Sea of ChangeRegulatory reforms to 2012 and beyond
The Critical Importance of Group Resolution
Simon Gleeson
Group StructuresGroup Structures
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1. “Bank/nonbank” Model
Financial
Creditors
Holding Company
Financial
2
Bank Investment firm
Bank Group
Investment
Business
Creditors
Financial
and
Banking
Creditors
2. “Big Bank” model
Bank Holding Company
Bank
Financial and
Banking
Creditors
3
Bank Group
Investment business Investment
Business
Creditors
3. “Global multi-bank” Model
Bank Holding Company
Bank Bank Bank Bank
4
Bank
(Country A)
Bank
(Country B)
Bank
(Country C)
Bank
(Country D)
Financial and
Banking
Creditors
Financial and
Banking
Creditors
Banking
Creditors
Banking
Creditors
4. “Conglomerate” model
Industrial Company Financial and
Commercial
Creditors
5
Bank
Financial and
Banking
Creditors
Investment firm Investment
Business
Creditors
Financial Holding Company
Bank
Summary of US Bank Group Regulation
Bank Investment Firm
Inter-group transaction restrictions
– Reg W
Bank activityrestrictions– Reg Y
Financial Holding Company activity Restrictions –Reg Y
6
Financial Holding Company
Retail Bank
Summary of UK Bank Group Regulation post Vickers
Retail Bank Commercial Bank
Inter-group transaction restrictions
– Large Exposures
Bank activityrestrictions– Legislation
7
Bank GroupsBank Groups
The Problem
� “The challenge in putting forward a proposal for the structure of group supervision …is to balance two competing views of a …. group: one view sees a …group as a single economic entity within which risks are pooled and diversified, the second recognises the group as a collection of
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second recognises the group as a collection of separate legal entities with segregated risks”
What is a group
� An association of separate legal entities
■ Different insolvency rules and jurisdictions■ Company law regulates inter-company dealings■ Assets of each entity ring-fenced for the benefit of
creditors of that entity in distress
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creditors of that entity in distress■ Transmission of surplus capital difficult■ Dividends■ Share redemptions■ Regulatory resistance to capital reduction
■ Contribution to a capital shortfall almost impossible
The Group
“Contagion risk”
■ The name for the fact that in credit terms the market disregards legal niceties and perceives the group as a whole
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Risks managed at group level
■ Liquidity■ Concentration■ Operational■ Management
Let them eat cake...?
Management structure
IT system IT systemIT system
Company Company
IT system
Company Company
12
Resolving Legal and Risk Positions
■ In an insolvency the individual creditors’ recourse is to the assets of the legal entity
■ Prior to insolvency, the individual creditor’s best hope is a group restructuring
■ Surplus capital should be capable of being moved around the group as efficiently as possible
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around the group as efficiently as possible■ Liquidity, concentration and operational
management should not be affected by balance-sheet issues relating to specific subsidiaries
BUT■ Investors who have invested on the strength of a
particular balance sheet should have recourse to the specific assets of that issuer
Group Holding Company
Bank
UK GermanyFrance Non-EU
14
Bank Bank
Subsidiary
Bank
Group Holding Company
Bank
UK GermanyFrance Non-EU
15
Passported Bank
Subsidiary
� Use of cross-border recognition measures
� Creditor safeguards
� Ownership caps
� Events of default
� Transition to the new regime
Additional issues
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Bank Resolution TriggersBank Resolution Triggers
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� Banks (credit institutions)
� Some investment firms
� Bank holding companies
� Affiliate service providers (some
Scope
� Affiliate service providers (some powers)?
� Branches of non -EU banks?
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� Proposed core trigger test:■ Insolvency-based tests■ No longer fulfils conditions for authorisation; OR■ Regulatory capital test■ Actual or “likely” failure
� Supplemental condition■ Last resort: no other measures available
Resolution triggers
■ Resolution is in the public interest
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Resolving Deposit-Funded banks Resolving Deposit-Funded banks
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Balance Sheet – Bank B
AssetsCash 50Retail Loans 200Mortgage loans 300Commercial loans 100
650
Unexpected loss of 60 in commercial loan portfolio
Equity eliminated –unsustainable
BUT
Resolving the Retail Bank - 1
650
LiabilitiesDeposits 500Short-term funding 100Equity 50
650
NCWO means that short-term funding providers will receive at least 90% of nominal (assuming all depositors preferred)
Therefore bail-in can only create 10 of new equity without breaching NCWO test
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Balance Sheet – Bank B
AssetsCash 50Retail Loans 200Mortgage loans 300Commercial loans 100
650
Unexpected loss of 40 in commercial loan portfolio
Equity reduced to 10 –unsustainable
BUT
Resolving the Retail Bank - 2
650
LiabilitiesDeposits 500Short-term funding 100Equity 50
650
NCWO means that short-term funding providers will suffer no loss.
Therefore any resolution violates NCWO?
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� Questions?
23
� Simon Gleeson, Partner, London+44 20 7006 [email protected]
Contact
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These slides are for illustration only. They are not intended to be comprehensive or to provide legal advice. For more information, contact the above partner or your usual Clifford Chance contact.
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The Critical Importance of
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The Critical Importance of Group Resolution