Recovery and resolution options

Transcription

1 Recovery and resolution options Operational Aspects of Bank Resolution and Restructuring EBRD, London 19 March 2012 Maggie Mills, Ernst & Young

2 Two phase model to dealing with financial crisis: A recover phase followed by a resolution phase Upper end of operating range Capital and liquidity ratios Factors influencing the mitigating actions taken may include: The interrelationships of economic functions Use of branches and subsidiaries in different jurisdictions The extent of inter-affiliate exposures Non-financial interdependencies between legal entities The impact of cessation of economic functions Treasury and funding key dependencies Operational key dependencies Payment systems dependencies Current capital/ liquidity ratios Target operating range Recovery actions - Undertake recovery actions to address severe stresses within the existing legal entity Lower end of operating range Stress buffer Actions may include: Cessation of lending activities by impacted institutions Selling off and divisions Changes to business strategy and the management team Insurance scheme for non performing loans Crisis threshold (capital or liquidity event) Recovery zone Resolution actions - Supporting efficient resolution activities after failure involving alternative legal structures. Failure threshold Resolution Actions may include: Bridge bank / Good-bank Bad-bank split Insolvency or bank insolvency procedures Nationalisation Bail in time 2 2

3 which has to be balanced against a set of public policy objectives Objective Implications Stability of the financial system including trading, payment and settlement infrastructure This objective implies that the systemic impact of any steps taken to resolve failed banks need to be considered. In particular, consideration should be given to the timing of intervention (e.g., taking actions during weekends). Public confidence in the financial system Protection of depositors Protecting public funds Preservation of public confidence is particularly key to maintaining deposits and therefore liquidity. Achievement of this involves assuring the public that deposits and services will remain available, and that problems of one part of the financial system will not be allowed to transfer to other parts. This policy objective requires a recognition that depositors is a class of creditors requiring special protection given their critical economic importance. Implies taking steps to ensure the effective expenditure of public money. Least cost/realisation maximisation Weightings of the objectives will depend on the circumstances of the particular failure and of the wider financial system. Complexity of the financial system will play a key role in determining how these objectives can be met. Property rights Includes avoiding unfair discrimination and ensure that any interference with property rights is in the public interest and is proportionate. No creditor worse off ( NCWO ) 3

4 As well as two overall questions Overall role for financial services in the economy Policy What is the desired future model for financial services? How is the future sector model achieved? Institutions: Universals Retail (including mutuals, cooperatives, credit unions) Investment advisors Specialised financial institutions Is the right toolkit available? When are the policy tools used? Proactively? Used only when really required? Private sector incentives Privatisations? Licence applications? Attitude to ownership Level of lending to SMEs (a requirement?) Landscape (an oligopoly / a top ten / more diversified)? Ownership National champion Foreign ownership Mix? Private equity Size Utilities versus a sector for growth? Relative roles of each stakeholder and their interaction throughout the process? Stakeholders Central Bank, Ministry of Finance, Regulator, Deposit Protection Scheme) 4

5 There are a number of resolution options available, the choice of which will be influenced by a range of factors The following considerations are likely to impact the method that is chosen: Are legal frameworks in place to deliver the desired resolution? What changes need to be implemented to make this possible? Likelihood of finding a private sector purchaser, and whether a deal could feasibly be completed within the required timelines Saleability of the and liabilities of an institution Speed of payouts to depositors and the method through which this would be achieved The feasibility of completing a partial transfer which complies with safeguards The operational risk of managing a bridge bank Bridge bank Including Good bank Bad bank split Options Insurance solution (e.g., the UK Asset Protection Scheme) In general, these may lead to the following strategies: Presence of a willing seller and ability to make swift and certain transfers Sale to private sector A stable platform is needed to prepare for and effect the onward sale of all of part of the bank Bridge bank solution Appropriate outcome is winding up of the institution Insolvency procedures Significant public support has already been granted, or other options are limited Full nationalisation Bail-in Other asset management solutions including alternative Good Bank Bad Bank models Full nationalisation Insolvency, including runoff of any rump It is important to ensure that whatever option is taken provides sufficient flexibility to enable flexing the approach as a clearer picture develops on the recoverability of. 5

6 An evaluation framework Resolution option Economic valuation considerations Execution risk Impact on stability Transfer to a third party buyer Valuation methodology: precedent transactions? Comparable quoted companies? Cost of TSAs Certainty of exit from TSAs? Remaining private sector capacity for future transactions? Sensitivities Resolution of one institution may involve a combinations of individual, liabilities, businesses, operations and employees Transfer to a Bridge Bank Leave in legacy / Transfer to AMC Capital requirement? Valuation methodology: Run-off valuation? Future sale? Basis? Impact of fair valuation at transfer for regulatory capital purposes Sensitivities Valuation methodology for decision making: Runoff valuation? Basis? Sensitivities Certainty of disposal of Bridge Bank? Timing? Bridge Bank readiness (Day1 plan and Transitional Operating Model) Provision of TSAs to / from legacy / buyer? Legacy readiness (Day1 plan and Transitional Operating Model) Provision of TSAs to / from Bridge Bank / buyer? Decisive? Signal sent to the markets more broadly? Bail-in What is the scope? All wholesale/senior bonds/derivatives Limited to subordinated debt? Can it be executed in a short timescale? Weekend? How is the haircut allocated to creditors? Stabilised situation to allow controlled restructuring Decisive? 6

7 An evaluation framework - an example loan portfolio Resolution options Economic valuation considerations Execution risk? Impact on stability Transfer to a buyer Envisage that buyer will make an offer at or below the clearing values for similar loan portfolios traded eg 400m Valuation at point of transfer certain. Although a buyer may not materialise If trade buyer then servicing required in the short term (provided under a TSA from legacy or Bridge Bank) ahead of a migration likely that TSA will be neither long term or onerous Likely to be seen as positive and decisive Remaining private sector capacity for future transactions? Example loan portfolio with face value of 1bn Transfer to a Bridge Bank Loan portfolio may yield discounted cash flow of 200 million over the next two years and may be sold for 300 million (discounted) in two years time. Total value 500 million Potential to sell a reduced portfolio in the future uncertain Risk in achieving cash flow forecast Ongoing servicing required (either by Bridge Bank itself or via a TSA from legacy) Decisive? Leave in legacy / Transfer to AMC Run-off over 10 years achieving discounted cash flow of 450 million Valuation at point of Resolution dependent on assumptions Risk in achieving cash flow forecast Ongoing servicing required (either by Bridge Bank itself or via a TSA from legacy) Signal sent to the markets more broadly prepared to do the same with larger portfolios / institutions? Conclusions Working hypothesis Transfer to Bridge Bank Transfer to buyer Transfer to buyer Transfer to buyer should bids materialise at levels near Bridge Bank / Legacy valuations (e.g. say 425 million) be prepared to transfer to Bridge Bank should bids not materialise (or not materialise at the benchmark level) with the knowledge that should Bridge Bank be unsuccessful in making a disposal in the future then the downside is estimated by the run-off valuation 7 7

8 Our experience of asset management solutions Vehicle to hold non performing off banks balance sheets to allow them to restore lending capability by freeing up capital and manage market uncertainty Resolution and asset management company structures have evolved and there are a number of successful models being deployed Virtual Bank (National Bad Bank / Vehicle) Nationalised Bad Bank / Vehicle Sector Sanitiser Limited Resolution Vehicle Privatisation Enablers Private Solutions National reach Eligibility system wide to regulated deposit takers of that territory inc foreign bank subsidiaries In receipt of multiple banks Insurance premium paid to isolate and indemnify asset but kept on balance sheet Multiple sector loans National reach Only holds of nationalised banks In receipt of multiple banks Assets transferred at balance sheet value Multiple sector loans National reach In receipt of multiple banks Clear eligibility criteria for loans and bank participation Bought at deep discount Single sector, e.g., property, focused to allow for loans to be worked out and repaid without destabilising economy by flooding it with Single nationalised bank solution State owned but run independently Assets transferred at a value designed not to encumber good bank Assets managed and held to allow for stabilisation of key sectors of economy and for market to recover Single nationalised bank solution Performing in high risk sector, e.g., mortgages Uses these to assume the responsibility for repayment of government aid freeing up good bank for sale Commercial bank own solution for their Run down and workout units to collect and manage poor performing, high capital consuming Managed through accounting reclassification and tax minimisation plays E.g. APS (UK) E.g. OHY Arsenal (Finland) E.g. NAMA (Ireland) E.g. Securum (Sweden) E.g. NRAM (UK) E.g. RBS Non Core (UK) 8

9 Ernst & Young Contacts David Barker Managing Partner Tel +44 (0) Mobile +44 (0) Fax +44 (0) John Cole Partner Tel +44 (0) Mobile +44 (0) Fax +44 (0) Philip Middleton Partner Direct Tel: +44 (0) Direct Fax: +44 (0) Mobile: +44 (0) Maggie Mills Partner Direct Tel: +44 (0) Direct Fax: +44 (0) Mobile: +44 (0)