Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Lukas Fecker: Cross-border banking Turnaround and Resolution

1,631 views

Published on

• Impact of ECB’s Comprehensive Assessment on banking turnarounds and restructuring in Europe
• The universal European single central supervisory and out of court solution:
• The central supervisory of the SSM
• The key components to the BRRD framework
• Scope and actions of the SRM
• Considerations for resolution options

Published in: Economy & Finance
  • Be the first to comment

Lukas Fecker: Cross-border banking Turnaround and Resolution

  1. 1. Confidential — all rights reserved © Ernst & Young LLP 2014 Confidential Cross-border Banking Turnaround and Resolution Restructuring and Insolvency conference, Vienna December 2014 Dr. Lukas Fecker Partner, Head of Banking Turnaround and Restructuring Solutions EY, UK
  2. 2. Confidential — all rights reserved © Ernst & Young LLP 2014 Page Section 1 Impact of ECB’s CA on Banking Turnaround in Europe 2 Section 2 European Universal Supervisory 4 Section 3 Bank recovery and Resolution Directive 7 Section 4 Single Resolution Mechanism 12 Section 5 Resolution Options 16 Contents Cross-border Banking Turnaround and Resolution 1
  3. 3. Section 1 Impact of ECB’s Comprehensive Assessment on Banking Turnaround in Europe
  4. 4. Confidential — all rights reserved © Ernst & Young LLP 2014 ► The ECB's Comprehensive Assessment is an important milestone on the road to fixing Europe's banks ► The results headlines are clear: 25 banks failing, €47.5bn in asset value adjustment and an increase in Non- Performing Exposure by €136bn. But the ECB's accompanying report bears further inspection ► An additional €126.2bn of CET was provided to Eurozone banks due to CRD IV transitional arrangements under country specific arrangements. The ECB understands this means capital comparisons across banks are compromised until the transition arrangements end in 2016. But the ECB already wants to address this compromise as a matter of priority. We will certainly see banks requiring significant amounts of this sum over the next two years ► Now we will see continuing reform and restructuring as a result of the AQR, the start of the Single Supervisory Mechanism and the need to clean-up balance sheets ► The results of the assessment, and the ECB's emphasis on the issue of inconsistent and significant transitional arrangements, underlines the need for turnaround in banks ECB’s Comprehensive Assessment results Cross-border Banking Turnaround and Resolution 3 Key message: The job is not yet done!
  5. 5. Section 2 European Universal Supervisory
  6. 6. Confidential — all rights reserved © Ernst & Young LLP 2014 Eurozone Banking Union Cross-border Banking Turnaround and Resolution 5 EZ banking union, a response to the financial crisis, will have a fundamental impact on banks Key elements of the Banking Union Single Supervisory Mechanism EU18+ ECB in charge of all Eurozone banks. Directly supervises top 120 Began 4 November 2014 Single Resolution Board EU18+ Single Resolution Board and Single Resolution Fund plan for and implement resolution of banks in difficulty Begins 1 Jan 2015 Funding Arrangements EU18+ Eurozone combined funds for depositor protection No political agreement yet Single Rulebook EU28 CRR/CRD IV BRRD
  7. 7. Confidential — all rights reserved © Ernst & Young LLP 2014 Single Supervisory Mechanism Cross-border Banking Turnaround and Resolution 6 ECB: Eurozone Bank Supervisor 120 most significant banks 6,000 smaller banks National Supervisory AuthoritiesJST Supports ECB – joint verification exercises Direct Supervision Indirect Supervision
  8. 8. Section 3 Bank Recovery and Resolution Directive
  9. 9. Confidential — all rights reserved © Ernst & Young LLP 2014 There are three key components to the BRRD framework: BRRD framework overview Cross-border Banking Turnaround and Resolution 8 Bank in control Regulator in control Resolution Authority Minimise cost to taxpayer of bank failureResolution Banks and resolution authorities draw up recovery and resolution plans. Obstacles to resolvability mitigated Preparation and prevention Intervention when financial institution faces distress Early intervention/recovery 1. The Bank Recovery and Resolution Directive (BRRD) implements a significant shift in the tools that National Resolution Authorities (NRAs) have at their disposal. The directive comes into force in 2015, with full bail-in powers following in 2016. 2. The impetus of the directive is to ensure that banks and authorities make adequate preparation for crises. Where banks fail, the public should not be left bailing out a bank. 3. Importantly NRAs provided with tools to help them intervene in a troubled institution at a sufficiently early stage to address developing problems. 4. Where bank failures cannot be avoided, NRAs have harmonised resolution tools and powers to take rapid and effective action and ensure authorities cooperate effectively when dealing with the failure of a cross-border bank. 5. Finally, BRRD makes it clear that it is the banks that should finance to resolution financing arrangements
  10. 10. Confidential — all rights reserved © Ernst & Young LLP 2014 ► Banks are required to develop actionable Recovery Plans with timetables to demonstrate their ability to respond to and recover from severe stress scenarios ► Recovery plans must identify economic functions which are core to their franchise value and/or of systemic importance to credit markets and financial services ► The Recovery Plan must demonstrate the banks’s consideration of: ► Triggers likely to indicate a crisis scenario – non-viability ► Actions to be taken to respond to the crisis ► Information needed to carry out those actions ► Obstacles that may impede their ability to respond in a timely manner ► Mitigants to minimize those obstacles ► Plans should be developed to allow for effective recovery without significant assistance from the authorities ► Recovery Plans must also include background information to provide the regulators a reconciliation of the lines of business to their legal entities and economic functions as well as an understanding of the interdependencies throughout the bank ► Banks are required to consider divestment strategies for extreme stress scenarios ► Institutions will need to maintain up-to-date Recovery Plans on a go-forward basis Requirements of the recovery and resolution plan Cross-border Banking Turnaround and Resolution 9
  11. 11. Confidential — all rights reserved © Ernst & Young LLP 2014 Early intervention/recovery measures Cross-border Banking Turnaround and Resolution 10 Implement measures set out in the recovery plan1 Identify measures to draw up an action program2 Convene the shareholder’s meeting of the institution3 Replace members of the management4 Require changes to the business strategy, legal or operational structures5 Contact potential purchasers to prepare for resolution6 Appoint a temporary administrator to replace management7
  12. 12. Confidential — all rights reserved © Ernst & Young LLP 2014 Timeline and scenarios Cross-border Banking Turnaround and Resolution 11 Source: European Commission August 2013 State Aid rules January 2015 Bank Recovery and Resolution Directive (BRRD) January 2016 BRRD full bail-in State Aid rules Exceptions: ► Disproportionate results ► Financial stability BRRD (full bail-in tool) Exceptions: ► BRRD: No exceptions for capital; exceptional exclusion of liabilities according to Art 38(3)(c) ► State aid: Financial stability and disproportionate results Burden- sharing Loss – absorption Capital Instruments (Common Equity Tier 1, Additional Tier 1, Tier 2) Subordinated debt State aid rules Minimum of 8% of total liabilities (Bail-in tool; Art. 41 of BRRD) Covered deposits/Deposit Guarantee Scheme Households and SMEs > €100.000 Senior debt and corporate deposits > €100.000 Capital Instruments (Common Equity Tier 1, Additional Tier 1, Tier 2) Subordinated debt Covered deposits/Deposit Guarantee Scheme Households and SMEs> €100.000 Senior debt and corporate deposits > €100.000 BRRD (transitional period) Exceptions: ► BRRD: No exceptions for capital ► State aid: Financial stability and disproportionate results Loss – absorption Capital Instruments (Common Equity Tier 1, Additional Tier 1, Tier 2) State aid rulesSubordinated debt Covered deposits/Deposit Guarantee Scheme Households and SMEs> €100.000 Senior debt and corporate deposits > €100.000
  13. 13. Section 4 Single Resolution Mechanism
  14. 14. Confidential — all rights reserved © Ernst & Young LLP 2014 Single Resolution Mechanism – key components Cross-border Banking Turnaround and Resolution 13 The Single Resolution Mechanism is designed to facilitate a quick, effective and co-ordinated response to bank failure European Commission and Council Single Resolution Board Funding arrangements European Central Bank as bank supervisor National resolution authorities x18+ Components of the Single Resolution Mechanism
  15. 15. Confidential — all rights reserved © Ernst & Young LLP 2014 SRM in action Cross-border Banking Turnaround and Resolution 14 ECB National Supervisors COM and Council Owners/creditors Supervise Notify Instructs Manages Orders Bail In Resolve Hold shares/claims Single Resolution Fund Mutualised over eight years Target €55bn Single Resolution Board National Resolution Authorities Failed bank All banks
  16. 16. Confidential — all rights reserved © Ernst & Young LLP 2014 Scope of SRM Cross-border Banking Turnaround and Resolution 15 Scope ► Mirrors SSM: All banks in the Euro Area and other participating Member States ► SRM tasks distributed between the Board and the National Resolution Authorities: ► Board directly responsible for cross-border and significant banks (>€30bn) ► NRAs responsible for all other banks ► Board is ultimately responsible for all banks Implementation ► Resolution scheme sets out the resolution tools and provides, where necessary, for the use of a certain amount of the Fund ► Board instructs NRAs to implement the scheme ► Board adopts general instructions to the attention of NRAs Funding ► The Single Resolution Fund sourced from the banking sector (not taxpayer) –provides mid-term funding where needed ► A single fund creates economies of scale, boosts credibility, and breaks the sovereign-bank link ► The fund can borrow from the market and is outside the EU budget ► During an eight year transitional period, the Fund comprises national compartments corresponding to each participating MS in the SRM Triggering resolution ► ECB (or Board if ECB unwilling to act) can determine a bank is failing/likely to fail ► Board must assess there is a: 1. Systemic threat (public interest); and 2. No alternative private solution ► Board adopts a resolution scheme setting out the necessary resolution and funding measures ► Resolution scheme is submitted to Commission then Council for endorsement or objection. Both have 24 hours to object
  17. 17. Section 5 Resolution Options
  18. 18. Confidential — all rights reserved © Ernst & Young LLP 2014 There are a number of resolution options available Cross-border Banking Turnaround and Resolution 17 Options Bail-in Insolvency, including run-off of any ‘rump’ Insurance solution (e.g., the UK Asset Protection Scheme) Bridge bank Including Good bank Bad bank split Other asset management solutions including alternative Good Bank Bad Bank models Full nationalisation Financial turnarounds Financial and operational turnarounds It is important to ensure that whatever option is taken provides sufficient flexibility to enable flexing the approach as a clearer picture develops on the recoverability of assets
  19. 19. Confidential — all rights reserved © Ernst & Young LLP 2014 Workout bank principles Cross-border Banking Turnaround and Resolution 18 1. Dedicated organisation 6. Credit process 5. Capabilities and staffing 2. Governance principles 3. Technology and data management 4. Data analytics and segmentation 7. Operating Model
  20. 20. Confidential — all rights reserved © Ernst & Young LLP 2014 The enhanced workout process Cross-border Banking Turnaround and Resolution 19 ► Data review ► Document review ► Client contact transfer ► Risk assessment ► Valuation ► Collateral improvement ► Continuous collection process ► … Screening for non performance Loan management (PL) Early collection Select related parties Workout Risk assessment Dynamic loan classification Early file shadowing NPL Watch list management Documentation improvement Client Business Review Work out Resolution Ron off/ Wind down In-court procedures Sit and wait File transfer Recovery strategy Recovery Exit ► IBR ► Client Business Review ► Coordination with syndicate and other lenders ► Coordination with share and bond/notes holders ► Define and sign off recovery strategy ► Sell – Hold Workout ► Collections and areas management ► Acceleration and enforcement ► SPV ► Project management ► Refinancing ► RWA optimisation ► Recycle to performing loan book ► Prepare for resolution ► NPL sales and disposals
  21. 21. Confidential — all rights reserved © Ernst & Young LLP 2014 The workout bank operating model Cross-border Banking Turnaround and Resolution 20 Workout bank Management–System Finance and incentive ► Equity vs. margin release ► Access to funding ► IR reporting ► Operations management Governance ► Investor led Board ► Monitoring and review services ► Local insolvency regime optimisation Regulatory ► Banking license? ► Sovereign support ► Litigation vs. amnesty Operations Legacy core banking system EY core banking solution Riskand compliance Bookof business Acquisition andgrowth JVs and alternative capital provider management Regulator management Client management Bookofbusinesses Cockpit Key industry Keep (workout) Dispose Workout Keep (workout) Dispose Retail TAS Keep (workout) Dispose Business Report Keep (workout) Dispose Other NPL recovery is different business to banking, hence needs a dedicated organisation Book of business: The focus on workout operations is crucial for value recovery. Key areas: ► NPL portfolio sale ► Underlying business restructuring ► Claims litigation ► Liabilities management Operations: Workout bank required a different skillset and scope of banking capabilities: ► Incumbent staff needs training/replacement with turnaround professionals, risk managers and litigators ► The IT systems are adapted to the tasks at hand Management systems: Finance, governance and regulation: ► Workout bank may delist to improve the capital ratios ► The management team to include experienced restructuring advisors
  22. 22. Confidential — all rights reserved © Ernst & Young LLP 2014 EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC300001 and is a member firm of Ernst & Young Global Limited. Ernst & Young LLP, 1 More London Place, London, SE1 2AF. © 2014 Ernst & Young LLP. Published in the UK. All Rights Reserved. ED None 1491613 (UK) 11/14. Creative Services Group. In line with EY’s commitment to minimise its impact on the environment, this document has been printed on paper with a high recycled content. ey.com/uk

×