Статьи Адвокат Молдова, Адвокат Кишинев

   Introduction

    The Cypriot bail-out has sent further shockwaves through the periphery of the eurozone. Ordinary EU citizens are waking up to the reality that their savings could end up as the target of their governments' desperate attempts to recapitalise their ailing banking industries. This update analyses the provisions of the proposed EU Directive Establishing a Framework for the Recovery and Resolution of Banks and Investment Firms and considers whether the implementation of this directive will make it more difficult in future for EU member state governments to raid retail depositors' savings to bail out banks.

    Background

    Chaos reigned in Ireland in response to the methods used to recapitalise Irish financial institutions and the Greek situation is a constant pressure on the global financial community. Spain recently implemented a 15-year scheme for the recovery and recapitalisation of its key banks. Cyprus proposed the unthinkable by attempting to place a levy on guaranteed deposits of retail depositors to fund recapitalisation, but was forced to apply a levy only to deposits outside of its deposit guarantee scheme.

    Since 2008 the existing regulatory framework, including the protections from appropriation of property under the European Convention of Human Rights, has proved unable to cope with the extent of financial distress faced by financial institutions. Consequently, the proposed directive has been drafted to establish a framework for the recovery and resolution of credit institutions and investment firms. The directive aims to prevent contagion between financial institutions and to align national bank recovery schemes across Europe.

    Proposed directive in brief

    While some EU member states have taken matters into their own hands, such as the Investment Bank Special Administration Regulations 2011 in the United Kingdom, the current EU-wide framework is insufficient to deal with distressed institutions where distress has a cross-border impact. Primarily, the proposed directive looks to fill this void and extend the scope of the EU Credit Institutions Reorganisation and Winding-up Directive (2001/24/EC) to investment firms. If adopted, the directive will establish three pillars to manage and resolve future European banking crises:

•  prevention;
• early intervention; and
•  resolution.

    The proposed directive aims to protect the financial system as a whole (rather than individual institutions themselves) and to minimise taxpayer exposure to losses in insolvency. The impact of the directive must be assessed in this context.

    Prevention

    Banks and investment firms will be required to develop robust recovery plans ('living wills') at both firm and group level. These will be used by national resolution authorities to construct credible resolution plans. They will be tested against a range of scenarios and frequently reviewed, while any deficiencies will promptly be remedied.

    Early intervention

    In line with the aim of taking action before the onset of insolvency, the proposed directive allows national resolution authorities to appoint a 'special manager' to restore an institution's financial condition and improve the management of its business. Special managers may act alongside or even replace the existing management and are equipped with all of the management's powers.

    The proposed directive will make it easier for institutions to benefit from intra-group financial support by removing legal barriers under restrictive corporate law regimes. EU member states will be required to facilitate such arrangements, regardless of any limitations imposed by domestic laws. Member states whose corporate laws already permit such arrangements may face obstacles of mutual undertakings and shareholder approval.

    Resolution toolkit

    Resolution will be partly funded by national financing arrangements, to which banks and investment firms must contribute. They will pay an annual levy as a proportion of their total covered deposits. Where this proves insufficient, additional funding may need to be recouped from surviving institutions after resolution. The proposed directive will effectively create an EU-wide resolution fund by requiring member states to provide cross-financing to each other where national financing arrangements are exhausted.

    The proposed directive envisages cross-border cooperation where resolution is concerned. The European Banking Association will have the ability to recognise foreign resolution actions and resolution may be carried out on domestic branches of third-country firms.

    In a resolution situation, national resolution authorities will have the choice of using one or more of the following tools:

•     the Sale of Business Tool;
•     the Bridge Institution Tool;
•     the Asset Separation Tool; and
•     the Bail-in Tool.

    Sale of Business Tool

   The Sale of Business Tool provides a national resolution authority with the ability to sell an institution, or the whole or part of its business, on commercial terms and without following usual procedural requirements.

    Bridge Institution Tool

   The Bridge Institution Tool provides a national resolution authority with the ability to transfer an institution's rights, assets and liabilities to a temporary publicly controlled entity. The business continues to operate as a commercial concern and may still operate its usual services. The purpose of this tool is for the business eventually to be sold back to the private sector.

    Asset Separation Tool

   The Asset Separation Tool may be used to transfer problem assets from an institution to an asset management vehicle where normal insolvency procedures would adversely affect the financial markets.

    Bail-in Tool

   The Bail-in Tool is the most controversial of these tools. It enables national resolution authorities to restructure the liabilities of a distressed institution by writing down unsecured debt or converting it to equity. It may be used where an entity is failing or about to fail, with the aim of restoring viability.

    The bail-in tool would not come into effect until January 1 2018. Nevertheless, its scope is broad and it is unclear whether it would catch existing debts due to mature in 2018. However, European Central Bank President Mario Draghi has indicated that he believes that this tool should come into force by 2015.

    While most secured debt is exempt from the tool, covered bonds may be caught at member states' discretion. Claims with original maturities of less than one month are also excluded. This may incentivise very short-term funding and deter vital long-term investment.

    The most contentious feature of this tool is its capacity to distort the hierarchy of creditors and shareholders by way of a 'debt write-down'. Authorities will be able to convert debt into common equity without consulting creditors. Debt write-downs could trigger compensation claims for interference with contractual rights. It would also amount to interference with individual property rights; however, the proposed directive's broad definition of 'public interest' is meant to justify such a write-down.

    Unsecured creditors will justifiably demand higher returns on investments to guard against these risks and it may become more expensive for institutions to obtain credit without offering security. However, one consolation to creditors is that their losses under any of the resolution tools should not exceed those under normal insolvency proceedings, as the resolution fund should compensate for any losses over and above. This is already the case in countries such as the United Kingdom, and such coverage calculations could take years for large financial institutions where value can be highly contested.

    In anticipation of bail-in, banks and investment firms must set aside an appropriate percentage of total liabilities that could be bailed in. An appropriate percentage of total liability that could be subject to bail-in could be equal to 10% of total liabilities (excluding regulatory capital).

    Timing

    The proposed directive may be adopted by the European Parliament as early as October 2013. The proposed deadline for the proposed directive to be transposed into the laws of member states is December 31 2014, although the bail-in tool will not be implemented until January 1 2018. However, Draghi's recent comments on the subject suggest that this timetable may be brought forward, and that the bail-in tool may be implemented as early as 2015.

For further information on this topic please contact Louise Verrill, Steven Friel, Neil Micklethwaite or Jeffrey Jonas at Brown Rudnick LLP by telephone (+44 20 7851 6000), fax (+44 20 7851 6100) or email (lverrill@brownrudnick.com, sfriel@brownrudnick.com, nmicklethwaite@brownrudnick.com or jjonas@brownrudnick.com).