Resolution Authority Research Articles

Bail-In between Liquidity and Solvency

The concept of “bailing in” a distressed bank’s creditors to avoid a taxpayer-financed public rescue is commonly accepted as one of the most significant regulatory achievements in the post-crisis efforts to end the problem of “Too Big To Fail”. Yet behind the political slogan, surprising uncertainties remain as to the viability of the concept and its optimal legal design. This paper traces the development of the bail-in concept since it was first conceived in 2010 and demonstrates that it has undergone an important conceptual metamorphosis. Bail-in, first understood as fulfilling the “redistributory” purpose of sparing taxpayers from rescuing banks, has more recently been promoted as additionally serving a “market stabilizing” function: to stem a panic and to avoid run risks.Whilst this trend is to be welcomed, it requires a number of changes to the present legal frameworks that are in place in many jurisdictions around the world. Issues to be addressed include, inter alia, to formulate appropriate criteria to trigger bail-in measures and to overcome a natural reluctance by resolution authorities to intervene and apply bail-in powers. This paper makes the case for early intervention triggers and demonstrates that liquidity provision by a lender of last resort during resolution is crucial to make bail-in credible. The paper places bail-in as a conceptual tool into the broader debate of how to deal with distressed banks and derives a number of concrete regulatory proposals.

Sporting Justice: An Arbitrator's Perspective

Drawing on my experience of a number of sports dispute resolution tribunals the UK and Ireland (such as Sports Resolutions UK; Just Sport Ireland; the Football Association of Ireland’s Disciplinary Panel and the Gaelic Athletic Association’s Dispute Resolution Authority) I intend to use this paper to review the legal arguments typically made sports-related arbitrations. These points of interest can be summarised as a series of three questions: the fairness question; the liability question; the penalty question. In answer to the fairness question, the aim is to give a brief outline on best practice establishing a sports disciplinary tribunal. The answer, I believe, is always twofold nature: first, and to paraphrase Lord Steyn R v Secretary of State For The Home Department, Ex Parte Daly [2001] UKHL 26 at [28] in law, context is everything – translated into the present matter, this means that sports disciplinary cases, the more serious the charges against the individual (in terms of reputational damage, economic impact and/or length of sanction); the more tightly wrapped the procedural safeguards surrounding any subsequent disciplinary hearing must be. A fair disciplinary system will be discussed the context of the principles laid down Article 8 of the World Anti-Doping Code which, effect, acts as sport’s Article 6 of the ECHR on a right to a fair trial. Following on from the above, the 60 or so sports arbitrations that I have heard, there are two further points of interest. First, the claim before the arbitral panel will often be framed an argument that, for various reasons of substantive and procedural irregularity, the sanction imposed on the appellant should be quashed (the liability). Second, and alternative, that the sanction imposed was wholly disproportionate (the penalty). The liability issue usually breaks down into two further questions. First, what is the nature of the legal duty upon a sports body exercising its disciplinary remit? Second, to what extent does a de novo hearing on appeal cure any apparent defects a hearing of first instance? The first issue often results an arbitral panel debating the contra preferentum approach to the interpretation of a contested rule i.e., the sports body’s rules question are so ambiguous that they should be interpreted a manner to the detriment of the rule maker and favour of the appellant. On the second matter, it now appears to be a general principle of sports law, administrative law and even human rights law that even if a violation of the principles of natural justice takes place at the first instance stage of a disciplinary process, they may be cured on de novo appeal. Authority for this approach can be found at the Court of Arbitration for Sport and particular CAS 2009/A/1920 FK Pobeda, Aleksandar Zabrcanec, Nikolce Zdraveski v UEFA at para 87. The question on proportionality asks what, aside from precedent found within the decisions of the sports body question, are the general legal principles against which a sanction by a sports disciplinary body can be benchmarked order to ascertain whether it is disproportionate length or even irrational nature? On the matter of (dis)proportionality of sanction, the debate is usually guided by the authority Bradley v the Jockey Club [2004] EWHC 2164 (QB) and affirmed at [2005] EWCA Civ 1056. The Bradley principles on proportionality of sports-specific sanctions, recently cited with approval at the Court of Arbitration for Sport, will be examined this presentation. Finally, an interesting application of many of the above principles (and others such as the appropriate standard of proof sports disciplinary procedures) can be made to recent match-fixing or corruption related hearings held by the British Horse Racing Authority, the integrity units of snooker and tennis, and at the Court of Arbitration for Sport.

The Implementation of the BRRD in Italy and its First Test: Policy Implications

Eleven months after the deadline, in November 2015, Italy implemented the Bank Recovery and Resolution Directive. The detailed structure of the Directive drove most of the choices, but the Italian implementing acts are overall clearer than the Directive, especially in outlining the sequence of decisions that the competent authorities and the resolution authorities have to take with respect to a bank that is failing or likely to fail. Less than a week after their enactment, the new rules were applied to resolve four regional banks that until then had been under temporary administration. Although the resolution has been carried swiftly and in accordance with the principles of the Directive, this apparently minor case shows two lessons: that almost all banking crises will be handled with the new rules, liquidation being confined to micro-banks, and that the practical challenges of resolution actions are enormous.

Bail-in in the Banking Union

On 1 January 2016, the Single Resolution Mechanism as the second pillar of the EU’s Banking Union became fully operational. At the same moment, bail-in, i.e. the statutory power of resolution authorities to cancel shares and to write down or to convert liabilities of a bank which is failing or likely to fail, became mandatory in the EU. This paper sets out the newly created regulatory framework on the recovery and resolution of banks in the EU, focusing on the main features of the EU’s rules on bail-in in the Banking Union. It examines the legal and economic impact of bail-in in general and highlights the various challenges for the application of bail-in. Finally, this paper assesses whether bail-in can attain the goals which it is meant to achieve and what it will take to make it effective.

EU BANK RECAPITALISATION AND THE BAIL-IN OPTION: AN ANALYSIS OF THE EFFECTS OF MANDATORY BAIL-IN ON CREDITORS’ PROPERTY RIGHTS

As of 1 January 2016, all members of the European Union (EU) are required to have bail-in provisions as part of their national bank resolution and recapitalisation legislation. The bail-in of bank creditors’ claims in order to recapitalise the bank is not a new phenomenon, it was utilised in Cyprus in 2013 and has since been used in a series of rescue operations launched for struggling banks in Austria, Slovenia, Greece, Italy, Hungary, Denmark, and Portugal. One of the most obvious concerns with the bail-in tool is that it deprives bank creditors of their property, namely a right to claim repayment of a debt obligation. The object of this paper is to determine if bail-in rules actually interfere with the right to property of bank creditors and whether such interference is unjustified. The paper concludes that, firstly, bail-in amounts to an interference with peaceful enjoyment of property and, secondly, such interference cannot be justified because bail-in rules fall short of the legality and legitimacy requirements which must be met when the State interferes with the right to property. Bail-in rules infringe bank creditors’ right to property and, as such, present a legal risk to resolution authorities in Member States.

Montenegro: Financial Sector Assessment Program-Financial Crisis Preparedness and Management-Technical Note

This paper provides assessment of the crisis preparedness and management framework of Montenegro. The banking sector dominates the financial system and accounts for about 90 percent of financial system assets, equivalent to about 93 percent of GDP as of June 2015. In 2010 the Financial Stability Council (FSC) was established to maintain financial system stability and avoid financial distress. FSC members are the Central Bank of Montenegro (CBM) governor (chair), the minister of finance, the president of the Insurance Supervision Agency Council, and the Securities and Exchange Commission president. The CBM functions as the de facto resolution authority for banks.

The Fall and Rise of Debt: Bank Capital Regulation after the Crisis

Under the Basel capital rules for internationally active banks, subordinated debt has always been permitted to contribute a part of the bank’s regulatory capital requirements. This is a surprising concession to banks, at first sight, since debt, as a liability, cannot contribute to equity (ie the surplus of assets over liabilities). The Basel approach is explicable only on the basis that bank capital is designed to protect short-term debt holders, who might ‘run’ on the bank and cause its collapse, rather than bank creditors as a whole. Long-term debt subordinated to the holders of non-subordinated debt could conceivably discharge this function. In the financial crisis, however, subordinated debt singularly failed to discharge this role. Because debt absorbs losses only when the company is put into insolvency (bankruptcy) and states were unwilling to contemplate the bankruptcy of banks, in most cases, debt did not in fact absorb losses as anticipated. Bail-out by the state pre-empted loss falling on creditors. An initial, and wholly to be expected, response on the part of the Basel III authorities was to downgrade the role of even subordinated debt in regulatory bank capital and in the new capital buffers which Basel III introduced. It was to be allowed only where the resolution authorities could write it down or convert into equity (bail it in) in advance of insolvency. However, in a second phase of reform bail in debt bids fair to become a mandatory element in the newly devised procedures for resolving failing banks. Bail-in in resolution is changing from being a concession to banks, which want to issue debt, to a requirement imposed with the aim of giving resolution authorities sufficient room for manoeuvre to reorganise failing banks. Whilst the role of bail-in debt in future regulation is not secure – and it has fierce critics – this constitutes a remarkable turnaround for a liability that was once seen as almost beyond redemption.

The Fall and Rise of Debt: Bank Capital Regulation After the Crisis

Under the Basel capital rules for internationally active banks, subordinated debt has always been permitted to contribute a part of the bank’s regulatory capital requirements. This is a surprising concession to banks, at first sight, since debt, as a liability, cannot contribute to equity (i.e., the surplus of assets over liabilities). The Basel approach is explicable only on the basis that bank capital is designed to protect short-term debt holders, who might ‘run’ on the bank and cause its collapse, rather than bank creditors as a whole. Long-term debt subordinated to the holders of non-subordinated debt could conceivably discharge this function. In the financial crisis, however, subordinated debt singularly failed to discharge this role. Because debt absorbs losses only when the company is put into insolvency (bankruptcy) and states were unwilling to contemplate the bankruptcy of banks, in most cases, debt did not in fact absorb losses as anticipated. Bail-out by the state pre-empted loss falling on creditors. An initial, and wholly to be expected, response on the part of the Basel III authorities was to downgrade the role of even subordinated debt in regulatory bank capital and in the new capital buffers which Basel III introduced. It was to be allowed only where the resolution authorities could write it down or convert it into equity (bail it in) in advance of insolvency. However, in a second phase of reform, bail-in debt seems likely to become a mandatory element in the newly devised procedures for resolving failing banks. Bail-in in resolution is changing from being a concession to banks, which want to issue debt, to a requirement imposed with the aim of giving resolution authorities sufficient room for manoeuvre to reorganise failing banks. Whilst the role of bail-in debt in future regulation is not secure – and has fierce critics – this constitutes a remarkable turnaround for a liability that was once seen as almost beyond redemption.

Regulatory Influence on Market Conditions in the Banking Union: the Cases of Macro-Prudential Instruments and the Bail-in Tool

This paper looks into the specific influence that the European banking union will have on (future) bank-client relationships. It shows that the intended regulatory influence on market conditions in principle serves as a powerful governance tool to achieve financial stability objectives. From this vantage, it analyses macro-prudential instruments with a particular view to mortgage lending markets; the latter have been critical in the emergence of many modern financial crises. In gauging the impact of the new European supervisory framework, the paper finds that the ECB will lack influence on key macro-prudential tools to push through more rigid supervisory policies vis-à-vis forbearing national authorities. Furthermore, this paper points out that the current design of the European bail-in tool supplies resolution authorities with undue discretion. This feature, which also afflicts the SRM, imperils the key policy objective to re-instill market discipline in banks’ debt financing operations. This goal is also called into question because the nested regulatory technique that aims at preventing bail-outs unintendedly provides additional manoeuvring space to political decision-makers.

Regulatory Influence on Market Conditions in the Banking Union

This paper looks into the specific influence that the European banking union will have on (future) bank client relationships. It shows that the intended regulatory influence on market conditions in principle serves as a powerful governance tool to achieve financial stability objectives.From this vantage, it analyzes macro-prudential instruments with a particular view to mortgage lending markets – the latter have been critical in the emergence of many modern financial crises. In gauging the impact of the new European supervisory framework, it finds that the ECB will lack influence on key macro-prudential tools to push through more rigid supervisory policies vis-a-vis forbearing national authorities.Furthermore, this paper points out that the current design of the European bail-in tool supplies resolution authorities with undue discretion. This feature which also afflicts the SRM imperils the key policy objective to re-instill market discipline on banks’ debt financing operations. The latter is also called into question because the nested regulatory technique that aims at preventing bail-outs unintendedly opens additional maneuvering space for political decision makers.

European Banking Union B: The Single Resolution Mechanism

The options available to European governments to respond to a multinational bank in financial trouble have been severely limited since each country has its own unique laws and authority applicable to banks operating within its borders. The Bank Recovery & Resolution Directive (BRRD), which was adopted in 2013 and scheduled to go into effect January 2015, harmonizes rules across EU countries for how to restructure and resolve failing banks. However, the directive would maintain the existing system of individual national resolution authorities and resolution funds. To better secure the Eurozone banks and to compliment the Single Supervisory Mechanism, which was enacted in April 2014, the European Parliament approved the Single Resolution Mechanism (SRM). The SRM establishes a Single Resolution Board and a single Resolution Fund that will handle bank failures in all EU countries participating in the SSM. This case reviews the changes in Eurozone bank resolution resulting from the BRRD and the SRM.

Towards the Development of a Framework for Sustainable Marine Space Governance: A Proposal for Collaborative Design Approach

Malaysia is surrounded by ocean, approximately, 515,000 square kilometers covered by maritime realm and 4,576 km in length by coastline. The country has terrestrial borders with Thailand, Brunei Darussalam and Indonesia and has maritime borders with Thailand, Brunei Darussalam, Singapore, Indonesia, Vietnam and the Philippines. In addition Malaysia has many institutions for managing the marine environment. Hence the development of the institution and the scope still has some ambiguity, conflict and overlapping marine because organizations exist on the basis of a resolution of the Parliament. While on the physical condition, especially in the marine environment is difficult to determine the resolution authority area to an area of true governance. This paper addresses the need on collaborative design approach that fits into Malaysian marine space governance scenario, in particular with respect to stakeholder management. This paper first reviews several international collaborative designs. An exemplary model of collaborative has been developed, which constitutes the key factors that determine the success of collaborative implementation. This model is pending for experimentation to examine its effectiveness on Malaysia marine space governance.

Financial Regulation's Architecture within International Economic Law

The financial crisis that became broadly visible in 2008 has dramatically reshaped international economic law. Financial regulation (for example, capital requirements for banks, rules for trading derivatives and securities, resolution authority for institutions that fail) has moved to a more central place in international regulatory discussions alongside traditional topics such as trade, monetary exchange, and direct investment. Yet the international approach to legal rules for financial regulation looks different that its older cousins even as it responds to sometimes similar incentives and interactions among parties. The reasons for the increased prominence of financial regulatory issues on the international stage are easily identified. Technological advances in communications and transportation have made it much easier to engage in business elsewhere and have shrunk the barriers traditionally posed by oceans or national boundaries. The development of finance theory has spread a shared focus on concepts like risk and return and portfolio theory to investors around the globe. The retreat of communism and state-owned enterprises has enhanced the influence of the private sector and has increased the space for the development of common finance principles. Innovations in financial instruments provided new opportunities that spurred greater level of participation in financial transactions. As a result, finance held a much higher share of economic activity in the run-up to the financial crisis than in earlier times.

Resolution: Concepts, Requirements and Tools

With a harmonised 'toolbox' of instruments for the resolution of banking institutions, the European Bank Recovery and Resolution Directive of 2014 (Directive 2014/59/EU, "BRRD") significantly widens the range of policy options available to national resolution authorities in accordance with international best practice. This paper, prepared for a conference volume to be published in 2015, analyses the harmonised toolbox in the light of the academic literature on bank resolution published both before and in reaction to the global financial crisis. The focus is on the relevant policy objectives, conditions and requirements for resolution, and the five resolution tools prescribed by the BRRD, i.e., the sale of business, bridge institutions, asset separation and bail-in tools.

(A Study on Improving Financial Resolution Regime for Large Complex Financial Institutions in Korea)

Korean Abstract: 본고는 우리나라의 금융지주회사 등 대형복합금융회사들의 부실정리체계 현황을 살펴보고, 최근 글로벌 금융위기 이후 국제적으로 활발히 전개되고 있는 대형복합금융회사들의 부실정리체계구축을 위한 논의들을 정리 소개한다. 이를 통해 국내 부실금융기관 정리 제도 개선을 위한 시사점 도출을 목적으로 한다. 본고에서는 우리나라 대형복합금융회사들의 질서정연한 부실정리체계를 구축하기 위해 국내 현황과 국제적 논의를 감안하여 다음과 같은 개선방안을 제안한다. 첫째, 은행 뿐만 아니라 비은행금융기관 까지 포함하여 금융위원회가 국내의 시스템적으로 중요한 금융회사(SIFI)를 지정한다. 둘째, 금융위가 지정한 SIFI로 하여금 향후 위기상황에 대응하기 위한 회생·정리계획(RRP)을 작성하여 정리당국의 평가와 승인을 받는다. 셋째, SIFI의 부실정리 비용을 충당하기 위하여 채권자 손실분담(Bail-in)과 재원확충 방안을 마련한다. 넷째, 금융위원회가 금융그룹 차원의 부실정리방식을 결정하고, 예금보험공사가 SIFI의 관재인을 맡을 수 있도록 법적 근거를 마련한다. English Abstract: This paper aims to provide some policy considerations to improve the resolution regime for financial institutions in Korea, especially for large complex financial institutions (LCFIs) including financial holding companies and non-bank financial institutions. For that purpose, this paper provides an overview of the resolution regime in Korea and widely reviews the recent developments in global discussions and recommendations on orderly resolution regimes for LCFIs. Finally, this paper suggests some practical policy recommendations for improving the orderly resolution regime in Korea as follows; first, the Financial Services Commission (FSC) provides a guidelines for designating significantly important financial institutions (SIFIs). Second, resolution authorities in Korea evaluate and approve recovery and resolution plans (RRP) prepared and submitted by the SIFIs. Third, it is necessary to introduce contingent capital and designated resolution fund for bail-in purposes. Lastly, development of legal framework i advance is suggested to provide powers for FSC’s resolution strategy and KDIC’s receivership when resolving financial groups.

Restructuring an Insolvent Bank

Banks are regarded as special institutions, and regulated and supervised heavily than other institutions. However, regulation and supervision cannot achieve zero failure regimes. Banks fail like any other commercial entities, and will continue to fail. Failure of a bank may trigger formal insolvency (resolution) proceedings, if there is no available option to save it as a going concern. Bank insolvency proceedings comprise various mechanisms, instruments, and transactions to enable resolution authorities to properly deal with a failed bank. Bank restructuring within insolvency proceedings means taking extensive measures to resolve the bank’s problems, including recapitalisation, transfer of the bank’s shareholding or asset base to new investors, or the bank’s merger with (or acquisition by) another healthy bank and employing other restructuring techniques. This article analyses bank restructuring and possible tools and mechanisms that resolution authorities should have at their disposal to smoothly conduct the process.

Third-Country Relations in the Directive Establishing a Framework for the Recovery and Resolution of Credit Institutions

This article presents a critical analysis of the principles behind the scope and forms of cooperation between EU Member States and third-country resolution authorities in the context of the 2014 Bank Recovery and Resolution Directive. The article also explores the future responsibilities of the prospective Single Resolution Authority regarding relations between the euro area and third-country resolution authorities.

CROSS‐BORDER BANKING, EXTERNALITIES AND SOVEREIGN DISTRESS: DOES THE EURO NEED A COMMON BANKING AUTHORITY?

ABSTRACTThis paper analyses the role of linkages between cross‐border banks and sovereigns in the spread of crises. After discussing evidence from past crises, I focus on the Euro Area. Banks from the Euro‐core played a key role in shedding the seeds for the transition from the US mortgage crisis to the Euro Area crisis. While national authorities supported their damaged banks, the Euro‐system's infrastructure allowed Euro‐core banks to undo intra‐area exposures with minor disruptions. Although this helped stabilize peripheral asset markets, the extent to which public funding replaced private one implied less macroeconomic correction and the current fiscal woes.The combination of cross‐border banking and national resolution schemes creates an externality on sovereigns, who are forced to contain the effects stemming from the balance sheet management of cross‐border banks. Weak public finances can easily push a banking crisis into a fiscal one. This negative externality is reinforced by Central Banks' mandate that limits fiscal cooperation. In the context of the Euro Area, to limit this problem, the Union should equip itself with a common bank resolution authority, which delinks banks and sovereigns. In addition, to limit the externality, macro‐prudential policy could set contributions for cross‐border operators in order to pre‐fund future bank rescues. Copyright © 2014 John Wiley & Sons, Ltd.

Recognition of Debt Restructuring and Resolution Measures under the European Union Regulatory Framework

AbstractUnder the proposed Bank Recovery and Resolution Directive (BRRD), member states will be required to provide for bail‐in powers to restructure failing financial institutions. At this moment, the Dutch, French, UK and German legislator already provide public authorities with resolution powers. In order to be effective in debt restructuring of failing (non‐)financial institutions, the measures taken by the resolution authorities need to be enforceable (before all courts) and effective in the entire European Union. Given the fact that not all the firm's debt is issued in the home jurisdiction, the question of recognition is critically important. In regard of non‐financial firms, the Dutch, UK, French and German jurisdictions provide for court proceedings to impose a collective settlement reached by the debtor and the majority of its creditors binding on the opposing minority. Out‐of‐insolvency plans approved by the court are recognised under the Brussels I Regulation. If the EU Insolvency Regulation reform proposal is adopted, these court‐approved debt restructuring plans in insolvency situations will be subject to the recognition regime of this regulation. Credit institutions, insurance undertakings, investment undertakings holding funds or securities for third parties and collective investment undertakings are excluded from the scope of the Insolvency Regulation whereas the scope of application of the Reorganisation and Winding Up Directive is limited to credit institutions. The regime under the future BRRD and the Single Resolution Mechanism is limited to credit institutions. National (private international) law determines the recognition of resolution measures taken by the authorities of another member state. Copyright © 2014 INSOL International and John Wiley & Sons, Ltd

European Deposit Insurance and Resolution in the Banking Union

AbstractSince the European Council of June 2012, ‘banking union’ is a key item for the EU's policy agenda. This contribution outlines the state of the policy debate – identifying the elements that are missing but important from a theoretical viewpoint. Concrete proposals are made as to how the missing elements could be added in the form of a new European Deposit Insurance and Resolution Authority, which would work alongside the ‘single supervisory mechanism’ under which the European Central Bank assumes supervisory powers for the largest eurozone banks. The paper also illustrates how a gradual transition could align incentives and mitigate the political resistance to a full banking union. Finally, new estimates are provided for how much would be needed for a European Deposit Insurance and Resolution Fund.