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INSPECCIÓN II
KEY ATTRIBUTES OF EFFECTIVE RESOLUTION REGIMES
EUROPEAN DIRECTIVE FOR RECOVERY AND RESOLUTION Sonsoles Eirea Banco de España INTERNATIONAL SEMINAR ON RESOLUTION REGIMES IN THE BRAZILIAN FINANCIAL SYSTEM
May 6-7, 2013
INSPECCIÓN II
CONTENTS
FSB WORK ON RESOLUTION: “Key Attributes”
PROPOSAL OF A DIRECTIVE FOR RECOVERY AND RESOLUTION: European Framework
IMPLEMENTATION OF A RESOLUTION FRAMEWORK: Spain
2
INSPECCIÓN II
MANDATE
Establish a framework that achieves:
Lower the probability of failures
Lower the cost of failures
Preserve financial stability and keep continuity of critical functions
Losses to be absorbed by shareholders and creditors, not taxpayers
Lower moral hazard: credibility of “no bail-out”
Strengthen market discipline
Ending “Too big to fail-TBTF” dilemma for authorities
3
Financial Stability Board
Nov 2011: approval of FSB’s “Key Attributes of Effective Resolution Regimes for Financial Institutions”
INSPECCIÓN II
BUILDING BLOCKS OF “TBTF” POLICY
4
Financial Stability Board
SUPERVISORY INTENSITY
HIGHER LOSS ABSORBENCY
CAPACITY
EFFECTIVE RESOLUTION
REGIMES
FINANCIAL MARKET INFRASTUCTURES
RESILIENCE
FSB TBTF POLICY
INSPECCIÓN II
WHAT THE CRISIS UNDESCORED
Inadequate tools and authorities to resolve institutions
Supervisory frameworks not aligned with crisis resolution frameworks
Resolution frameworks were “ad hoc” based in national initiatives
Lack of effective cross-border arrangements: MoUs insufficient
Lack of preparation: no “ex ante” planning and no information sharing
Week protection of holdings of clients’ assets
Inconsistent decisions and political pressures: forbearance
5
Characteristics
INSPECCIÓN II
FSB “KEY ATTRIBUTES”
1. Scope 2. Resolution authority 3. Resolution powers 4. Set-off, netting, collateralisation, segregation of client assets 5. Safeguards 6. Funding of firms in resolution 7. Legal framework conditions for cross-border cooperation 8. Crisis Management Groups (CMGs) 9. Institution –specific cross-border cooperation agreements 10. Resolvability assessments 11. Recovery and resolution planning 12. Access to information and information sharing
6
Principles
INSPECCIÓN II
RESOLUTION POWERS
Remove and replace senior management
Appoint an Administrator
Override shareholders’ rights
Transfer of assets and liabilities
Bridge institution
“Bail-in” within resolution : High Level Absorbing
Capacity
7
Main Tools
INSPECCIÓN II
RECOVERY AND RESOLUTION PLANNING
8
Crisis Management Groups
RECOVERY AND RESOLUTION FRAMEWORK
Recovery Plan
Resolution Plan
Resolvability Assessment
AUTHORITIES’ ACTION: Remove obstacles to resolution
Improvements to legal framework Organization, structure and strategies
High Level Resolution Strategy
RAP
Reporting to FSB
Cross-border Cooperation Agreements
COAGs
INSPECCIÓN II
BASIC RESOLUTION STRATEGIES
SINGLE POINT OF ENTRY: Resolution at the parent bank or “holding”. Write down and/or conversion of
HLAC instruments and other liabilities
Intra-group debt is capitalized in subsidiaries
Firms with centralized approach to business
Small number of businesses/countries locally systemic
MULTIPLE POINT OF ENTRY: Resolution at units/businesses that need it
“Local” Plans, coordinated at consolidated level
Coordinated implementation of Resolution tools in the jurisdictions that require it
Firms that run their businesses with de-centralized resources
Several businesses/countries with local systemic presence
There is no “One Size Fits all”. Some combination might be needed
9
Draft Guidance
INSPECCIÓN II
WORK PLAN
10
G-SIFIs
Recovery Plans December 2012
High Level Resolution Strategy December 2012
Resolution Plans June 2013
Resolvability Assessment December 2013
Cooperation Agreements - CoAgs June 2013
Resolvability Assessment Process - RAP Q1 2014
For G-SIFIs designated in 2011. For those identified in November 2012 the timetable is shifted 12-18 months
INSPECCIÓN II
CONTENTS
FSB WORK ON RESOLUTION: “Key Attributes”
PROPOSAL OF A DIRECTIVE FOR RECOVERY AND RESOLUTION: European Framework
IMPLEMENTATION OF A RESOLUTION FRAMEWORK: Spain
11
INSPECCIÓN II
DRAFT EUROPEAN ARCHITECTURE
12
Banking Union
EU Harmonization
and KA implementation
Recovery and
Resolution Directive*
Single Supervisory Mechanism
Single Resolution Mechanism
European Union: Euro Area + Euro Area
* http://ec.europa.eu/internal_market/bank/crisis_management/index_en.htm
DGS ESM
INSPECCIÓN II
COMPREHENSIVE AND FLEXIBLE FRAMEWORK
Comprehensive: three pillars of preparation and intervention
Prevention: Banks (Recovery Plan) and Authorities (Resolution Plan) to anticipate problems
Early Intervention: Authorities to act before bank reaches “point of non-viability”
Resolution: through re-structuring of banks and preservation of critical functions
Flexibility: Range of tools and powers to be used proportionately
Implementation of KA resolution powers
To be applied for different bank types and sizes and in different crisis situations
13
RRD Overview
INSPECCIÓN II
PREVENTION
Recovery Plans: Prepared by Banks with the objective of restoring viability given a stressed
situation in capital and/or liquidity
Resolution Plans: Drawn by authorities. Options for orderly resolution of institutions. Removal
of impediments to resolvability: restrictions on business activities; changes to legal or operational structures
Elements: Scenarios of financial distress
Regularly updated – annually
Group level and individual institutions
No public support
14
RRD Overview
INSPECCIÓN II
EARLY INTERVENTION
Application: Institutions in breach of prudential requirements, showing
deterioration of solvency and/or liquidity and assessed as capable to return to long term viability
Powers and tools: Require implementation of Recovery Plan
Action program and timetable
Convene shareholder’s meeting and propose agenda
Require plan to re-structure the debt of the institution
Appoint a Temporary Special Manager
15
RRD Overview
INSPECCIÓN II
RESOLUTION
Striking a balance:
Financial stability requires to act before insolvency is reached
Interference with rights of stakeholders (ie. shareholders and creditors) has to be justified
Conditions for resolution:
Authority determines that the institutions is failing or likely to fail
No reasonable prospect that other action, private sector or supervisory, would prevent failure
Public interest to preserve financial stability
16
Trigger
INSPECCIÓN II
RESOLUTION PRINCIPLES
Minimise use of taxpayers’ monies. “No bail-out”. Shareholders and creditors bear the burden. European System of Financing Arrangements
Managers removed
Preservation of critical economic functions
Prompt, effective action
Independent valuation and recognition of losses at point of intervention
Action cannot be reversed in court
Right of compensation based on liquidation value
Stay of execution of enforcement of contracts
17
RRD Overview
INSPECCIÓN II
RESOLUTION TOOLS AND POWERS
Write Down or Conversion of Capital Instruments
Prior to any other resolution action
Common Equity Tier 1 instruments first. Then, following hierarchy
Resolution Tools (I)
Sale of business. Total or partial sale of sound businesses
Bridge bank. Transfer to a public controlled entity for subsequent sale to private sector when market conditions are favourable
Asset separation, in conjunction with another resolution tool. Transfer of impaired/problematic assets to Asset Management Company
18
RRD Overview
INSPECCIÓN II
RESOLUTION TOOLS (II): BAIL-IN
Bail-in powers: Write down and/or convert claims of unsecured creditors
Recapitalise and restructure
Facilitate set-up of a new institution – bridge bank
Intended to maintain Critical Economic Functions, not inefficient banks Scope: Any non-secured liabilities, except guaranteed deposits, client assets, short
term debt (<1 month), salaries and taxes (eligible liabilities)
Following a harmonised hierarchy of claims
Minimum eligible liabilities requirement (T1, T2 … down to senior liabilities) with maturities greater than on year
Deposit Guarantee Schemes to contribute according to what they would had borne in insolvency
Entry into force elapsed by 4 years
19
RRD Overview
INSPECCIÓN II
CONTENTS
FSB WORK ON RESOLUTION: “Key Attributes”
PROPOSAL OF A DIRECTIVE FOR RECOVERY AND RESOLUTION: European Framework
IMPLEMENTATION OF A RESOLUTION FRAMEWORK: Spain
20
INSPECCIÓN II
CONTEXT
Financial and economic crisis: Deep economic deterioration
Asset bubble in Real State
Linkages between Sovereign and Financial institutions
Doubts on the resilience of Spanish banks Breaking the circle: Back-stop facility 100 bn€ under strong conditionality
Assessment of resilience of Spanish banks under worst-case scenarios
Exercise completed by Sept. 2012: International institutions oversight and independent consultants
Capital needs under severe stress up to 57 bn€
Capital instruments should bear the cost first
Recapitalization exercise to be finished by June 2013
21
Spain
INSPECCIÓN II
LEGAL CHANGES: LAW 9/2012
Elements Early intervention
Re-structuring
Resolution
Asset Management Company
Liability Management Exercise (limited “bail-in”) until June 2013
Authorities Banco de España is the authority that determines Resolution
Fund for Orderly Restructuring of Banks (FROB) is the authority that executes Resolution
Broadly in line with KA and Draft RRD except for limited “bail-in”
22
Spain
INSPECCIÓN II
CURRENT STATUS
Banks without capital needs represented 62% of portfolios analysed
Equivalent to Spanish contribution to the rescue of other European economies
Continuous monitoring by IMF and European Commission through periodic reviews and progress reports
http://www.bde.es/f/webbde/GAP/Secciones/SalaPrensa/InformacionInteres/ReestructuracionSectorFinanciero/Archivo/Ficheros/fmi050313en.pdf
http://www.bde.es/f/webbde/GAP/Secciones/SalaPrensa/InformacionInteres/ReestructuracionSectorFinanciero/Archivo/Ficheros/comision_informeevaluacion032013en.pdf
23
Spain
€ bn Stress test capital needs
Impact of the transfer to
Sareb
Burden-sharing (SLE)
Asset sales, private capital
raising, etc.
Recapitalisation under the
programme Group 1 47 0 -10 0 37 Group 2 6 -1 -2 -1 2 Group 3 3 - - -3 0 TOTAL 57 -1 -12 -5 39
INSPECCIÓN II
WRAP-UP OF REFLEXIONS
Early detection does not guarantee effective reaction capacity, many elements may condition the process in a crisis Need to anticipate resolution measures Effective control of resolved institutions
Bridge-bank and transfer of asset to AMC
Bail-in implementation
Financial capacity is a “must” Pending bail-in details (MREL, flexibility, DGS/RF)
Challenge of litigation
Consider impact on financial stability Analyze impact on lending to real economy Resolution is complex and uncertain, calls for transparency and assistance from “experts”
24
INSPECCIÓN II
CONTENTS
FSB WORK ON RESOLUTION: “Key Attributes”
PROPOSAL OF A DIRECTIVE FOR RECOVERY AND RESOLUTION: European Framework
IMPLEMENTATION OF A RESOLUTION FRAMEWORK: Spain
25
INSPECCIÓN II
GRACIAS POR SU ATENCIÓN SONSOLES EIREA