is not (yet) available. This study examines Article 85 of the Regulation (EU) No 806/2014 and presents an interpretation of the legal protection system that balances the interests of credit institutions as well as the interests of the European financial market and the European taxpayers in a powerful European resolution authority. The results are summarised in 10 theses at the end of this paper for further discussion.

The Impact of the Dodd-Frank Act on Financial Stability and Economic Growth

This article assesses the benefits and costs of key provisions of the Dodd-Frank Act that strengthened regulation following the financial crisis. The provisions are placed into five groupings: clear wins, clear losses, costly tradeoffs, unfinished business, and too soon to tell. Clear wins include higher prudential standards, including for capital; the single-point-of-entry resolution authority; creation of the Consumer Financial Protection Bureau; and greater transparency and oversight of derivatives. Clear losses are restrictions on Federal Reserve emergency lending authority and forcing the Federal Deposit Insurance Corporation to obtain permission from Congress before providing temporary liquidity guarantees. Costly tradeoffs are the Volcker Rule and the Lincoln Amendment. Unfinished business includes regulatory consolidation and more independence for the Financial Stability Oversight Council and the Office of Financial Research. Too soon to tell are requirements and standards for leverage ratios, capital buffers, stress testing, and liquidity requirements.

The Banking Union and National Authorities Two Years Down the Line Some Observations from Germany

With the institutional setting for the Banking Union having been established and become fully operational, market participants, supervisory staff, and academics are gradually getting to terms with the reality of the new two-tier system of supervisory and resolution authorities within the Eurozone. Drawing from media coverage, input from practitioners and the on-going academic debate, the present article seeks to present an – inevitably provisional – assessment of the new regime from a German perspective. While regulatees and their advisers within the country appear to have got used to the new reality, the paper also identifies a number of residual concerns, some of which are attributable to the specific characteristics of the German financial sector, others indicative of broader problems.

Who should rescue subsidiaries of multinational banks?

This paper asks whether a single resolution authority for multinational banks is desirable. Such an authority was recently established within the European Monetary Union, where the resolution power for large banks was transferred to a Single Resolution Board. To address this issue, we consider the risk incentives of a multinational bank in the presence of different resolution frameworks and determine the welfare-efficient structure which prevents banks from excessive risk-taking. We argue that a single resolution authority is not always welfare-efficient, because it is the heterogeneity of bank resolution power which induces multinational banks to behave prudently. In severe solvency crises, the multinational authority should have the resolution power, whereas in less severe crises national resolution authorities are more efficient in avoiding excessive risk-taking on the part of multinational banks.

Rushing to Judgment: The Evolution of Sports Disciplinary and Arbitral Bodies in Ireland

This article provides a review of judicial scrutiny of decisions of the leading sports authorities in Ireland. It focuses primarily on the Gaelic Athletic Association (‘GAA’), Ireland’s leading sports organisation, and the manner in which it has dealt with the increasing incidents of so-called ‘ambush injunctions’, whereby individual participants seek, primarily through the use of interlocutory orders, to circumvent playing suspensions. The GAA’s experience, which is all the more remarkable given that it administers fundamentally amateur games, has been reflected across the Irish sporting spectrum with the Irish horse-racing authorities (the ‘Turf Club’), the Football Association of Ireland (‘FAI’) and the Irish Rugby Football Union (‘IRFU’) facing similar ‘rushes to judgment’.An interim assessment of the GAA’s recently enhanced disciplinary mechanism – the Disputes Resolution Authority – follows this introductory context. The DRA, of which the author is a panel member, is an arbitral-based disciplinary tribunal, independent of the GAA’s central authorities, and hears disputes referred to it on an appellate basis only. The establishment of the DRA is of interest for Irish sports administration as a whole. It is suggested that a body of similar operational remit might be used as the basis of a national sports disputes tribunal for Ireland. This analysis of the DRA and the concomitant promotion of a soi-disant Irish Court of Arbitration for Sport, forms the central part of this brief review, throughout which frequent use is made of the persuasive authority of English law.

Dispute Resolution in Irish Sport: The Courts as Reluctant Interlopers

In the past decade there have been a number of judicial review cases involving sports governing bodies in Ireland. While the courts have been willing to hear such cases, it has been repeatedly emphasised that judicial intervention in the decisions of sporting organisations should not occur lightly and recourse to the courts should only happen in the most exceptional of circumstances. The Irish courts have referred to the need for sports bodies to submit their dispute to arbitration or mediation. In Ireland there are two domestic bodies offering alternative dispute resolution in the sporting context: Just Sport Ireland (JSI) and the Disputes Resolution Authority (DRA) of the Gaelic Athletic Association (GAA). The availability of alternative forms of dispute resolution in Ireland provides a welcome alternative to the expensive, often divisive, option of judicial review proceedings. Given the benefits of resolution of disputes through the DRA or JSI and in light of the Irish courts’ general reluctance to become involved in sporting disputes, it is likely that these processes will become increasingly availed of, most pertinently as Sport Ireland (formerly Irish Sports Council (ISC)) has made it a condition for recognition for new governing bodies and has been actively encouraging existing sports governing bodies to insert a referral clause in their rules.