SUPERVISORS VS ECONOMIC POLICY-MAKERS T HE B EHAVIOUR OF B ANKS T - - PowerPoint PPT Presentation

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SUPERVISORS VS ECONOMIC POLICY-MAKERS T HE B EHAVIOUR OF B ANKS T - - PowerPoint PPT Presentation

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SUPERVISORS VS ECONOMIC POLICY-MAKERS T HE B EHAVIOUR OF B ANKS T OWARDS F INANCIALLY D ISTRESSED D EBTORS AND THE R EGULATORY F RAMEWORK European Central Bank 27 January 2016 Prof. Dr. Ignacio Tirado, LLM Universidad Autnoma de Madrid

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SUPERVISORS VS ECONOMIC POLICY-MAKERS

THE BEHAVIOUR OF BANKS TOWARDS FINANCIALLY DISTRESSED DEBTORS AND THE REGULATORY FRAMEWORK

European Central Bank 27 January 2016

  • Prof. Dr. Ignacio Tirado, LLM

Universidad Autónoma de Madrid European Banking Institute

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OUTLINE

  • Introduction
  • Ex Ante Effect of Insolvency Systems
  • The Internal Management of Loans
  • The Taxonomy of Lending
  • Regulatory Rules
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INTRODUCTION

  • Focus: banks as creditors. Other side of coin of NPLs

1) Adequate Institutional Framework

  • 3 Assumptions: 2) Adequate Level of Information

3) No Extraordinary Time (Crisis) AIM: To Preserve Value by Rescuing Viable Business Without Undermining the Banking Sector Viability: Objective Viability of Business (without debt) [Value higher than piecemeal liquidation] External Factors Considered

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THE EX ANTE EFFECT OF THE INSOLVENCY SYSTEM

THE PROTECTION OF BANKS IN A WAY CONSISTENT WITH RESCUE PROCEEDINGS

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EX ANTE –DESTRUCTIVE- PROTECTION MECHANISMS

  • The Set-Up:

– Several Loans with Cross-Default Clause – Covenants: Information/Solvency Ratio/Negative Pledge, etc. – Acceleration by Default of Any – Automatic Acceleration by Pre-Inso/Inso petition

  • Acceleration Death of Business n If Viable
  • Ordinary Measures: Ban on Ipso Facto Clauses

– Not enough – Analysis of Acceleration based on some Covenants (info, etc.) – The Solvency Ratio Covenant

  • Mechanisms create bad incentives
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POSSIBLE SOLUTIONS

  • Controlled Implementation of Directive on Financial

Collateral

  • Codes of Conduct
  • Effective Supervision and Implementation of CoC
  • Adequate Insolvency Position for Banks, to

Discourage Value-destructive Moves

– Absolute Priority Over Collateral – Highest Ranking for Post-Commencement Finance (including finance provided in Workouts) – Limitation of Unjustified Priorities over Unsecured Lending (esp. Public Claims)

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INTERNAL MANAGEMENT OF DISTRESSED LOANS

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Internal Loan Management

  • Different Internal Structures. Most common:

– (Simplified): Concession/Management + Recovery – (Expanded): C/M + Turnaround Division + Recovery

  • Problems:

– Ex.: RBS The Tomlinson Report – Different Objectives: Short Term vs Future Business – Insufficient Communication – Sometimes absence of Objective Decision-Maker. The importance of the “intermediate section”. “Separation” of

  • rigination from turnaround/recovery

– The problem of adequate staffing (with adequate skills)

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More on Distressed Debt Management

  • Recovery: Externalization of Loan Management

– Tendency to favour short-term/narrow approach – Dependent on level of autonomy:

  • Reporting Duties Risk of Mismanagement
  • Reporting to Correct Internal Department (not only Recovery)
  • Sale of the Portfolio:

– Price ≥ Value x Probability of Recovery – Cost of Mangm. – Sales tend to reduce drastically chances of debtor rescue – Acquirer has no incentive to restructure/No capacity – Sale should be limited to piece meal cases, unless, on case by case basis, to Distressed Debt Fund/Private Equity

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SOME SOLUTIONS

  • Supervisor´s control over adequate structure +

adequate resources

  • Client segmentation and appropriate NPL
  • management. Special structure for (M)SME
  • Bank´s internal complaints department strengthened

and independent

  • Financial Sector Ombudsman
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TYPES OF DEBT, TYPES OF BEHAVIOUR

SECURED VS UNSECURED/FIXED VS FLOATING

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How Do Banks Lend?

  • (a) Lending based in viability of project vs (b) collateral-

based lending

  • (a) “on the books”; (b) much more common
  • (b) Behaviour depends on type of security:

– (b.1) Fixed Recovery: Passivity. No incentive to rescue

  • C ≥ Loan: Reconcile different incentives
  • Comm. /Loan M. Incentive to rescue.Future business
  • C ≤ Loan Incentive to Rescue
  • (b.2) Floating/Equivalent Incentive to Rescue

The Supervisor´s Approach is Key in this Matter

  • System of appraisers also key. Need to avoid conflict
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Specific Problems of (M)SME lending

  • Smaller loans Banking Passivity

– Soft Law: Codes of Conduct – Hybrid Instruments: Sanctions for Passivity

  • Personal Guarantees

– Can be good to reduce debtor moral hazard, but… – Abuse undermines entrepreneurial activity – Balance needs to be achieved Good Discharge System + Adequate Supervision

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THE REGULATORY FRAMEWORK

THE EFFECT OF PROVISIONING AND OTHER REGULATORY NORMS ON BANK BEHAVIOUR TOWARDS DISTRESSED DEBTORS

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BANKS AS CREDITORS VS BANKS AS DEBTORS *Not provisioned, more open to negotiate

  • High Influence

*Provisioned: Incentive to Sell P.; lack of

interest to pursue credit, unless…

  • Adequate system of reclassification
  • Objective Justification. Granular Analysis
  • External Appraisers?
  • Problem of Cost for (M)SMEs
  • The Supervisor´s Dilemma: Regulatory Forbearance vs

Evergreening

  • Other elements to consider: -Rules that ban financing to

distressed debtors; - Rules that limit asset holdings; -Tax rules

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Thank You

Contact: ignacio.tirado@uam.es

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