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1 Seminar for Senior Bank Supervisors from Emerging Economies Constant Verkoren October 25, 2013 Resolution Regimes
1
Seminar for Senior Bank Supervisors from
Emerging Economies
Constant Verkoren
October 25, 2013
Resolution Regimes
2
Agenda
Overview
Resolution Authority
Resolution Toolkit
Information Sharing and Cross-Border Cooperation
Recovery and Resolution Planning
I.
II.
III.
IV.
V.
Lessons Learned VI.
3
I. Resolution regimes—overview
Resolution regimes part of comprehensive
policy framework for addressing the systemic
and moral hazard risks associated with
systemic institutions
Endorsed by G20 at Seoul Summit in
November 2010) (“We reaffirmed our view that
no firm should be too big or too complicated to fail
and that taxpayers should not bear the costs of
resolution.”)
4
I. Resolution regimes—part of a
comprehensive solution to address ‘TBTF’
Policy Measures to Address SIFIs
All SIFIs G-SIFIs
Key Attributes for
Effective Resolution
Regimes
New international
standard for effective
resolution regimes
Resolvability assessments
and recovery and
resolution planning for
G-SIFIs
More intensive and
effective supervision of all
SIFIs
Additional loss absorption
capacity for G-SIFIs
5
I. Overview—why a new
resolution standard?
Many current resolution regimes are
inadequate
Limited resolution powers
Ineffective cross-border cooperation mechanisms
Call for stronger resolution regimes to
Allow the authorities to take control early
Broaden range of resolution tools
Minimize value lost
Enhance cross-border cooperation
6
I. Overview—what are the objectives
of effective resolution regimes?
Objective of effective resolution regimes
make feasible the resolution of financial
institutions…
…without severe disruption and without
exposing taxpayers to loss…
…while protecting economic functions…
…and allowing for loss absorption in a manner
that respects hierarchy of claims in liquidation
Preamble Key Attributes of Effective Resolution Regimes, November 2011
7
In other words…
…this is what we are trying to avoid
8
Agenda
Overview
Resolution Authority
Resolution Toolkit
Information Sharing and Cross-Border Cooperation
Recovery and Resolution Planning
I.
II.
III.
IV.
V.
Lessons Learned VI.
9
II. Resolution authority
“Each jurisdiction should have a designated
administrative authority responsible for exercising the
resolution powers over firms within the scope of the
resolution regime” Key Attribute 2.1
Essential design elements
clearly defined mandate
operational independence
legal protection
unimpeded access to firms
10
II. Mandate
Access to information
Mandate
Legal protection
Operational independence
and sound governance
Pursue financial stability
and ensure continuity of
systemically important
functions
Protect depositors
Avoid unnecessary
destruction of value and
seek to minimize resolution
costs
Consider externalities of
resolution actions
11
II. Operational independence and
sound governance
Access to information
Mandate
Legal protection
Operational independence
and sound governance
Independence formally
enshrined in statute
In practice, no evidence of
undue political or industry
influence
Staffing requirements
(quality and quantity)
Safeguards against arbitrary
dismissals
Independence
complemented with
accountability and
transparency
12
II. Legal protection
Access to information
Mandate
Legal protection
Operational independence
and sound governance
Legal protection against
liability for actions taken in
good faith
Indemnification of staff
against any costs related to
court actions
Inadequate legal protection
impairs “will to act”
13
II. Access to information
Access to information
Mandate
Legal protection
Operational independence
and sound governance
Robust understanding of
the intricacies of firms
critical for planning and
implementation of
resolution strategies
Does not preclude indirect
access, i.e. through
supervisory authority
Robust information-
sharing arrangements
essential
14
II. Cross-country perspectives
United States
Dodd-Frank Act assigns resolution
powers to the FDIC (“Orderly
Liquidation Authority”)
Conduct all aspects of the company’s
business, as well as wind-up affairs of
the company in such manner as the
FDIC deems appropriate.
Inter alia, power to repudiate
contracts, transfer assets and
liabilities, enforce standstill
agreements and charter a bridge bank
Must involve unsecured creditors
(burden sharing) and replace
management of failed firm
European Union
No single resolution authority but
national regimes being harmonized
The European Commission has today
proposed a Single Resolution Mechanism
(SRM) for the Banking Union. (…) .
The Single Resolution Mechanism would
ensure that – not withstanding stronger
supervision - if a bank subject to the
SSM faced serious difficulties, its
resolution could be managed efficiently
with minimal costs to taxpayers and the
real economy
Press release European Commission,
July 10, 2013
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Agenda
Overview
Resolution Authority
Resolution Toolkit
Information Sharing and Cross-Border Cooperation
Recovery and Resolution Planning
I.
II.
III.
IV.
V.
Lessons Learned VI.
16
III. Toolkit—resolution powers
• Replace management, claw-back remuneration/bonuses
• Appoint an administrator to take control/manage the firm Assume control
• Override shareholders/creditors’ rights
• Transfer assets/liabilities to an existing entity, bridge bank or asset management company
• Bail-in creditors to recapitalize the failed firm or its successor
Tools
• Suspend payments to unsecured creditors
• Temporarily stay early termination rights
• Oblige related entities to continue providing essential services Support
17
III. Toolkit—resolution options
and trade-offs
Liquidation Systemic risk
Nationalization
Fiscal cost/ moral hazard
AMCs
Bail-in
P&A
Official administration
18
III. Toolkit—official administration
The authorities appoint an official
administrator over a failing firm
Assume control early to protect financial stability
Appointed when a firm is no longer viable
Authorities take control to execute resolution
action
Where possible, limited judicial review of
appointment
Experience: lacking in many countries; Fund staff have often
recommended official administration regimes
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III. Toolkit—transfer powers
Transfer assets and liabilities of failed firm to
healthy firm or bridge bank
May include systemic functions
Without consent of shareholders/creditors
Remainder left in failed firm, and liquidated
Shareholders/creditors of liquidated firm bear
losses
Experience: successfully used many times in some countries but
can be difficult to split large, complex, cross-border firms
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III. Toolkit—bail-in
Write down firm’s liabilities or convert them
into equity
No transfer to other entities
Insured and secured claims excluded
Without consent of shareholders/creditors
Administrative procedure
Experience: untested, may require other measures to prevent
increased reliance on short-term debt and secured funding
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III. Toolkit—asset management
companies
Transfer non-performing assets from failing
firms to AMCs
Purpose to pool and collectively manage non-
performing assets
Assets transferred at market prices
Frequently used in systemic crises
Experience: can be difficult to value assets; potentially high fiscal
costs if state has to recapitalize participating firms
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III. Supporting resolution—stay of
contractual rights
Incentive of creditors to maximize own position
vis-à-vis firm, inter alia by seizing assets
Undercuts other creditors and impairs
‘recoverability’ of the firm
Solution: stays of set-off and termination rights
“Subject to adequate safeguards, entry into resolution and the
exercise of any resolution powers should not trigger statutory
or contractual set-off rights, or constitute an event that entitles
(…) early termination” Key Attribute 4.2 and 4.3
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However, safeguards are necessary to protect
the interests of the firm’s counterparties, e.g.
duration of stay limited (e.g. two business days)
preservation of rights related to defaults that do
not arise solely by virtue of the resolution action
ex ante clarity on scope/modalities of the stay
Temporary stays particularly important for the
resolution of financial market infrastructures Recovery and resolution of financial market infrastructures (Consultative report), June 2012
III. Supporting resolution—stay of
contractual rights cont’d
24
III. Supporting resolution—
resolution funding
Back to our overarching policy objective:
“make feasible the resolution of financial institutions
(…) without exposing taxpayers to loss (…).” Preamble Key Attributes of Effective Resolution Regimes, November 2011
“Jurisdictions should have statutory or other policies
in place so that jurisdictions are not constrained to rely
on public ownership or bail-out funds as a means of
resolving firms” Key Attribute 6.1
25
Objective – avoiding bail-outs
26
III. Supporting resolution—
resolution funding cont’d
Strict “no bailout” policies may not be fully
credible…
… and privately financed resolution funds in
many jurisdictions still lack sufficient capacity
KA allows for “temporary public funding” ,
subject to strict conditionality to minimize
moral hazard risks
financial stability trigger
private funding exhausted or cannot achieve this
ex post allocation of losses
27
III. A closer look at funding
arrangements
Funding arrangements for private sector
contributions differ across jurisdictions
dedicated resolution funds (e.g. Germany, US)
funding of resolution actions via deposit
guarantee schemes (e.g. Canada, France, Italy,
Singapore, Spain, UK), subject to safeguards
“Mechanisms for recovery of public funds (…) are less
well developed” FSB Thematic Review on Resolution Regimes, April 2013
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III. A closer look at funding
arrangements cont’d
Designing resolution funds is more an art
than a science
Aspects to consider:
perimeter of the private sector contribution
base of the contribution
phase-in period
back-stop financing (including mechanisms for
recovery of public funds)
levy or separate fund?
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III. A closer look at funding
arrangements cont’d
“Past experiences suggest, as a rough guide, that for many
countries the costs to be provisioned for would approximate
2-4 percent of GDP” A Fair and Substantial Contribution by the Financial Sector, IMF 2010
5
25
45
65
85
105
125
145
Ind
on
esi
a 9
7
Jam
aic
a 9
6
Th
ailan
d 9
7
Ch
ile 9
1
Turk
ey 0
0
Ko
rea 9
7
Uru
gu
ay 8
1
Co
te d
'Ivo
ire 8
8
Do
min
ican
Rep
03
Ecu
ad
or
98
Mexi
co 9
4
Sen
eg
al 8
8
Mala
ysi
a 9
7
Bra
zil 9
4
In percent of GDP
In percent of financial system assets
Past Crises Fiscal Costs Relative to GDP and Financial System
Assets, 1981—2000
Source: Luc Laeven and Fabian Valencia
median
=28%
0
5
10
15
20
25
30
35
40
45
50
Icela
nd
08
Irela
nd
08
Gre
ece
08
Neth
erl
an
ds
08
UK
07
Belg
ium
08
Latv
ia 0
8
Au
stri
a 0
8
Un
ited
Sta
tes
07
Sp
ain
08
Den
mark
08
Germ
an
y 0
8
Slo
ven
ia 0
8
Sw
itze
rlan
d 0
8
Sw
ed
en
08
In percent of GDP
In percent of financial system assets
Fiscal Costs Relative to GDP and Financial System Assets,
2007—08
Source: Luc Laeven and Fabian Valencia
median =4.9%
30
III. Cross-country perspectives—cont’d
United States
Dodd-Frank provides that “taxpayers
shall bear no losses from the exercise of any
authority under this title”
FDIC may borrow funds from the
US Treasury (Orderly Liquidation
Fund), to be repaid from sale of
failed firm’s assets
Dodd-Frank allows for ex-post
industry assessments if proceeds of
asset sales are insufficient to meet
repayment obligations
European Union
“Member states shall establish financing
arrangements for the purpose of ensuring the
effective application by the resolution
authority of the resolution tools and powers.” Draft Recovery and Resolution Directive
A European resolution scheme to be
primarily funded by contributions of banks
could provide assistance in the application of
resolution measures (…)” Report Van Rompuy, June 2012
“The Single Resolution Mechanism should
be centered in a Single Resolution Authority
with a European Resolution Fund at its
disposal.” Statement Draghi in Brussels, February 2013
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Agenda
Overview
Resolution Authority
Resolution Toolkit
Information Sharing and Cross-Border Cooperation
Recovery and Resolution Planning
I.
II.
III.
IV.
V.
Lessons Learned VI.
32
IV. Information sharing
“Jurisdictions should ensure that no legal, regulatory
or policy impediments exist that hinder the
appropriate exchange of information, including firm-
specific information between supervisory authorities,
central banks, resolution authorities, finance
ministries and the public authorities responsible for
guarantee schemes” Key Attribute 12.1
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IV. Information sharing—cont’d
Precondition: adequate confidentiality
requirements
ability to refuse disclose of information received
from another authority without authorization
from authority that supplied the information
effective sanctions and penalties for breach of
confidentiality requirements
Exclude application of freedom of information
legislation
34
IV. Cross-border cooperation
Financial crisis illustrated many challenges
domestic focus (no burden sharing arrangements)
potential discrimination of foreign creditors
no recognition of foreign resolution actions
impediments to information sharing
E.g. Fortis, Lehman, Kaupthing
35
IV. Cross-border cooperation cont’d
Effective cross-border cooperation: condito
sine qua non for resolution of G-SIFIs
Objective: prevent disruptive and value-
destroying uncoordinated resolution actions
36
IV. Key Attributes on cross-border
cooperation
Provide a mandate in law for cooperation, information
exchange and coordination domestically and with
international foreign resolution authorities before and
during a resolution Preamble Key Attributes of Effective Resolution Regimes, November 2011
Statutory mandate of a resolution authority should
empower and strongly encourage the authority
wherever possible to act to achieve a cooperative
solution with foreign resolution authorities” Key Attribute 7.1
37
IV. Key Attributes on cross-border
cooperation
Amend national resolution frameworks to
enable and encourage cooperation
Eliminate discrimination against foreign creditors
Grant resolution powers over local branches
Ensure recognition and effect of foreign
resolution measures
Facilitate information-sharing with confidentiality
safeguards
Enhanced cooperation for G-SIFIs
38
IV. Key Attributes on cross-border
cooperation—cont’d
Legal framework conditions
COAG
CMGs
Established for all
G-SIFIs
Finalization ongoing
no ‘automatic’ actions
powers over branches
no creditor discrimination
Ability to give effect to
foreign resolution actions
information-sharing
Some progress but “national legal frameworks for cross-
border cooperation in resolution are, overall, less well-
developed across all sectors than other areas of the KAs.” FSB Thematic Review on Resolution Regimes, April 2013
39
IV. Cross-border cooperation—
burden sharing
Importance of burden-sharing principles
cannot be underestimated (but not envisaged
in Key Attributes)
Temporary public funding may be necessary
Absence of principles will undermine
cooperation
Further work in this area is necessary
Experience: in practice, very few examples of
burden sharing
40
IV. Cross-border cooperation—
what is next?
Joint paper FDIC-Bank of England on
resolving globally active, systemically
important firms
development of top-down resolution strategies
hinges on (i) ability to apply resolution powers at
holding level; (ii) availability of sufficient
unencumbered assets; (iii) mutual trust
Interaction with structural measures warrants
further attention
Diverging national measures pose challenges
41
Agenda
Overview
Resolution Authority
Resolution Toolkit
Information Sharing and Cross-Border Cooperation
Recovery and Resolution Planning
I.
II.
III.
IV.
V.
Lessons Learned VI.
42
V. Recovery and resolution
planning
Apr
2009
• Financial stability Forum: “Relevant authorities will encourage firms to maintain contingency plans and procedures for use in a wind-down situation, and regularly review them to ensure that they remain accurate and adequate.”
Sept
2009
• Basel’s Committee’s Cross-border bank resolution group: “Banks, as well as key home and host authorities, should develop practical and credible plans to promote resilience in periods of severe financial distress and to facilitate a rapid resolution should that be necessary.”
Sept
2009
• G20’s Pittsburg Summit Leaders’ Statement: “Systemically important financial firms should develop internationally consistent firm-specific contingency and resolution plans”
Mar
2010
• Basel’s Committee’s Cross-border bank resolution group: “the contingency plans for such institutions should address the practical and concrete steps that could be taken in a crisis or wind-down”
Nov
2011
• Financial Stability Board: “Jurisdictions should put in place an ongoing process for recovery and resolution planning, covering at minimum domestically incorporated firms that could be systemically significant or critical if they fail.”
43
V. Recovery and resolution
planning—cont’d
“Jurisdictions should put in place an ongoing process
for recovery and resolution planning, covering at
minimum domestically incorporated firms that could
be systemically significant or critical if they fail” Key Attribute 11
Responsibility for developing, maintaining
and executing recovery plan lies with the
firm, whereas resolution authorities are
responsible for resolution plan
44
V. Recovery and resolution planning—
cont’d
Recovery plans
Provides options to restore
financial strength and viability measures for addressing capital
and liquidity shortfalls
idiosyncratic and market wide
stress scenarios
implementation triggers
operational contingency plans
Resolution plans
Facilitate the effective use of
resolution powers regulatory thresholds and legal
conditions
critical interdependencies
resolution funding sources
Cooperation between home
and host authorities to ensure
consistency
reviewed at least annually or in case of material changes to a
firm’s business or structure
ability to impose measures that seek to improve resolvability
45
Prevention Early
intervention Orderly
resolution
RRPs implemented
and maintained
Recovery Plans
executed
Resolution Plans
executed
Cross-border cooperation
V. Recovery and resolution planning—
cont’d
46
Agenda
Overview
Resolution Authority
Resolution Toolkit
Information Sharing and Cross-Border Cooperation
Recovery and Resolution Planning
I.
II.
III.
IV.
V.
Lessons Learned VI.
47
VI. Effective resolution regimes—
Preliminary lessons learned
“While major legislative reforms have already been
undertaken (…), it is clear that implementation of the
KAs is still at an early stage.”
“Resolution regimes (…) exhibit a broad range of
practices in terms of scope, mandates and powers of
authorities. (…) However, jurisdictions sometimes have
different interpretations of what constitutes a ‘resolution
regime’ and its relationship to ordinary insolvency regimes
and powers for ordinary supervisory purposes.
FSB Thematic Review on Resolution Regimes, April 2013
48
VI. Effective resolution regimes—
Preliminary lessons learned cont’d
Main findings peer review
bank resolution powers insufficiently comprehensive
immature resolution regimes for non-banks
inadequate powers to resolve financial groups
weaknesses in cross-border cooperation arrangements
gaps in funding arrangements
recovery and resolution planning to be enhanced
operational capacity to resolve complex SIFIs remains
unclear
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VI. What remains to be done?
Next steps
Peer Review issued three sets of recommendations
(i) full implementation of the KA,
(ii) development of additional guidance; and
(iii) On-going implementation monitoring
Inclusion of KA in IMF/World Bank’s Standards
and Codes initiative?
Concerns about the reliability of cross-border
cooperation in resolution continue to loom large
