The Bank Recovery And Resolution Directive by Andreas Dombret and Patrick S. Kenadjian

3856c039d87faf8.jpg Author Andreas Dombret and Patrick S. Kenadjian
Isbn 9783110321074
File size 3 MB
Year 2013
Pages 289
Language English
File format PDF
Category economics


Institute for Law and Finance Series Edited by Theodor Baums Andreas Cahn Volume 13 The Bank Recovery and Resolution Directive Europe’s Solution for “Too Big To Fail”? Edited by Andreas Dombret Patrick S. Kenadjian ISBN 978-3-11-032107-4 e-ISBN 978-3-11-032140-1 Bibliographic information published by the Deutsche Nationalbibliothek The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data are available in the Internet at © 2013 Walter de Gruyter GmbH, Berlin/Boston Cover image: Medioimages/Photodisc Data Conversion: Werksatz Schmidt & Schulz GmbH, Gräfenhainichen Printing and Binding: Hubert & Co. GmbH & Co. KG, Göttingen ♾ Printed on acid-free paper Printed in Germany Preface Since the beginning of the financial crisis in 2008, legislators and scholars alike have identified the potential repercussions of the failure of a major banking institution within the global financial system as a key regulatory issue. On November 5, 2010, the Institute for Law and Finance of Goethe University hosted a conference focusing on issues related to the “too big to fail” problem. Papers based on the presentations given at this first “too big to fail” conference have been published in volume 9 of the ILF Series. The current volume contains articles based on presentations given at a follow-up conference entitled “The Crisis Management Directive – Europe’s Solution for Too Big to Fail?” hosted by the Institute for Law and Finance of Goethe University on May 3, 2012. The range of topics discussed in both conferences reflects the progress made in the field of bank resolution between fall of 2010 and spring of 2012. While the first conference dealt with basic conceptual issues, such as whether special rules for bank resolution are needed, what the appropriate triggers and tools of bank resolution should be, and how a creditor protection regime should be designed, the second conference focused on more specific issues. The papers by Dombret and Tucker review the development of the new regulatory approach to bank resolution. In part 2 of the volume, Gleeson and Randell highlight the importance of group rather than single company resolution. Parts 3 and 4 deal with specific new instruments of bank resolution. In part 3, Hüpkes, Otto and Guynn explore the potential and the limitations of living wills, while in part 4, Huertas, Bliesener and Kenadjian analyse key aspects of bail-ins as a resolution tool. The organizers are particularly pleased that eminent experts from the United States, the United Kingdom, Switzerland and Germany agreed to participate in the event and to share their views on and experiences with the new regulatory approach on bank resolution. The presentations given at the conference of May 3, 2012 have been updated in 2012 to reflect recent developments. Andreas Cahn Table of Contents Preface   V The Authors   IX Andreas Dombret, Patrick S. Kenadjian Introduction   1 From G-20 to FSB to EU Directive Andreas Dombret Solving the Too-Big-To-Fail-Problem for Financial Institutions  Paul Tucker Resolutions: a Progress Report   15 Group Resolution – the Key European Innovation Simon Gleeson The Importance of Group Resolution   25 Charles Randell Group Resolution under the EU Resolution Directive   39 Living Wills – The Centerpiece of Resolution Eva Hüpkes “Living Wills” – An International Perspective  Mathias Otto Living Wills – The In-House Perspective  Randall D. Guynn Resolution Planning in the United States   71  87  109 Bail-ins – the Problematic Tool Thomas F. Huertas The Case for Bail-ins   167 Dirk H. Bliesener Legal Problems of Bail-ins under the EU’s proposed Recovery and Resolution Directive   189 Patrick S. Kenadjian CoCos and Bail-Ins   229  7 The Authors Prof. Dr. Andreas Cahn Andreas Cahn studied law at the Johann Wolfgang Goethe-University Frankfurt/ Main and at the University of California at Berkeley, where he earned an LL.M. After his Second State Examination in Frankfurt he worked for 6 years as a research assistant at the University of Frankfurt. During this period of time he wrote his doctoral thesis on problems of managers’ liability (published in 1996) as well as his post-doctoral thesis on legal aspects of intra-group financing (published in 1998). In 1996 he took up the Chair of Civil Law, Commerce Law and Corporate Law at the University of Mannheim. Since October 2002 he is Director of the Institute for Law and Finance at Goethe-University in Frankfurt. He has published extensively on corporate law, capital markets law, the law of products liability, general civil law as well as on civil procedure. He is co-publisher of “Der Konzern”, a law journal focusing on company law, taxation and accounting of corporate groups, of “Corporate Finance law”, a journal with a focus on current legal issues corporate finance, co-editor of the Institute for Law and Finance Series and member of the editorial board of the law journal “European Company Law”. Dr. Dirk H. Bliesener Dirk H. Bliesener is a partner of Hengeler Mueller in Frankfurt am Main, Germany. Admitted to the New York and Frankfurt bars, Dirk Bliesener acted for Hypo Real Estate in setting up the bad bank FMS Wertmanagement (2009–2010) and was legal adviser to WestLB during their restructuring and transformation (2007–2012) which included state-guaranteed securitizations, two successive portfolio transfers to the bad bank Erste Abwicklungsanstalt and the transfer of banking activities to Helaba. Since 2010, Dr. Bliesener has been counsel to the German Federal Ministry of Finance on the European Financial Stability Facility (EFSF). He also frequently advises on debt capital markets, banking and securitization matters. Dirk Bliesener speaks frequently on topics related to bank restructuring and resolution. He is a co-editor and co-author of the recent commentary on German banking law (Bankrechts-Kommentar, 2013) and author of various publications on banking and securities laws. Previously a research associate of Hamburg-based Max Planck Institute for Foreign and Private International Law, Dirk Bliesener holds a doctorate of Hamburg University and is an alumnus of Yale Law School (LL.M.), University of Paris 1 (Maîtrise en Droit) and Institut d’Etudes Politiques de Paris (Sciences Po, C.E.P.). XII   The Authors Dr. Andreas Dombret Andreas Dombret was born on 16 January 1960 in the USA to German parents. After completing his “Abitur” (senior school-leaving certificate) at the Neu­ sprachliches Gymnasium in Ahlen, North Rhine-Westphalia, he trained as a bank clerk with Dresdner Bank before studying business management at the Westfäli­ sche Wilhelms University in Münster. He was awarded his PhD by the FriedrichAlexander University in Erlangen-Nuremberg. From 1987 to 1991, he worked at Deutsche Bank’s Head Office in Frankfurt as a manager with the power of procuration. From 1992 to 2002, he worked at JP Morgan in Frankfurt and London, from 1999 as a Managing Director. From 2002 to 2005, he was the Co-Head of Roth­schild Germany located in Frankfurt and London, before serving Bank of America as Vice Chairman for Europe and Head for Germany, Austria and Switzerland between 2005 and 2009. He was awarded an honorary professorship from the European Business School in Oestrich-Winkel in 2009. Since May 2010, he has been a member of the Executive Board of the Deutsche Bundesbank with responsibility for Financial Stability, Statistics and Risk Control. Dr Andreas Dombret holds several other positions outside the Deutsche Bundesbank. He sits on the Board of Trustees of the Center for Financial Studies (CFS) in Frankfurt, the Österreichische Bankwissenschaftliche Gesellschaft (Austrian Society for Bank Research) in Vienna, the Westfälische Wilhelms University in Münster, the Schirn Kunsthalle art exhibition centre and the Städel Museum in Frankfurt, and the Museum Wiesbaden. In addition, he is a member of the Board of the International Center for Monetary and Banking Studies (ICMB) in Geneva and the Exchange Experts Commission (BSK), as well as the treasurer of the Verein für Socialpolitik and the Atlantik-Brücke. He is also a co-editor. Simon Gleeson Simon Gleeson joined Clifford Chance in 2007 as a partner in the firm’s Financial Regulation group, where he specialises in financial markets law and regulation. He has advised Governments, regulators and public bodies as well as banks, investment firms, fund managers and other financial institutions on a wide range of regulatory issues. He advised the World Economic Forum on their report on their 2009 Report on The New Global Financial Architecture, and has worked with regulators and governments around the world on the establishment of regulatory regimes. He has been a member of the Financial Markets Law Committee, chairs the Institute of International Finance’s Committee on Cross-Border Bank Resolution, has written numerous books and articles on financial regulation, and is the author of “International Regulation of Banking”, recently published by Oxford University Press.  The Authors   XIII Randall D. Guynn Mr. Guynn is the head of Davis Polk & Wardwell LLP’s Financial Institutions Group. He has advised the Securities Industry and Financial Markets Association, the principal trade organization for U.S. banks, securities firms and asset managers, all six of the U.S.’s largest banks and many non-U.S. banks on the Dodd-Frank Act and its regulatory implementation. His practice focuses on providing strategic bank regulatory advice and advising on M&A and capital markets transactions when the target or issuer is a banking organization or other financial institution. He also advises on regulatory enforcement actions and white collar criminal defense, bank failures and recapitalizations, corporate governance and internal controls, cross-border collateral transactions, credit risk management, securities settlement systems and payment systems. Mr. Guynn has been considered a thought leader on bank regulatory matters for many years. He has been listed in numerous guides to the world’s leading business lawyers since 1996, most recently Chambers Global 2012, Chambers USA 2012, and the IFLR1000 2013. He has been a guest lecturer on bank regulation at the Harvard, Pennsylvania, Virginia and Yale Law Schools and frequently speaks on panels at bank regulatory conferences. Dr. Eva Hüpkes Dr. Hüpkes is Adviser on Regulatory Policy and Cooperation at the Financial Stability (FSB) Board. Prior to assuming her position with the FSB in September 2009 she served as Head of Policy and Regulation with the Swiss Financial Market Supervisory Authority FINMA and FINMA’s predecessor organization, the Swiss Federal Banking Commission (SFBC), which she joined in 1999. Before that she worked at the Legal Department of the International Monetary Fund in Washington D.C. Dr Hüpkes is a member of the New York Bar and holds degrees in law and international relations from the University of Geneva, the Graduate Institute of International Studies, Geneva, and Georgetown University (LLM. with distinction), and a doctorate in law (magna cum laude) from the University of Berne. She played a pivotal role in promoting effective resolution of financial institutions as Secretary to the FSB’s groups working on resolution, as Co-Chair of the Basel Committee Working Group on Cross-Border Bank Resolution and as member of the Advisory Panel of the International Association of Deposit Insurers. She also served as Consulting Counsel to the IMF advising national authorities on the implementation of international standards relating to banking regulation and supervision and crisis management and is a Member of the Committee on International Monetary Law of the International Law Association. She is a Lec- XIV   The Authors turer in international financial regulation at the University of Zurich and Frankfurt Goethe University. Thomas F. Huertas Thomas F. Huertas is currently a partner in the risk practice at Ernst & Young LLP where he advises major financial institutions on regulatory and strategic issues. He is also an Adjunct Professor at the Institute of Law and Finance in the Goethe University Frankfurt where he teaches a course on financial intermediation and risk management. He has published extensively on finance, including his recent book Crisis: Cause, Containment and Cure. He holds a Ph.D. in Economics from the University of Chicago. Prior to joining Ernst & Young at the start of 2012 Dr. Huertas was a Member of the Executive Committee at the UK Financial Services Authority and Alternate Chair of the European Banking Authority. He also served as a member of the Basel Committee on Banking Supervision and as a member of the Resolution Steering Committee at the Financial Stability Board. Prior to joining the FSA in 2004, Dr. Huertas held a number of senior positions at Citigroup, including Chairman and Chief Executive of Citibank AG (Germany) in the years 1999 to 2001. Patrick S. Kenadjian Patrick S. Kenadjian is currently an Adjunct Professor at the Goethe University in Frankfurt am Main, Germany, where he teaches courses on the financial crisis and financial reform and comparative public mergers and acquisitions at the Institute for Law and Finance. He speaks frequently on topics related to financial reform, including too big to fail, the architecture of financial supervision and the new regulatory environment in the US and the EU. Mr. Kenadjian is also Senior Counsel at Davis Polk & Wardwell, LLP in their London office. He was a partner of the firm from 1994 to 2010, during which time he opened the firm’s Tokyo and Frankfurt offices in 1987 and 1991, respectively and spent over 25 years in their European and Asian offices. His practice includes cross-border securities offerings, especially for financial institutions, mergers and acquisitions, privatizations and international investments and joint ventures, as well as general corporate advice, with an emphasis on representing European clients. He has been active in securities transactions for issuers in Asia and Europe, particularly on initial public offerings and privatizations in Germany, Austria, Italy and Switzerland. He has represented bidders and targets in cross-border acquisitions throughout Europe, in particular in France, Germany, Italy, Switzerland, the United Kingdom and the United States. Mr. Kenadjian has also represented European and Asian issuers in U.S. debt private placements. He speaks French, German and Italian.  The Authors   XV Dr. Mathias Otto Mathias Otto is Deutsche Bank’s Deputy General Counsel for Germany, Central & Eastern Europe. He also serves as global co-head of the Governance, Regulation and Litigation practice group. Based in Frankfurt, his responsibilities include bank and securities regulatory matters, the agenda on regulatory reform, governance aspects, group investments and restructurings and capital markets transactions. In his over 20 years of experience, Dr. Otto was involved in numerous strategic initiatives of Deutsche Bank, securities issuances, hybrid capital, Deutsche Bank’s listing on the New York Stock Exchange, licensings, acquisitions, restructurings and disposals. Dr. Otto received his legal education at the Augsburg University which awarded him his PhD for a thesis on comparative procedural law. Charles Randell Charles Randell joined Slaughter and May in 1980 and became a partner in 1989. In the field of restructuring of financial institutions, he advised the UK Treasury on a range of assignments arising from the financial crisis, including the resolutions of Northern Rock, Bradford & Bingley and the UK operations of Landsbanki and Kaupthing; the recapitalisation of the UK banking sector, including the Government investment in RBS and the merged Lloyds/HBOS; and the £280 billion Asset Protection Scheme. He also advised the Portuguese Ministry of Finance on the €8 billion recapitalisations of the Portuguese banks BCP, BPI, CGD and Banif. His practice also included other major insolvencies and restructurings and a variety of mergers and acquisitions work. In March 2013, he became a director of the Prudential Regulation Authority and he will cease to be a Partner of Slaughter and May at the end of August 2013. Charles graduated from Oxford University and holds an MA in jurisprudence. He is a Visiting Fellow at Queen Mary University of London. Paul Tucker Paul Tucker was appointed as Deputy Governor, Financial Stability in March 2009. He is a member of the Bank of England’s Monetary Policy Committee, Financial Policy Committee, Court of Directors and of the Board of the Prudential Regulation Authority. He was appointed chair of the Committee for Payment and Settlement Systems in April 2012. He is a member of the G20 Financial Stability Board Steering Committee, and chairs the Financial Stability Board’s group on resolving large and complex banks. From June 2002 until Paul’s current appointment, Paul was Executive Director for Markets. Andreas Dombret, Patrick S. Kenadjian Introduction On May 3, 2012, the Institute for Law and Finance (“ILF”) at the Johann Wolfgang Goethe University in Frankfurt am Main hosted its second symposium on bank resolution. The first session, held on November 5, 2010, in which we both participated, took place at a time when the consensus that special bank resolution laws were necessary to combat the phenomenon known as “too big to fail” was still forming and Germany was preparing to adopt its law on bank resolution. Eighteen months later the ILF held a follow up conference as the European Commission was preparing to publish its long awaited directive establishing a framework for the recovery and resolution of credit institutions and investment firms which was finally issued on June 6, 2012 (the “Bank Recovery and Resolution Directive”, or “RRD”). In those eighteen months the consensus that bank resolution laws are an essential element in resolving “too big to fail” has become quasi-universal. The G20 endorsed the ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’ issued by the Financial Stability Board as a new international standard and national laws have been adopted in numerous countries, but the twin problems of international coordination and uniformity of approach which the RRD attempts to tackle within the European Union still remain largely unresolved. “Too big to fail” refers to the conundrum that large, complex financial institutions, especially those active internationally, present regulators and public authorities in the countries in which they operate. On the one hand, classical insolvency proceedings, designed for commercial and industrial firms, have proven too slow and not appropriate for complex financial institutions, which lose going concern value very quickly and are so interconnected with other similar institutions that contagion is an incalculable risk. On the other hand, bailing out their shareholders and creditors places undue burdens on the public sector and encourages the kind of reckless behavior, known as “moral hazard,” which makes failure more likely. Bank resolution regimes are meant to provide a “third way” between a disorderly value destroying and contagion spreading insolvency such as that which Lehman Brothers experienced in September 2008 and a moral hazard generating bail-out of shareholders and creditors of large, complex financial institutions, of which the financial crisis provided many examples in 2008 and 2009. The effort to develop bank resolution regimes is taking place as controversy continues to surround financial institutions, leading to a variety of alternative proposals to deal with “too big to fail,” such as those to divide up financial insti- 2   Andreas Dombret, Patrick S. Kenadjian tutions by function so that insured deposits and essential commercial banking services are insulated from losses generated by trading activities or to cap their size. The motivation for such proposals is understandable and we are open to considering their pros and cons. However, these proposals raise complex collateral questions and they cannot be a substitute for developing the tools necessary to allow large, complex financial groups to be resolved. The history of the financial crisis and of the subsequent sovereign debt and banking crisis in Europe does not provide any conclusive evidence that a functional division of financial institutions into commercial banking and investment banking activities would have removed a significant cause of the crisis nor any practical help in drawing a line as to the optimal or maximum size of financial institutions. Both investment banks and commercial banks, as well as other financial institutions, such as insurance companies and money market mutual funds, failed or had to be rescued and many of the rescues were not motivated by the preservation of insured retail deposits within the institutions involved, but rather by the need to prevent contagion to other financial institutions and even the collapse of the financial system. Furthermore, absolute size alone has not proven a reliable indicator of whether at a specific point in time a specific institution would need to be bailed out. Thus attempts to identify ex ante which kinds of activities should be banned or which kinds of institutions should be broken up are not a substitute for the urgent task of ensuring that, sooner rather than later, a set of tools is uniformly available to banking supervisors worldwide to allow large, complex financial groups to be dismantled in a crisis in a way which does not endanger the provision of essential banking services or the stability of the financial systems in which they operate. We are now in year five of the financial crisis and have been relatively lucky that, since the end of 2008, we have not had to face the collapse of a “too big to fail“ financial institution, but we cannot continue running for luck. Whatever other solutions to “too big to fail” may be proposed, explored and eventually adopted, the kinds of procedures and tools proposed by the RRD will have to be available if these solutions prove not to be effective at preventing the failure of a large, complex financial institution. Only a credible resolution system is a long term as well as a short term solution to “too big to fail.” The RRD provides a comprehensive catalogue of what these tools need to include and while neither we nor the other authors of this volume agree totally with all elements of the proposed Directive, we believe it is essential that we focus on the issues it raises and that the Directive is finalized, adopted and implemented as soon as possible. In this connection we think it is very important that the RRD become effective as a whole on a single date and that the currently proposed effective date for the “bail-in tool” be brought forward from January 2008 Introduction   3 to January 2005, when the rest of the Directive is to take effect. That tool is central to the effectiveness of cross-border resolutions. Deferring it would deprive the RRD of much of its effect. This should, however, be just the next step, as European integration continues to progress. We welcome the EU Commission’s intention to go even further, namely to propose a single resolution mechanism for member states participating in the single supervisory mechanism for financial institutions within the Euro zone as soon as the RRD has been adopted. This volume contains some of the speeches delivered at the conference on May 3 as well as a number of more extensive essays which reflect the contents of the RRD and some of the other relevant developments within the European Union between May 3 and the end of 2012, including proposals to create a Banking Union. The authors’ contributions follow the design of the conference and focus on three main themes, the complexities involved in the resolution of financial groups, the theory and practice of recovery and resolutions plans, colloquially known as “living wills” and the controversy generated by one particular resolution “tool”, the “bail-in”. Frankfurt, April 2013

Author Andreas Dombret and Patrick S. Kenadjian Isbn 9783110321074 File size 3 MB Year 2013 Pages 289 Language English File format PDF Category Economics Book Description: FacebookTwitterGoogle+TumblrDiggMySpaceShare The volume is a collection of articles based on presentations given at a conference titled The Crisis Management Directive Europe s Answer for Too Big to Fail? hosted by the Institute for Law and Finance on May 3, 2012.”     Download (3 MB) The Business Guide to Credit Management Preventing Money Laundering and Terrorist Financing: A Practical Guide for Bank Supervisors The New International Financial System The Economics of Money, Banking and Financial Markets, 4th Canadian edition Unravelling the Credit Crunch Load more posts

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