Resolution Regimes in Europe: Implementation of effective resolution regimes in the region. Funding in Resolution

Transcription

1 Resolution Regimes in Europe: Implementation of effective resolution regimes in the region Funding in Resolution 19 April 2017

2 FSB Guiding principles on the temporary funding needed to support the orderly resolution of a G-SIB Principle 2 - Public sector backstop funding mechanism An effective public sector backstop funding mechanism should be available for use when necessary and appropriate in order to promote market confidence and to encourage private sector counterparties to provide or to continue to provide funding to the material operating entities of a G- SIB in resolution. Principle 3 - Strict conditions to minimise moral hazard risk (KA 6.4) Public sector backstop mechanisms should only provide temporary funding to the extent that (i) market access to funding is temporarily not available or not sufficient for effectuating an orderly G- SIB resolution; (ii) such funding is necessary to foster financial stability and enable successful implementation of the preferred resolution strategy; and the terms of the funding include conditions that minimise moral hazard risk. Principle 4 - Provisions to recover any losses incurred (KA 6.2) Where temporary public sector sources of funding are needed to accomplish an orderly resolution, the resolution authority or authority extending the temporary funding should make clear, ex ante provisions to recover any losses incurred either from shareholders and unsecured creditors subject to the no creditor worse off than in liquidation safeguard (see KA 5.2), or from the financial system more widely, if necessary. 2

3 Dodd-Frank Act Provisions related to Resolution Planning Title I, Section 165(d) Requires covered companies (domestic BHCs and foreign banking organizations (FBOs) with total consolidated assets of $50 billion or more and non-bank financial companies designated by FSOC) to periodically report to the Federal Reserve Board (Board) and the Federal Deposit Insurance Corporation (FDIC) (and FSOC) their plans for rapid and orderly resolution under the Bankruptcy Code in the event of material financial distress or failure. Board and FDIC are not required to approve plans, but may find a plan is not credible or would not facilitate an orderly resolution in bankruptcy. Joint Board/FDIC implementing rule was published in the Federal Register on November 1, Title II Orderly Liquidation Authority (OLA) Under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank Act) the FDIC may be appointed as receiver for the orderly liquidation of a covered financial company (CFC) whose failure and resolution under otherwise applicable Federal or state law would have serious adverse effects on financial stability in the United States. In case of distressed systemic financial companies, OLA allows FDIC to establish bridge financial companies and provide liquidity through the Orderly Liquidation Fund (OLF).. 3

4 Title II DFA Orderly Liquidation Fund As part of the OLA, the Dodd-Frank Act established the Orderly Liquidation Fund (OLF) as a mechanism for providing a temporary emergency backstop source of liquidity to support the orderly liquidation of CFCs for which the FDIC is appointed receiver. The OLF is a separate fund established within the United States Treasury (Treasury), from which the FDIC may borrow to carry out its resolution responsibilities with respect to covered financial companies. It is not an ex ante, or pre-funded, resolution fund. The temporary source of funding under OLF are only available for purposes of emergency liquidity support for CFCs in resolution. Under current law, there is no funding available for temporary solvency support for CFCs in resolution. It is expected that the OLF would only be available to CFCs on a fully secured basis, and would only be utilized if there is an expectation of full repayment to the Treasury. [See Resolution of Systemically Important Financial Institutions: The Single Point of Entry Strategy, 78 Fed. Reg , (December 18, 2013)]. 4

5 Title II DFA: Orderly Liquidation Fund The FDIC as receiver may issue obligations to the Treasury. The Treasury may purchase such obligations. Before obtaining any funds, the FDIC must submit to the Secretary of the Treasury an orderly liquidation plan, which is acceptable to the Secretary. During the 30 day period immediately following the appointment, the obligations may not be more than 10% of the total consolidated assets of the CFC, based upon the most recent financial statement available. Notwithstanding the 10% limit above, once the fair value of the consolidated assets is determined and the FDIC and the Secretary have agreed on a repayment plan to retire the debt within 60 months, the obligations may be equal to 90% of the fair value of the consolidated assets. Fair Value means the expected total aggregate value of each asset, or group of assets that are managed within a portfolio, of a covered financial company on a consolidated basis if such asset, or group of assets, was sold or otherwise disposed of in an orderly transaction. See, Calculation of Maximum Obligation Limitation (77 FR 37554; June 22, 2012). The statute provides a formula for the calculation of interest on borrowings under the OLF that is structured to achieve an above-market rate. 5

6 Use of Orderly Liquidation Funds The funds may be made available to the receiver as determined by the FDIC in its discretion as necessary or appropriate, subject to the orderly liquidation plan and provided that, in taking any such action, the FDIC shall i. determine that such action is necessary for purposes of the financial stability of the United States, and not for the purpose of preserving the CFC; ii. ensure that the shareholders of a CFC do not receive payment until after all other claims and the Fund are fully paid; iii. ensure that unsecured creditors bear losses in accordance with the priority of claim provisions in the Act; iv. ensure that management responsible for the failed condition of the CFC is removed (if such management has not already been removed at the time at which the FDIC is appointed receiver); v. ensure that the members of the board of directors (or body performing similar functions) responsible for the failed condition of the CFC are removed, if such members have not already been removed at the time the FDIC is appointed as receiver; and vi. not take an equity interest in or become a shareholder of any CFC or any covered subsidiary. 6

7 Recovery of OLA Funds Funds borrowed from the OLF must be repaid from disposition of the CFC s assets or, if the proceeds thereof are insufficient, from assessments on other eligible financial companies. Eligible financial companies are defined as a Bank Holding Company with assets of $50 billion or more or a significant non-bank. 7

8 FDIC Possesses Broad Powers of a Receiver Statutory examples of receiver s powers and how funds may be used (to the extent funds are used for any of these actions, an administrative expense or US government claim priority attaches). To facilitate the orderly liquidation, the receiver may: i. make loans to, or purchase any debt obligation of, the CFC or any covered subsidiary; ii. iii. iv. purchase or guarantee against loss the assets of the CFC or any covered subsidiary, directly or through an entity established by the FDIC for such purpose; assume or guarantee the obligations of the CFC or any covered subsidiary to 1 or more third parties; take a lien on any or all assets of the CFC or any covered subsidiary, including a first priority lien on all unencumbered assets of the CFC or any covered subsidiary to secure repayment of transactions; and v. sell or transfer all, or any part, of such acquired assets, liabilities, or obligations of the CFC or any covered subsidiary. 8