Bank crisis management

Question 1

What is BCM and what are main options in the past?

Answer 1

Procedures/legal tools to apply to successfully handle a failing bank

Options: 1) Insolvency (liquidation) 2) submission of bank to special insolvency regimes

Question 2

Main weaknesses of EU regime (before GFC)

Answer 2

1) cross-border activities not adequately addressed by cross-border supervision and crisis mgmt
2) no common legal tools allowing for recovery and resolution of banks in crisis
3) vicious cycle between sovereign debt of member states and domestic banking systems

Question 3

Objective of resolution regime according to FSB

Answer 3

Resolution of CI without severe systemic disruption, no loss to taxpayers, protection of vital economic functions which makes it possible for SHs and creditors to absorb losses that respects hierarchy of claims

Question 4

BRRD basis and objective

Answer 4

Based on distinction between liquidation and resolution.
Default option: liquidation, but if public interest is concerned -> resolution preferred (financial stability)
So: larger banks rather resolved, smaller banks rather liquidated

Question 5

BRRD stages

Answer 5

1) Preparation: recovery and resolution planning, resolvability assessments
2) early intervention: triggered by failure to meet authorisation conditions, supervisors have powers to direct remedial action and to appoint temporary admin
3) resolution: harmonised objectives and triggers, common set of resolution tools (sale of business, bridge institution, asset separation, bail-in), depositor preference

Question 6

Main parties

Answer 6

Scope: EU -credit institutions -holding companies of CIs -subsidiaries of CIs -branches of non-EU CIs

Authorities: resolution and compotent authorities, EBA, for groups: group level resolution authority, resolution college

Question 7

Objectives and principles of resolution

Answer 7

Objectives: ensure continuity of critical funcitons, avoid sign. adverse effect on fin. stability, protect public funds, insured depositors and investors an client funde and assets while avoiding destruction of value and minimizing cost of resolution

Principles: SHs bear first losses, creditors bear losses after SHs, senior management replaced, mgmt procide assistance, causes responsibility investigated and persons held accountable, creditors of same class treated equitably, no creditor bears greater loss than in insolvency proceedings

Question 8

Conditions for resolution

Answer 8

1) Institution failing or likely to fail (e.g. breach of authorisation requirements, assets < liabilities, unable to pay debts, require extraorinary public financial support)

2) no reasonable prospect of other actions preventing failure
3) resolution action is in public interest

Question 9

Resolution tools

Answer 9

1) sale of business
2) bridge institution: transfer of shares/assets to bridge institution controlled by public authorities with aim of sale within 2 years
3) asset separation: transfer of assets/liabilities to asset management vehicles controlled by public authorities. aim to maximise value by sale or orderly wind down (can only be used with other tools)
4) bail-in: write-down equity instruments and eligible liabilities/debt to absorb losses and recapitalise institution