Bank Resolution Research Articles

Insolvency of Significant Non-Financial Enterprises: Lessons from Bank Failures and Bank Resolution

In the aftermath of the global financial crisis the EU bank resolution regime went through fundamental changes that seek to preserve financial stability and ensure continuity of critical functions. The same cannot be said of insolvency rules applicable to non-financial enterprises. Unlike bank resolution with its macroprudential and proactive focus, insolvency law has largely remained microprudential and reactive. Admittedly, unlike bank failures, corporate insolvencies usually do not pose systemic risk. However, in practice this may not hold true for significant non-financial enterprises (SNFEs). Such enterprises oftentimes play a major role in national economies and serve important public functions. Their failure may trigger contagion and cause disruptive consequences. Insofar as insolvency of SNFEs raises concerns common to bank failures, the question arises whether certain strategies and tools embraced within the EU bank recovery and resolution framework should be extended to regulate SNFE insolvency. This article explores the feasibility of such an extension. Bank resolution, insolvency, significant non-financial enterprises, enterprise groups, Carillion, early intervention, recovery and resolution planning, living wills, public interest, systemic risk, critical functions.

The European Crowdfunding Service Providers Regulation: The Future of Marketplace Lending and Investing in Europe and the ‘Crowdfunding Nature’ Dilemma

The Regulation on European Crowdfunding Service Providers (ECSPs) for businesses, since its Proposal by the European Commission in March 2018, has experienced difficult trilateral negotiations. The length of the legislative process relates not only to nationalism resurgence, uncertain Brexit negotiations and COVID-19 outbreak but also to different views about crowdfunding and its optimal regulation within the three European Institutions. The present paper, after describing crowdfunding’s main features, will critically analyze the ECSPs Regulation in details as eventually adopted in October 2020, also in comparison with the alternative options available and their relative implications, in order to discuss the resulting picture of crowdfunding and its future under the new European regime, also providing suggestions for certain adjustments. Bank resolution, insolvency, significant non-financial enterprises, enterprise groups, Carillion, early intervention, recovery and resolution planning, living wills, public interest, systemic risk, critical functions.

Post-crisis banking regulation and credit rating adjustments. How did the bail-in affect Eurozone banks' credit rating?

This paper looks at the credit rating adjustments on Eurozone banks that followed the post-crisis regulation of bank resolution in Europe in 2014. The empirical assessment analyses within-bank variation using the credit ratings of the major Eurozone banks. The analysis shows that with the introduction of the bail-in: 1) the ratings of Eurozone banks, as expected, were subject to downward pressures; 2) however, credit rating agencies (CRAs) reacted in a variety of ways, moving to post bail-in ratings for Eurozone banks that were more homogenous across CRAs than pre bail-in ratings. While the credit rating adjustments are rightly justified by the rating methodologies used, the convergence among CRAs suggests some degree of discretion in assigning the rating. These results are consistent with herding behaviour among CRAs.

Fighting Failure: The Persistent Real Effects of Resolving Distressed Banks

We study the real effects of resolving distressed banks using quasi-experimental variation in resolutions introduced by a threshold-based rule of the FDIC Improvement Act. Our fuzzy regression discontinuity estimates indicate that resolutions lead to reductions in employment and establishments growth of up to six percentage points. These effects are concentrated in small, less urban counties, and translate to large declines in SME lending and increases in corporate bankruptcies. These results imply that large acquiring banks restrict lending to the small business borrowers of distressed target banks. Overall, current bank resolution policy may have costly externalities for local economic activity.

Towards an optimal composition of bail-inable debtholders?

ABSTRACT The core insight of the new EU framework for bank resolution is to allocate losses to bank's insiders (bail-inable creditors). This affects both financial stability and the corporate governance of banks. The current academic debate on bank resolution overlooks the relevance of identifying the investors in bail-inable securities (ie who is going to bear losses) and the role of counterparty risk. This article identifies the investors that are better suited to hold those instruments and highlights the trade-offs between the corporate governance role and the threat to financial stability posed by different investors. The article demonstrates that the composition of bail-inable debtholders matters and shows – empirically and theoretically – a transition towards a desirable composition of holders; although a considerable room for improvement remains. This exercise deepens the understanding of the impact of the resolution framework and the importance of counterparties for its credibility and future applications.

Considerations on the application of the NCWO principle under the SRM Regulation

The aim of this article is to make certain specific considerations on the application of the ‘no creditor worse off (NCWO) principle’ (or safeguard) under the Regulation governing the Single Resolution Mechanism and the Single Resolution Fund (SRMR). Even though the field of application of the SRMR also covers other financial firms, the article’s focus, which is structured in four sections, is (solely) on credit institutions. Section 1 overviews the provisions of the SRMR dealing with the third resolution condition, namely the public interest criterion, on the basis of which the decision is taken by the Single Resolution Board whether a credit institution determined as failing or likely to fail should be resolved or wound up. It is only when the public interest criterion is met and the Board takes a decision on the resolution of the credit institution concerned, that the NCWO principle is applicable. Section 2 discusses the provisions governing the NCWO principle under international and EU banking law. In this respect, after a brief overview of the international financial standards adopted by the Financial Stability Board (FSB) on banking resolution, including on the NCWO principle (under 2.1), this principle is analysed as a general principle governing resolution under the SRMR; its perimeter of application and the obligations imposed on national resolution authorities (NRAs) in this respect are also discussed (under 2.2). The following two sections deal then, in turn, with two specific aspects of application of the NCWO principle under the SRMR: mandatory and optional exclusion of deposits from bail-in (Section 3), as well as ex-ante and ex-post valuations for the purposes of resolution (Section 4). The final Section 5 concludes.

THE TRANSNATIONAL GOVERNANCE OF BANK RESOLUTION AND THE TREATMENT OF NATIONAL REGULATORY VARIATION IN THE EU

AbstractThe transnational governance of bank resolution must be well-designed to provide credible solutions to financial crisis management. While at policy level, there is a broad consensus on best practice, the implementation stage often leaves something to be desired. Focusing on the implementation of the relevant Financial Stability Board (FSB) recommendations in the EU, this article explores this issue and proposes certain reforms. It argues for closer EU control and scrutiny over national decision-making without, however advocating a “one-size-fits-all” approach. Its main insight is that the promotion of transnational convergence need not come at the expense of the distinctive attentiveness of EU law to local conditions nor indeed involve a massive shake-up of the existing EU architecture. Its aim is to contribute to scholarly and public policy debates in this field in anticipation of the EU response to the final conclusions of the post-implementation evaluation of the FSB recommendations, which is currently in progress.

Twelve Years after the Financial Crisis—Too-big-to-fail is still with us

ABSTRACT This article comments on the Consultation Report published by the Financial Stability Board (FSB) evaluating the success of regulatory reforms since the global financial crisis of 2007–2009. It argues that the FSB’s assessment of the role of equity is too narrow, being phrased in terms of bankruptcy avoidance and risk-taking incentives, without attention to debt overhang creating distortions in funding choices, the systemic impact of ample equity reducing deleveraging needs after losses, or equity contributing to smoothing of lending and asset purchases over time. The FSB’s treatment of systemic risk also pays too little attention to the mutual interdependence of different parts of the system, which is not well captured by linear causal relationships. Finally, the article points out that bank resolution of systemically important institutions is still not viable, due to lack of political acceptance of single-point-of-entry procedures and bail-in. Within the European Union, this viability is further undermined by the lack of sufficient funding for banks in resolution and the lack of fiscal backstops.

Banking Resolution: Expansion of the Resolution Toolkit and the Changing Role of Deposit Insurers

In this Policy Brief, we provide quantitative evidence demonstrating that the resolution toolkit has expanded considerably since the 2008 Global Financial Crisis (GFC). Purchase and assumption transactions, bridge bank facilitation and bail-in mechanisms have all become more available for bank resolution purposes. The use of such resolution tools is increasingly subject to least cost rules and to systemic failure considerations. These resolution tools may be available to different authorities, such as deposit insurers or resolution authorities, depending on the jurisdiction in question. Two of the three statistical models applied point to a significant increase in resolution powers for deposit insurers.

When Trust is Not Enough: Bank Resolution, SPE, Ring-fencing and Group Support

This discussion paper investigates the differences existing between the Single Point of Entry and the Multiple Point of Entry resolution models and links this question to the issue of support that bank subsidiaries can expect from their parent companies both in resolution and in normal insolvency proceedings. Given that parental support remains imperfect in these two resolution models, the paper concludes that existing safeguards aiming at preserving the corporate interests of subsidiaries remain needed and justified. The paper then identifies potential avenues that could be further explored to reinforce the support model and thereby reduce incentives to adopt ring-fencing measures.

Private Equity and Financial Stability: Evidence from Failed Bank Resolution in the Crisis

We investigate the role of private equity (PE) in the resolution of failed banks after the 2008 financial crisis. Using proprietary failed bank acquisition data from the FDIC combined with data on PE investors, we find that PE investors made substantial investments in underperforming and riskier failed banks. Further, these acquisitions tended to be in geographies where the other local banks were also distressed. Our results suggest that PE investors helped channel capital to underperforming failed banks when the “natural” potential bank acquirers were themselves constrained, filling the gap created by a weak, undercapitalized banking sector. Next, we use a quasi-random empirical design based on proprietary bidding data to examine ex post performance and real effects. We find that PE-acquired banks performed better ex post, with positive real effects for the local economy. Our results suggest that private equity investors had a positive role in stabilizing the financial system in the crisis through their involvement in failed bank resolution.

Private Equity and Financial Stability: Evidence from Failed Bank Resolution in the Crisis

This paper investigates the role of private equity (PE) in failed bank resolutions after the 2008 financial crisis, using proprietary FDIC failed bank acquisition data. PE investors made substantial investments in underperforming and riskier failed banks, particularly in geographies where local banks were also distressed, filling the gap created by a weak, undercapitalized banking sector. Using a quasi-random empirical design based on detailed bidding information, we show PE-acquired banks performed better ex post, with positive real effects for the local economy. Overall, PE investors had a positive role in stabilizing the financial system through their involvement in failed bank resolution.

Private Equity and Financial Stability: Evidence from Failed Bank Resolution in the Crisis

Private Equity and Financial Stability: Evidence from Failed Bank Resolution in the Crisis

EU Bank Resolution Framework. A Comparative Study on the Relation with National Private Law

EU Bank Resolution Framework. A Comparative Study on the Relation with National Private Law

Financial Narratives. A multimodal analysis of newspaper articles

Financial narratives have always been relevant to economic fluctuations, rationalising current actions, such as spending and investing, inspiring and linking activities to important values and needs (Shiller 2017). In 2014, the European Parliament adopted the Bank Recovery and Resolution Directive (BRRD) which includes the bail-in tool. This means that taxpayers would not risk losses, but rather creditors and depositors would take a loss on their holdings. This Directive was applied to four banks and the press and media coverage of both resolutions and their effects was remarkable, influencing several issues regarding these banks’ bondholders. The present study will investigate a corpus of articles from The Financial Times ( FT.com , Europe) and one from The Times ( thetimes.co.uk ), selected around the keyword bail*-in , attempting to highlight how financial information is provided multimodally. The choice of the expression bail*-in was made because of its highly specialised semantic load in the financial field. The use of textual organisation, tables, graphs, and the relationship between text and image will be dealt with and applied to the corpus gathered. Verbal and visual elements have been considered as fulfilling, on the one hand, the three functions of informing, narrating and persuading, characterising news discourse, and, on the other hand, those of informing, evaluating and predicting, typical of financial discourse. This paper is part of an ongoing study on financial newspaper articles and whether and to what extent knowledge dissemination is popularised from specialised to non-specialised texts, recombined and recontextualised to be more intelligible to the layman. The main aim will be to analyse the combination of the verbal and visual structures of these articles, trying to detect any differences in the multimodal strategies employed by a specialised and a non-specialised newspaper.

Bail-in vs bail-out: Bank resolution and liability structure

What is the joint impact of different resolution regimes and capital requirements on the optimal liability structure of a bank holding insured deposits and issuing non-bail-inable debt and bail-inable Tier1-capital debt? We address this novel question and find that: (1) a credible bail-in resolution regime rules out extreme leverage and creates value by postponing default; (2) a positive probability of bail-out destroys credibility with dramatic effects on financial risk-taking, to the point of reversing the classical positive link between optimal leverage and growth prospects; and (3) a strict enforcement of the Basel III CET1 capital requirement strongly mitigates the impact of a non-credible resolution regime.

Misselling in Self-placement and Bank Resolution under BRRD2

Abstract1. Bank crises and the treatment of retail investors in the BRRD era. – 2. The problem of misselling in the context of self-placement of securities issued by banks. – 3. The (loose) interplay between investor protection and bank resolution in the current regulatory environment. – 4. The Single Resolution Board’s policy on the treatment of retail clients’ holdings for the purpose of MREL eligibility. – 5. Art. 44 a BRRD 2 on the «selling of subordinated eligible liabilities to retail clients». – 6. The need for a more effective integration between investor protection and bank resolution discipline: from an ex-post to an ex-ante approach. The role of product governance under MiFID 2. – 7. Concluding remarks.

Anatomi Laporan Keuangan Bank Bermasalah Sebelum Pencabutan Ijin Usaha

This research based on the many problematic rural banks (BPR) in Indonesia and had declared as failing banks those their business licenses had revoked by the bank supervisory authority. This paper aims to explain the conditions that occurred in the last years of a BPR before experiencing failure and to analyze the causes of this condition based on interviews with practitioners who had taken handle failed bank resolutions and references and financial indicators in the BPR. The bank condition is seen based on the financial reports for the last two years submitted by the BPR to the bank supervisory authority. This research was conducted by conducting interviews, studying literature, and analyzing the main financial ratios of banks by taking a sample of 31 rural banks whose business licenses had been revoked by the bank supervisory authority. The concluding of this study is mismanagement is the main factor that has impacted increasing of Non-Performing Loan (NPL), Operating Expense to Operating Income (OEOI), and Loan to Deposit Ratio (LDR), it Also has consistently decreasing Capital Adequacy Ratio (CAR) and Return on Asset (ROA).

Twelve Years after the Financial Crisis – Too-big-to-fail is still with us. Comments on the Financial Stability Board’s Consultation Report ‘Evaluation of the Effects of Too-big-to-fail Reforms’

The paper contains comments made on the Financial Stability Board’s (FSB) Consultation Report concerning the success of regulatory reforms since the global financial crisis of 2007-2009. According to these comments, the FSB’s assessment of the role of equity is too narrow, being phrased in terms of bankruptcy avoidance and risk taking incentives, without attention to debt overhang creating distortions in funding choices, as well as the systemic impact of ample equity reducing deleveraging needs after losses and equity contributing to smoothing of lending and asset purchases over time. The FSB’s treatment of systemic risk pays too little attention to mutual interdependence of different parts of the system that is not well captured by linear causal relationships. Finally, the comments point out that bank resolution of systemically important institutions is still not viable, for lack of political acceptance of single-point-of-entry procedures, for lack of funding of banks in resolution (in the EI), for lack of fiscal backstops (in the EU), and for lack of political acceptance of bank resolution with bail-in.

Are Banks Finally Resolvable? A Perspective from Europe

AbstractAfter the global financial crisis, policymakers in many countries promised that banks should never again be bailed out using taxpayers’ money. Therefore, new regulatory measures were introduced, most importantly new bank resolution regimes like the Single Resolution Mechanism in the euro area. This paper shows that these measures contributed to a reduction in bail‐out expectations and a return of market discipline in Europe. But European banks are still far from being truly resolvable. More remains to be done.