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Banking Crisis in the Euro Zone

February 26, 2013

Presenters:

Pdraig Rordin, Arthur Cox

Juan Carlos Machuca, Ura Menndez

Primary Legal Themes in the Euro Zone Banking Crisis

Pdraig Rordin, Arthur Cox

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Maastricht Treaty (Treaty on European Union) 1993. Established the Economic Monetary Union requiring member states to coordinate economic policies and required eurozone budgetary discipline.

Cohesion Standards debt criterion and deficit criterion

Ineffective enforcement mechanisms once states admitted to the Eurozone

Escalating Sovereign Debt

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European Central Bank central mandate to control inflation

Low Interest Rate Environment In a low interest rate environment, banks might [also] have less incentive to monitor credit risk properly and may provide too many loans to non-profitable business," - Mario Draghi, European Central Bank, February 2013

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Central Banks in Eurozone Member States no autonomy to raise interest rates or moderate individual Member State economies A central bank must have clearly defined and prioritised objectives, sufficient authority to achieve those objectives and be autonomous to remain credible. - Tonny Lybek, International Monetary Fund, 2004

Cheap funding to Eurozone banks and their borrowers

Sovereign debt crisis and widespread property crisis leading to Eurozone Banking Crisis

Irish Banking/Financial Crisis

Pdraig Rordin, Arthur Cox

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Roots of Irish Banking/Financial Crisis Fiscal problem Systemic Banking problem Both related to property investment Bank Lending

It appears now, with hindsight, to be almost unbelievable that intelligent professionals in the banking sector appear not to have been aware of the size of the risk they were taking. Nyberg Report, March 2011

Design of Eurozone

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September 2008 Background Crisis of confidence Bank share prices plummet Deposit levels in banks quickly eroding Liquidity, not Solvency Problem

Response Irish Government issues blanket bank guarantee covering all deposits and senior debt

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Early 2009 Actions Nationalisation of Anglo Irish Bank

3.5 Billion Preference Share recapitalisations of each of BOI and AIB

4 billion recapitalisation of Anglo

Revised (Eligible Liabilities) Guarantee Scheme

Believed we were complete

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Reality

Total recapitalisations now over 70 billion

30 separate transactions in restructuring the banking system with total value of 140 billion

Human ability to adjust reference points

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Late 2009 Actions Creation of the National Asset Management

Agency (NAMA)

Designed to stabilise banks by removing toxic development land assets from balance sheets

Structure designed for speed and efficiency 74 billion in book value of assets bought by NAMA for 33

billion Crystallised losses on banks balance sheets NAMA is asset management company with 10 year sunset

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2010 Actions Further recapitalisations including issuance of 33 billion

promissory note to Anglo Irish Bank

Progressive reduction by banks of loan to deposit ratios to circa 122.5% and strengthening of balance sheets Liability Management Exercises Asset disposals Increase in deposits Other capital injections (e.g. rights issue)

Required regulatory capital levels in banks 8% base CT1, 4% stress CT1

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EU/IMF Programme of Support for Ireland - 28 November 2010

The Troika = IMF, EU, ECB

22.5bn from EFSM 22.5bn from IMF 22.5bn from EFSF / bilateral loans 17.5bn NPRF / Irish cash reserves

Programme memorandum economic and structural conditions including restructuring of banking system

Debt refinancing, not debt repayment

2010 Troika Refinancing

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2011 Actions - Powers Complete restructuring of banking system in 6 months Powers based on Credit Institutions (Stabilisation) Act 2010 Toolbox included Direction Orders, Transfer Orders,

Subordinated Liability Orders Constitutionality and Court Process Impact on UK law denominated debt instruments and

Credit Institutions Winding Up Directive preserve and restore

Switched off default triggers

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2011 Actions - Implementation

Demutualised Building Societies Merged Building Societies into banks Transferred Anglo and INBS deposit books to AIB and ILP Recapitalised banks to 10.5% CT1 base and 6% stress State-underwritten rights issue in Bank of Ireland Investment by US syndicate in Bank of Ireland reducing

State ownership in Bank of Ireland from 52% to 15%

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2011 Actions Haircutting of subordinated debt in solvent banks

Subordinated Liability Orders Liability Management Exercises Voluntary to the extent possible

Recovered over 5 billion in capital

Only time this has been achieved.

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2012 Actions

Transfer of Irish Life from ILP to Minister for Finance

Throughout the whole of 2012 there were no further recapitalisations

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February - 2013 Actions 7 February liquidation of the Irish Bank Resolution Corporation

(IBRC), formerly the Anglo Irish Bank, and the Irish Nationwide Building Society, the first liquidation of a major bank in the eurozone

The Irish government replaced 25bn (21.3bn) of promissory notes, which were used to bail out Anglo Irish and Irish Nationwide, with long-term government bonds with maturities of up to 40 years

The agreement will mean Irish taxpayers avoid a payment of 3.1bn due in March, reduce the need to borrow over the next 10 years by 20 billion, materially improve our budget deficit and enhance our ability to access capital markets and exit the IMF/EC programme

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Banking Landscape Now Bank of Ireland Listed 15% State owned AIB Listed 99% State owned ILP Listed 99% State owned Anglo In liquidation 100% State owned INBS In liquidation Merged into Anglo EBS Demutualised Merged into AIB

State Bank Guarantee continues, at substantial cost to banks

70 billion total recapitalisation cost to State to date

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Current Position Continued Restructuring of Banks

Deleveraging to core business Liquidation of IBRC/INBS

On going interaction at European/Troika level ESM Replacement of Promissory Note financing and ending of ELA

Stability

Sovereign Debt Continuing Austerity Budgets Beginning of return to markets

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Thank You

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The Spanish Banking Crisis

A late but (probably) fruitful reform

Juan Carlos Machuca, Ura Menndez

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A. The Emergence of the Crisis The three axes of bank restructuring: 1) Market concentration circumstantial perspective 2) Reorganisation

Structural perspective Collapse of the real estate sector

3) The problem of savings banks

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B. The Steps Taken to Reinforce the Banks 1) General features of the process

Delayed reaction (2009) in comparison with other EU countries.

Reorganisation structural perspective Political aspect of savings banks

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2) Early internal developments A cascade of legislation: 6 Decree-Laws in 3 years. RDL 9/2009 creation of Fund for Orderly Bank Restructuring (Fondo para la Reestructuracin Ordenada Bancaria, FROB).

FROB I Aids (loans / preference shares) First wave of mergers / Cold mergers

RDL11/2010 new regime for savings banks: The bank as the corporate form through which

savings banks may pursue their activity.

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RDL 2/2011: New capital requirements FROB II (contributions to capital)

RDL 2/2012 Provisions and additional capital to cover potential

expenses related to risky/non-performing real estate assets.

FROB III (Contingent Convertible Bonds, CoCos) RDL18/2012

Provisions and additional capital to cover potential expenses related to normal/performing real estate assets.

General Asset-Management Companies (AMC).

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3) European intervention Memorandum of Understanding (June 2012): EUR

100,000 million loan granted by the Eurogroup for the reorganisation of the Spanish banking system.

Road map: a) Stress tests (Oliver Wyman) b) Classification of credit entities into 4 groups

RDL 24/2012, on restructuring and resolution of credit entities (later, Law 9/2012). Early intervention (G3) / Restructuring (G1/G2) /

Resolution (G1/G2) New core capital ratio: 9% (applicable since 01/01/2013)

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Group Description Entities involved Measures applied

Group 0 Do not have any capital shortfall

Unicaja, Sabadell, Bankinter, Caixabank,

Kutxabank, Santander, BBVA

N/A

Group 1 Owned by FROB BFA-Bankia, CatalunyaBanc, NCG

Banco, Banco de Valencia

Recapitalisation plan Restructuring plan

Burden sharing Transfer to AMC

Group 2 Need state aid to meet capital requirements

Banco Mare Nostrum, Banco Caja 3,

Liberbank, CEISS

Recapitalisation plan Restructuring plan

Burden sharing Transfer to AMC

Group 3 Do not need state aid to meet capital

requirements

Ibercaja, Banco Popular

Investment of Convertible Contingent Bonds (CoCos)

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4) Instruments for restructuring and resolution Financial assistance Recapitalisation Burden-sharing regime Resolution instruments The Bad Bank AMC: Sociedad de Gestin de Activos Procedentes de la Reestructuracin Bancaria, S. A. (Sareb). December 2012.

Shareholding structure Assets Management

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C. Progress to Date (Working in Progress) Recapitalisation of banks is already on its way:

Group 1 banks 28 November 2012, the EC approved the restructuring plans for the four banks in that group; 26 December 2012, the FROB implements the recapitalisation (around 37 billion).

Group 2 20 December 2012, the EC approved the restructuring plans for the four banks in that group (around 2 billion).

Significant reduction in the number of savings banks (vid. charts on next slides).

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Reduction of capital needs as a result of burden sharing.

The AMC is now operational. Some of the assets that were transferred to it are already being offered to the public.

Still some uncertainty on some nationalised banks.

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D. Objectives 1) Unresolved problems 2) Main goals Generally improve core capital ratio of credit entities (increase of equity or reduction of RWAs) Reduce the minimum level of core capital (long-term) Admission to trading (stock exchange, private placing) Elimination of the savings banks controlling stakes in commercial banks Specifically for Sareb: optimise recovery of assets and the preservation of their value, minimising negative impacts on Spanish economy Return of credit liquidity

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Muchas gracias!

Questions?

Lex Mundi the law firms that know your markets.

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Speaker Contact Information Pdraig Rordin

Arthur Cox (Lex Mundi member firm for Ireland and Northern Ireland)

Earlsfort Centre Earlsfort Terrace

Dublin 2 Ireland

http://www.arthurcox.com padraig.oriordain@arthurcox.com

www.lexmundi.com

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Speaker Contact Information Juan Carlos Machuca

Ura Menndez (Lex Mundi Member Firm for Spain)

London

http://www.uria.com juancarlos.machuca@uria.com

www.lexmundi.com

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