Banking Resolution Spanish experience. Future implications of BRRD.

Transcription

1 Banking Resolution Spanish experience. Future implications of BRRD. FinSAC workshop on Recovery and Resolution Planning 24 April Mario Delgado EY; Partner, Risk & Regulation

2 Banking resolution Spanish experience & Implications of BRRD for future resolutions In the last few years significant bank restructuring processes have taken place in several countries, including Spain. Various resolution instruments have been used in Spain: Public money injections ( bail-out ). Use of Industry Funded Deposit Guarantee Fund. Bail-in. Asset Management Company (SAREB). BRRD introduces a new paradigm of bail-in which could build on existing experience but that will also introduce new challenges. A new culture of resolvability is introduced. Page 1

3 Section 1 Financial Sector Restructuring: Spanish experience

4 Financial Sector Restructuring Spanish experience The Spanish banking sector has gone through a very significant restructuring in the last few years, focused on Saving Banks ( Cajas de Ahorros ). The crisis was linked to the international crisis and also reflected internal vulnerabilities: Oversizing In terms of entities, branches and employees. Significant exposure to real estate sector Vulnerabality when construction bubble burst. Structural limitations of «Cajas de Ahorros» Corporate Governance. Lack of possibility of shares issuance. Gaps in the regulatory framework Lack of specific resolution regime. Page 3

5 Financial Sector Restructuring Spanish experience There was a need to work on resolution and on resolvability at the same time. Regulatory and preparatory measures Resolution measures Creation of FROB. Independent AQR / Stress Test Enhancement of resolution framework. Encouragement of financial sector rationalization. Transfer of financial activity from Cajas to banks being encouraged. Public money for solvency purposes ( 53.5 billion) EU financial support Use of Deposit Guarantee Scheme ( 7.9 billion). Burden-sharing ( bail-in ). Creation of an Asset-Management Company (SAREB). Bank restructuring Strong interaction with EU Commission, ECB and IMF in the context of EU financial assistance. Page 4

6 Financial Sector Restructuring Spanish experience Public Bail-out Around 53.5 billion. Initially in the form of preferred shares. Originally financed by FROB issuances. In June 2012 EU financial support required; up to 100 billion ( 41b used). Burden-sharing ( Bail-in ) Bail-in affected shareholders; holders of hybrid instruments and subordinated debt. Around 13 billion of recapitalization generated through bail-in. However, burden-sharing was difficult because of commercialization issues : Arbitration procedures were launched for retail investors/savers. Liquidity was granted to bailed-in retail investors through the DGS. Page 5

7 Financial Sector Restructuring Spanish experience Role of the Deposit Guarantee Fund (DGF). Financed the first resolution cases. Provided Asset Protection Schemes in distressed banks sales. Provided liquidity to bailed-in holders of subordinated debt that had had their securities transformed into non-liquid shares. Asset Management Company (SAREB) Equity (ownership structure): 45% public (FROB) ; 55% private. Financing: Bonds issued by SAREB with public guarantee. Transferring Banks: all the banks needing financial support. Scope: Assets qualifying as Real Estate (owned and not for use) > Loans to Real Estate development firms > Transfer price: Based on Real Economic Value additional discount for managerial costs. Average haircut: 53%. Total assets transferred: 107 billion price Transfer price 50.8 billion. Page 6

8 Financial Sector Restructuring Spanish experience Summary A clear resolution framework with clearly defined powers is of the essence. Importance of a quick and credible diagnosis. Need to act on the asset side of the balance sheet (loss recognition) as well as on the liability side (recapitalization). Burden-sharing requires proper commercialization. Focus on prevention. Page 7

9 Section 2 Future resolution cases: the BRRD regime

10 Banking Resolution Under BRRD Implementation of the bail-in paradigm BRRD introduces a paradigm shift: from bail-out to bail-in Objectives of resolution: Safeguard financial stability, protect deposits and ensure continuity of critical functions. Allocate losses to private sector. Preference for the non-covered part of deposits of SMEs and natural persons. Losses should be absorbed by shareholders and creditors. Minimum bail-in of 8% of total liabilities before possible access to Resolution Fund (funded by the industry). New hierarchy of liabilities: Super-preference for DGS (in the place of covered deposits). Preference for the non-covered part of deposits of SMEs and natural persons. Need to ensure that resolution is feasible and credible work on resolvability. In the euro area, the Single Resolution Mechanism introduces a new institutional framework: Single Resolution Board. Single Resolution Fund. Page 9

11 Banking Resolution Under BRRD Implementation of the bail-in paradigm Stages in the resolution process Ex ante resolution planning is aimed at ensuring that an eventual resolution is feasible: 1) Capacity to absorb losses; 2) Continuity of critical functions. Viable entity Preparation of resolution Activatio n Stabilization Restructuring Exit Crisis room Failing or likely to fail Resolution scheme: Sale of business Bridge Bank Asset Management Company Bail-in Business Reorganization Plan Orderly liquidation Communication Page 10

12 Banking Resolution Under BRRD Implementation of the bail-in paradigm Need for some sort of reserve capital to which bail-in could be applied. MREL requirement is aimed at ensuring there are enough liabilities for which bail-in is not only legal but also feasible and credible. How much MREL will be required? MREL will be set by resolution authorities on a case by case basis; Enough for: Loss absorption Recapitalization Similar in concept to TLAC (Total Loss absorbing capacity) but with some technical differences: TLAC will apply to G-SIBs; MREL applies to EU entities. TLAC involves a minimum pillar 1 requirement; MREL is set on a case by cases basis. TLAC requires subordination; MREL not necessarily. Page 11

13 Banking Resolution Under BRRD Implementation of the bail-in paradigm Role of Deposit Guarantee Funds & Resolution Funds The role of DGF will be conditioned by: Strict bail-in rules combined with MREL requirement. Super-preference being given to Deposit Guarantee Funds. At the same time, preference given to deposits enhances credibility of bail-in. New role for Resolution Funds: They could become shareholders of entities: need for corporate governance policies + divestment strategies. One very relevant difference with respect to DGF: the protected liabilities are not defined ex-ante. Page 12

14 Banking Resolution Under BRRD Implementation of the bail-in paradigm Resolutions based on bail-in will involve new challenges with respect to resolution based on bail-out : Liquidity in resolution. Successive rounds of recapitalization. Corporate Governance of resolved entity. Litigation risks. Page 13

15 Conclusion

16 Banking resolution Conclusion The new bail-in paradigm will change the way in which resolution is conducted. Bail-in is now a clear legal mandate. Resolution authorities need to feel confident that entities are prepared for their eventual resolution in case it becomes necessary, that is to say, entities need to be resolvable. Resolution planning should ensure that the implementation of BRRD is feasible and credible. The resolvability requirement needs to be internalized by entities and incorporated in their corporate governance. Page 15

17 Banking Resolution FinSAC workshop on Recovery and Resolution Planning 24 April Mario Delgado; EY; Partner, Risk & Regulation THANK YOU