Bank resolution from a small host perspective

Transcription

1 Bank resolution from a small host perspective The FinSAC experience in Emerging Europe Pamela Lintner World Bank FinSAC Workshop on Resolution Regimes in Europe Vienna, 19 April 2017

2 AGENDA Overview FinSAC TA in small host countries Key issues in the design of bank resolution concepts in FinSAC client countries Scope, Governance, Role of Judicial RRP, EIM, Valuation Resolution funding Bail-in Cross border cooperation

3 FinSAC Countries Resolution TA FinSAC provides TA to EU countries (all non SSM), Countries with EU candidate status non EU countries in the ECA region most of which are small host countries i.e. dominated by foreign owned banking systems where the local subsidiary is systemic for the financial market but immaterial to the group Alignment of interest / management of differences between home and host

4 Key issues for FinSAC client countries Scope, Governance, Role of Judicial Scope All banks or only systemic Which resolution tools should be available also for small banks (under Liquidation): P&A/SoB, Bridge Bank at a minimum Administrative resolution authority In most countries within supervisory authority i.e. Central Bank; in some DGS is RA CoI management esp. if the RA is central bank and supervises, controls, manages and owns a (bridge) bank via the Resolution Fund Role of judicial No suspensive effect of resolution decisions Court bound to economic assessment of RA (unless it is arbitrary, fraudulent etc); Ex-ante judicial involvement to assess procedural correctness might reduce ex-post legal actions Constitutional issues if resolution starts prior insolvency and RA takes over ownership rights

5 Key issues for FinSAC client countries RRP, EIM, Valuation Recovery and Resolution Planning For all or only systemic banks Access to and reliance on group plan Approval by parent Proportionality; Interconnectivity with parent; simplification, waivers, limitation in use of indicators Dependency on sound supervisory framework EIM triggers Risk based supervision (SREP) Cooperation between authorities is key early inclusion of RA to prepare! Valuation methodology for resolution purposes Independent valuer in small local markets Lack of (historical) data (for the NCWOL / least cost test; no market price, )

6 Key issues for FinSAC client countries Resolution Funding Ex-ante or ad-hoc funding Separate Resolution Fund or use of DGS If separate Resolution Fund Ownership (esp. if Central Bank is RA) Management (by DGS) Triggers for use of DGS esp. in countries where super-preference of DGS in the hierarchy of claims under liquidation makes use very unlikely Resolution financing Usefulness of introducing a legal minimum amount of bail-in before use of RF / government support in non EU countries Access to liquidity Central Bank ELA, esp. problematic in countries with currency boards Government support (conditions)

7 Key issues for FinSAC client countries Bail-in tool: key preconditions Ability of eligible creditors to absorb losses requires, in particular: Availability of high-quality loss-absorbing instruments; problematic in particular with banks which are funded predominantly by deposits funded to a large extent by loans or securities issued in third countries whose liabilities are highly concentrated in the hands of only a small number of investors state owned or have state owned debt holders or debt held by neighboring countries financed by related party debtholders: fit and proper Sufficiently deep markets for loss-absorbing debt - LAC from parent regardless of group MPE/SPE strategy - In which form: positioned on balance sheet - Advantage of bail-inable debt over capital Legal certainty, based on a clearly defined hierarchy of creditors claims and the effective and reliable implementation of insolvency law by the courts. Protection of public funds versus practical constrains of bail-in: gradual introduction; lower than minimum prior 8% bail-in

8 Key issues for FinSAC client countries Cross border cooperation 3 rd Country observer status in EU Colleges only upon request and only if subsidiary or branch is material. Will Resolution entities be limited to EU entities, or could 3 rd countries opt in? Also within the EU: on some decisions limited legal certainty on common approach Key Resolution Decisions If NO JOINT DECISION can be reached decision taken by EBA Mediation RECOVERY Group recovery plan Parent supervisor For parts binding Group recovery plan measures at subsidiary level (e.g. material deficiencies, enable recapitalization, change Host supervisor(s) For parts binding structure, funding etc.) Need for individual entity recovery plan Host supervisor(s) - IGFSA agreement Parent supervisor Binding IGFSA actual support Supervisor of providing entity Assistance RESOLUTION Group resolution plan Parent RA on group plan Host RA(s) on subsidiary plans Binding but fiscal impingement clause Group resolvability assessment Parent RA on measures at group level Host RA(s) on measures at individual level Binding but fiscal impingement clause Remove impediments to resolvability for the group Parent RA on measures to be taken at group level Host RA(s) on measures to be taken at individual level Binding MREL at consolidated level Parent RA Binding MREL at subsidiary level Host RA(s) Binding Resolution action for parent that includes a group resolution scheme Resolution action for subsidiary and the action likely triggers the resolution of the other group members Only for financial stability reasons: host RA take decision for its subsidiary (for financial stability reasons): Own decision of host RA Assistance Assistance

9 Annex: Bail-in versus bail-out Bail-in Bail out + incentive to more prudent behavior - Moral hazard, excessive risk taking + Losses on investors (who made investment choice and received revenue/interest ) - Socialization of losses (versus profit for few) - Relatively high losses for a few + Relatively small loses for all - Governance issues (fit and proper) - State ownership - Procyclicality and contagion - Increase in fiscal costs / debt - Longterm negative welfare effects - Stronger effects on specific business models; purely deposit funded banks forced to hold MREL; MREL non RWA based: punishes low risk (different: TLAC) - Only effective if idiosyncratic bank failure - State ownership or at least state support versus free market

10 Thank you! Pamela Lintner Financial Sector Advisory Center Europe & Central Asia Region Praterstrasse th Floor, 1020 Vienna, Austria