20/01/2010 ASOCIACIÓN ESPAÑOLA DE BANCA Velázquez, 64-66 28001 Madrid (Spain) ID 08931402101-25 Response to the Commission s Communication on An EU Cross-border Crisis Management Framework in the Banking Sector Summary of AEB s position and main concerns. (i). (ii). (iii). (iv). (v). The AEB shares the European Commission s concern regarding the need to improve the legal crisis management framework at both European and national level, so that the authorities can act effectively to prevent, manage and resolve banking crises including those affecting cross-border banking groups in a more efficient way than in certain episodes during the recent financial crisis. As a member of the European Banking Federation (EBF), the AEB has participated in the preparation of this Federation's response to the Commission's consultation, a response that the AEB broadly supports. The AEB, however, would like to highlight certain matters that are particularly important for Spanish banks. Thus, the AEB has decided to participate individually in the Commission's consultation and draw up this reply document. First and foremost, we consider that financial stability depends to a large extent on supervisors having sufficient knowledge of the reality of the supervised entities, and also on having the appropriate legal tools available to anticipate banking crises, manage them when they have occurred and, in the last resort, resolve them through any means that may be considered appropriate, if necessary by the orderly winding up of the entities affected. When it comes to establishing effective mechanisms for supervisors to anticipate their response to a banking crisis or manage the crisis when it has occurred, the differences resulting from the structure and business model of the different banking groups should be taken into account. This may require different tools or a different use of such tools, depending on the structure and/or model. We do not believe that the legal architecture of the banking groups should be reviewed, or that the current barriers between the entities that make up these groups and have a different legal personality (subsidiaries) should be ignored. On the contrary, banking groups with a parent and subsidiaries (if the latter comply individually with the capital, liquidity and leverage requirements, the deposit guarantee scheme and proper standards for good corporate governance) may be considered as an effective instrument for the prevention and orderly management of banking crises. Our positive assessment of the groups made up of a parent and its subsidiaries does not mean, however, that this is the only model that should exist. Indeed, it is equally legitimate for banking groups that are made up of a single entity and its branches to exist in accordance with the basic freedoms established under the Treaty.
Having said that, we would like to insist on the benefits of an international expansion model based on affiliates, as evidenced by the experience of Spanish banks, including during the recent crisis. These benefits are as follows:- o The model offers autonomy in terms of capital and liquidity among the different institutions that belong to the group demands an independent management fully accountable for the performance of the affiliate in question. At the same time, it makes it possible to get full support from the parent company in terms of policy framework, group best practises and product development. o The model generates incentives for an adequate valuation and management of the inherent risks of the activity of a cross-border group. o The model acts as a firewall, limiting the risk of contagion among the different institutions in case of crises and, thus, contributing to neutralise systemic risk. o The model implies a two-tiered supervision, conducted by both home and host supervisors. Similarly, capital and liquidity requirements are being monitored by the institution itself and the parent company establishing a control system based on double-checking. Against this backdrop, we are once again doubtful as to the need to undertake significant reforms to European or national company law, such as introducing the concept of "group interest" or allowing intergroup asset transfers under non-market conditions. We believe that these changes would lead to greater legal insecurity and would generate additional risks. (vi). Finally, we believe that the action of the European Commission in this area of crisis management should be adequately coordinated with the initiatives that, in the same area, are being or may be addressed in the future at global level, especially by the Financial Stability Board and the Basel Committee on Banking Supervision. This would be of great usefulness if we consider that quite often, cross-border banking groups in Europe are at the same time global cross-border groups, and thus any possible solutions to their crisis situations would not be exclusively European. This coordination would meet the specific problem of global groups and prevent situations of asymmetrical competition between them. 2
1. Which additional tools should supervisors have in order to address developing problems? 2. How should their use be triggered? 3. How important are wind-down plans ( living wills ) as a tool for crisis management? 1 We believe that the recent cross-border financial crisis has stressed the importance of and need for granting more effective early intervention powers to national supervisors across the EU. We consider the following to be reasonable objectives: i) the strengthening of supervisors powers to anticipate and act early to prevent banking crises; ii) should such crises occur, to manage them properly; and, iii) in the worst case scenario, to liquidate the banks in an orderly fashion when necessary. Early intervention objectives and tools available to the supervisory authorities of Member States should be harmonised across the EU. Harmonisation should target best practices. International coordination, and not only at European level, should be strengthened. The mechanisms that allow for a coordinated response by the supervisors in the case of cross-border banking groups should be improved as far as possible. 2 Events that legitimize the supervisors early intervention (trigger events) should be defined and harmonised across the EU. Their definition should be as objective as possible. It is too early at this stage to propose specific trigger events. However, a possible example could be the falling of the banks capital ratio below a certain threshold (a solution similar to the one provided under the US Prompt Corrective Actions). Harmonisation of both powers and trigger events would be necessary to reach the following objectives: i) avoid any possibility for regulatory arbitrage; ii) eliminate national discretions; and, therefore, iii) provide legal certainty. Harmonisation would enhance trust among supervisors and create incentives for supervisors to coordinate their actions in cross-border interventions. Beyond harmonisation, further questions would need to be addressed, especially who would trigger the intervention mechanism and who would be responsible for it. In the case of a cross-border banking group, we believe that the decision to trigger the intervention should be taken by the College of Supervisors at the proposal of any of its relevant members. 3 Different authorities have recently suggested the possibility of using living wills as a tool for crisis management. In our opinion, living wills/enhanced contingency planning can be a useful instrument for an orderly solving of crises. However, there are two elements that we would like to highlight initially. On the one hand, detailed and in-depth supervision is an adequate contribution to financial stability and a prerequisite for guaranteeing an adequate assessment of the risks that an entity may have to confront. In this respect, living wills/enhanced contingency planning are a complement to supervision, not a substitute. They can therefore not be considered an alternative to a sound supervision system. 3
In this respect, as we have mentioned in the Executive Summary, even though all the organisational structures have advantages and disadvantages, the subsidiary models have proved to be more resilient during crises. Thus, the subsidiary model favours transparency and reduces the complexity of the structures, making it more easy to solve crises. As a result, entities with adequate supervision and organisational models that enable management decentralisation have greater ability to anticipate, prevent and manage financial crises. We thus consider living wills/enhanced contingency planning to be an additional crisis-management element. In order to be effective, living wills/enhanced contingency planning must meet a number of requirements, including: i) their content must have a high degree of precision, accurately describing the organisational structure and the entity's relationships, ii) they must be based on a model that can be applied to a wide range of entities, not only to international or more complex institutions, iii) their content, or at least a large part of it, must be limited to the home supervisor, given the significant sensitivity of the aspects included in this document, and iv) it is necessary to assess the operating elements and the limits to the implementation of a document that is prepared without knowing the characteristics of the crisis that the entity is going to deal with. 4. Is the development of a framework for asset transfer feasible? If so, what challenges would need to be addressed? 5. What safeguards for shareholders and creditors are needed? 4 Asset transfers that are not carried-out under market conditions are intrinsically prejudicial to one of the participating entities (and, therefore, to its shareholders, depositors, workers or public creditors) and should not be permitted. Therefore, we are opposed to asset transfers between entities making up banking groups, except those made at arm s length or as regular banking operations. Asset transfers should not be permitted even if precautionary conditions were introduced aimed at combining the protection of the rights of the entities' stakeholders with the general interest of the banking group. Regarding this issue, we consider the international business expansion model applied by a specific group to be particularly important. Expansion through a model of subsidiaries that are autonomous in terms of capital and liquidity allows for a system of firewalls between the group s units that neutralises contagion among them and halts the expansion of systemic risk. It would make absolutely no sense to break down the firewall (that is, making asset/liquidity transfer feasible) and trigger the domino effect that was sought to be avoided. This subsidiary model also ensures a proper safeguard for the shareholders and creditors. Against this backdrop, we do not support the idea of creating a new, different and specific legal concept known as banking group. We do not believe in the appropriateness of a group interest notion that 4
legitimizes the carrying out of actions by the entities that make up a banking group which, although beneficial to the group, may be detrimental to the individual entities. Such a legal possibility could pose a threat to the rights of shareholders, especially minority stockholders, workers, creditors and other relevant parties. Finally, we believe that, should a legal notion similar to the one mentioned in the preceding paragraph be recognised, it would be very difficult to justify the non-existence of the duty of the entities making up a banking group and, in particular, of their parent company to come to the rescue of an individual group entity. In our view, however, this decision must always fall to the administrators of the entity offering help. 5 Consistent with our negative stance on asset transfers, the issue of safeguards does not arise. Furthermore, we believe that the possible introduction of precautionary conditions such as those described in the consultation document, corresponds rather to the need to provide legal safeguards to those carrying out these types of transactions, and not to the effective protection of the rights potentially affected by them. 6. What should be the key objectives and priorities for an EU bank resolution framework? 6 The main objective of the future European legal framework for solving banking crises should first be to enable the restructuring or orderly winding up of insolvent entities, thus ensuring the soundness of the European financial system. Secondly, the new framework would have to avoid purely national solutions to banking crises insofar as these inevitably end up distorting competition between European credit institutions and only serve to avoid the creation of a real integrated banking services market. Since financial stability is a priority goal, the rights of the shareholders should not become an obstacle inhibiting the authorities from acting to prevent or manage a crisis. As a result, a fundamental question is how to combine the aforementioned principle with the equally necessary protection of the rights of the shareholders, which must also be taken into account. We refer to this matter in our response to question 11. 7. What are the key tools for an EU resolution regime? 8. What are the appropriate thresholds for the use of resolution tools? 7 We consider that the best way of preventing a banking crisis is to establish close supervision that includes the physical presence of the supervisor at the individual bank level and which allows for indepth knowledge of the reality of the supervised entity. Another positive contribution could be provided by a business model that is reluctant to take excessive risks, entails a simple corporate structure, and 5
complies with the principles of good corporate governance. Therefore, we would back any measures that are designed for this purpose. It is important to add the requirement that crisis resolution measures must abide by the rules of competition, and specifically in the case of insolvency asset sales, these should be carried out through open auctions with the possibility of concurrent bidders. 8 Whatever the established mechanisms, we believe that their regulation should be clear, objective (i.e., predetermining specifically the assumptions that enable their use, as well as their scope) and harmonised, at least, at European level. 9. What should be the scope of an EU resolution framework? Should it only focus on deposit-taking banks (as opposed to any other regulated financial institution)? 10. If so, should it apply only to cross-border banking groups or should it also encompass single entities which only operate cross-border through branches? 9 The experience of the current international crisis proves that a whole range of financial institutions, whatever their nature and size, may affect the stability of the financial system. Therefore, we believe that any future EU resolution framework should apply to all kinds of financial institutions. However, we consider that methods and tools for resolving crises involving deposit-taking banks may be different from those applying to other kinds of entities, due to the need to protect depositors rights and the deposit guarantee schemes in place for those entities. Moreover, differences in business models, corporate structures and risk profiles among entities should be taken into account in the implementation of any resolution mechanism. We believe that the proposal to restrict the scope of the framework to systemically relevant institutions is not feasible. Instead, as we have stated, a single banking crisis resolution framework should be put in place for the whole EU financial sector. Indeed, the recent crisis demonstrated that even if a bank has small size and nationally-based activities it can pose systemic risks, if it is interconnected. This in spite of the fact that the instruments used may deal with the various circumstances and characteristics of each entity and should respect the principle of proportionality. 10 The crisis showed that branches default may affect in a significant way the financial stability of the host Member State where they are located. This risk increases when the home Member State, which is in charge under relevant EU legislation of the resolution of the parent company, does not have the appropriate means to deal with its default. Therefore, branches of cross-border banking groups should be covered by any new European bank resolution framework. In fact, the reality is that the current EU winding-up Directive is only applicable to the entities with their branches, and for this reason it would be a contradiction not to be able to apply the new regulation on banking crisis resolution to the branches. 6
11. Is it necessary to derogate from certain of the requirement imposed by the EU Company Law Directives and if so which conditions or triggers should apply to any such derogations? What appropriate safeguards, review or compensation for shareholders, creditors and counterparties would be appropriate? 11 The new European crisis resolution framework must ensure that the supervisors and public authorities have at their disposal all the mechanisms needed to guarantee the maintenance of financial stability and, if possible, the viability of the entities facing difficulties. The application of this principle would require a review of those provisions of the European Directives on EU Company Law which may give excessive precedence to shareholder rights. However, several principles should be maintained. First, the use of new resolution tools by authorities should be exceptional. Second, these new resolution tools would require the a priori definition of a set of objective circumstances justifying their use and the subsequent control of their implementation. Thirdly, the use of such resolution tools would require a justified decision stating the causes on which the intervention would be based, as well as the existence of effective legal means providing effectual protection of the rights of the entity and of its shareholders and creditors and, where appropriate, economic compensation mechanisms in order to reverse the damage caused, when the actions of the authorities are eventually considered to be not legally admissible. In addition, it would be preferable that any framework for limiting shareholders' rights should be established at an international and not only European level, so that European banks would not be at a disadvantage compared with their non-european competitors when it came to gaining access to funding. 12. How can cooperation and communication between authorities and administrators responsible for the resolution and insolvency of a cross-border banking group be improved? 13. Is integrated resolution through a European resolution authority for banking groups desirable and feasible? 14. If this option is not considered feasible, what minimum national resolution measures for a crossborder banking group are necessary? 12-14 Of the two main options suggested by the Commission, we would be in favour of the first one, namely the establishment of a coordination framework among the different competent authorities involved. AEB believes that this coordination may be performed by the Cross-border Stability Group (CBSG), for two main reasons: (i) the composition of the CBSG would reduce the possibility of conflict of interests for supervisory authorities, which are caused by the fact that a majority of them are also responsible for monetary policy; and (ii) the presence of Ministers of Finance permits an early assessment of whether or not to use public resources in bailing out an ailing bank. 7
With regard to these questions, we would like to make clear that the effective management of a crisis such as the current one requires a broader framework for coordination between Authorities than at European level only. This need has been made clear in the current crisis, which has been international in scope. Further cooperation and harmonisation of best international practices among national supervisors is also desirable. 15. What is the most appropriate way to secure cross-border funding for bank resolution measures? What role is there for specific private sector funding? 16. Is establishing ex-ante crisis funding arrangements practical? If not, how could private sector solutions best address the issue? Is there scope to achieve greater clarity on burden sharing? If so, would the first priority be to define principles for burden sharing? 15-16 The Spanish Bank Deposit Guarantee Fund is made up of bank contributions (ex-ante financing) and can act as a deposit guaranteeing fund or as a resolution fund. To act in the latter capacity, the Deposit Guarantee Fund may be financed temporarily with public funds to be returned subsequently through bank contributions. Spanish experience in the management of banking crises shows the usefulness of having such a type of fund available to protect depositors in advance and with the capacity for preventive action in situations of difficulty for credit institutions. Our experience supports the idea that the use of this type of instruments could be effective and more efficient than a possible liquidation of the entity with payment of only part of the deposits. This type of schemes also provides less costly solutions to banking crises, avoiding the problems that liquidation could cause. Before proposing more ambitious solutions, we believe that it would be more realistic to set up in each Member State guarantee/resolution funds of the type mentioned earlier, totally harmonised at least as regards the following aspects: objectives and functions; ex-ante financing; and bank contribution criteria. Once these guarantee/resolution funds have been established in each Member State, all the crossborder banking groups would operate in Europe under equivalent rules and on a level playing field. Likewise, once such funds are established in Europe, cooperation mechanisms could be established amongst them in the event of a crisis affecting a cross-border banking group. We reckon that the creation of an European guarantee/resolution fund is a more complex construction, at least without going through the aforementioned prior stage of creating totally harmonised national funds. In any case, the possible creation of a European fund should not be addressed without first solving two questions. Firstly, the harmonisation of banking supervision in Europe based on best practices. And secondly, the transformation of the existing national funds so that certain banks do not have to deal with dual contributions. 8
17. Is a more integrated insolvency framework for banking groups needed? If so, how should it be designed? 18. Should there be a separate and self-contained insolvency regime for cross-border banks? 17 We believe that it is necessary to move forward in the harmonisation of the different national insolvency rules. The first objective of this harmonisation should be to eliminate any possible conflicts that may arise from the application of the different national insolvency rules in processes affecting cross-border banking groups, while the second goal would be to enable proper coordination of the actions carried out by the competent judicial or administrative authorities in such processes. This would enable a more integrated insolvency framework to be achieved, while abiding by the principle of application of the national insolvency law. Notwithstanding the preceding paragraph, we believe that, as happens in the Spanish case, it would be a good idea to establish procedural instruments that enable the accumulation of the different proceedings in one single court in order to facilitate the coordination of the actions by the parties and the judicial authorities, while maintaining the individuality of each of the proceedings. In any case, and based on the reasons we have mentioned on several occasions in this document, we would not assent to the existence of one single process for one banking group, or to the possibility of the assets of the entities making up the group being transferred or managed in a unitary way (asset pool), so that they can assume responsibility for the outstanding obligations of other entities belonging to the group. 18 Consistent with the preceding paragraph, we would not propose any specific insolvency rule applicable to cross-border banks, as we support the separate application of the different national insolvency rules as required and in accordance with the legal structure of the cross-border banking group 9