Bail-in: Origins & Implementation Wilson Ervin Vice Chairman - - PowerPoint PPT Presentation
Bail-in: Origins & Implementation Wilson Ervin Vice Chairman May 2015 This document and the information contained therein may not be reproduced in whole or in part or made available without the written consent of the author. The views
This document and the information contained therein may not be reproduced in whole or in part or made available without the written consent of the author. The views contained in this document and presentation reflect those of the author.
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20 40 60 80 100 Dec-06 Dec-07 Dec-08 Dec-09
Phase 1: 1: Asset shock Phase 2
Lehman fails
Systemic Crisis
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Total Assets / 600 Total Liabilities Senior Liabilities
Debt, Clients &
550
Counterparties
Pref/ Sub. Debt 25
Equity
25 Asset losses (25) Zero Equity: Insolvency !
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Total Assets /
Total Liabilities Senior Liabilities
Debt, Clients &
Counterparties
Pref/ Sub. Debt
25
Equity
25
Asset loss
(25)
1.
value destruction 2.
high ( (correlation AND contagion) 3.
highly rational 4.
unstable . . . . . . Bankruptcy Estate
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1.
into “operational” and “financial” (i.e. term debt) 2.
3.
Re-cap i investor capital for losses A AND strong new equity (25 25050) 50) 4.
concern” strategy 5.
$ Losses << << liquidation 6.
key functions
AFTER
Total Assets 600 575 “Operational Liabilities”
Clients &
430 430
Counterparties
Senior Debt 120 95 Pref/ Sub. Debt 25 Equity 25 50
BEFORE
Asset losses
(25) No change for clients/ customers Debt 20% converted to equity 0 / warrants
investors
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1) Works on the liability side of the balance sheet – restores solvency internally − Single point of control - Avoids need for merger partners, or asset buyers − Not an asset liquidation tool - mitigates ‘fire sale’ discount & pressure on markets 2) Chapter 11: Challenges for Banks: a) Bank failure moves too fast for traditional Chapter 11 legal process b) Unlike other businesses, many bank customer activities occur on the liability side (e.g. deposits, swaps, payments). A strict pari passu process could impair the “franchise” adding significant costs faster than capital was created (e.g. Lehman swap unwind) 3) Bail-in separates “capital structure liabilities” from “operational liabilities” − Operational liabilities are protected to preserve franchise value & market stability Continuity tools like the 2014 ISDA protocol and x-border recognition are key − Capital structure liabilities convert to new equity via standard Chapter 11 techniques 4) Bail-in uses fast track procedure to preserve confidence and critical functions − Typically includes a Resolution Authority with special legal powers − RRP’s can provide a stand-by “pre-pack” for the RA (if designed properly) − Solvency, liquidity, and operations need to be clear by Monday morning − Other elements (e.g. precise valuation and allocation) can take much longer
BRRD / SRM
Special Resolution Regime (Bridge tool) Swiss Expert Commission 10% Equity + 9% Cocos Swiss BIO FINMA “SPE Bail-in is primary strategy” Dodd Frank FDIC adopts SPE Bail-in ICB (Vickers) Ring Fence & Bail-in “Key Attributes” Selected countries
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2) Bail-in will only work for one-off, idiosyncratic bank failures.
3) Bail-in is just a bridge to liquidation or wind down – “resolution is not resurrection”
4) Banks fail because of liquidity, not solvency. Bail-in doesn’t address liquidity
5) Banks are often quite international with many legal entities. National interests will frustrate Bail-in
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adopts SPE Bail-in in in 2012
credible & politically essential
premium has slowly disappeared – 2014 GAO report unable to discern any remaining market impact in US
as fully l loss a absorbing
(2015) 2015):
used next time
enough to invest intelligently
* See Credit Suisse strategy research: US Financial Institutions: Regulatory Reform Impact on Bank Credit Spreads, July 2013, by John Giordano/ Dennis Hannan
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