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

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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

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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

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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

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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

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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

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Main Tools

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RECOVERY AND RESOLUTION PLANNING

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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

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Draft Guidance

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WORK PLAN

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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

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INSPECCIÓN II

DRAFT EUROPEAN ARCHITECTURE

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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

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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

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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

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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

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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

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Trigger

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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

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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

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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

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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

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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

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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”

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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

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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

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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”

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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

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INSPECCIÓN II

GRACIAS POR SU ATENCIÓN SONSOLES EIREA