Corporate Restructuring Summit 2012
Bank Restructuring
A perspective from the European
Commission
Alberto Bacchiega
Head of Unit Task Force Financial Crisis
DG Competition
European Commission
The views expressed in this document are those of the
author and may not in any circumstances be regarded as
stating an official position of the European Commission
The European Commission in the
Financial Crisis
Macro and
Financial
Stability
Respect of Maastricht criteria,
Excessive Deficit Procedures,
Fiscal consolidation programs
(DG ECFIN)
CRD IV, resolution framework,
banking union, SSM
(DG MARKT, DG ECFIN)
Sectoral
regulation
Competition
Enforcement
State aid control
Restructuring of problematic
institutions
(DG COMP)
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Member States' response to the
financial crisis
State-guaranteed funding
Recapitalisation by the State
Impaired assets measures
• Guarantees of impaired assets
• Purchase of impaired assets
• Hybrid schemes
State aid
potentially
triggering
need for indepth
restructuring
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Competition Policy in the Crisis
State aid control as competition policy's main driver
Special rules for the crisis
EU Treaty gives
exclusive competence
Coordination tool
Activation of a "never
to EC on State aid
control
but
Normal State aid rules
not suitable for depth
and scale of the
problem
used" clause to 'remedy
a serious disturbance of State Aid Control as
'second best' EU-wide
the economy' (Art.
co-ordination tool until
107.3.b) to
new regulation is in
Develop specific rules
place
and guidance for the
So contributing to the
financial sector in the
preservation of the
crisis.
internal market
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EU State aid control in the financial
crisis: Instruments
13 October 2008
Banking Communication: General principles, guarantee pricing,
recapitalisation, winding-up, liquidity assistance, procedural aspects.
5 December 2008 Recapitalisation Communication: refines approach to recapitalisations.
25 February 2009
Impaired assets Communication: guidance on asset purchase / insurance
/ hybrid schemes.
14 August 2009
Bank restructuring Communication: guidance on how to restore long
term viability of banks in difficulty while ensuring burden sharing and
minimising competition distortions.
1 December 2010 "Exit"-Communcation: update on conditions for guarantees to incentivise
exit from state support;
1 December 2011 Prolongation Communication: extension of crisis rules beyond end 2011;
link between bank restructuring and sovereign crisis
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3 pillars in bank restructuring
Burden
Sharing
Competition
Return to long term
viability,
remuneration of
capital
Minimisation of the
cost for the State
Competition
distortion is
unavoidable (bank
should have exited
the market)
No more public
support after
restructuring
Mitigation of moral
hazard problem
But distortions should
be kept to the
minimum
Viability
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Viability assessment
Review of business model
•Understand the roots of the problem
•Clear view of final goal (acceptance that change is necessary)
Identification of best path to new model
•Discontinuation of problematic activities
•Concentration on core areas
•Simplification and de-risking
Technical feasibility assessment
• Assessment of solvency / liquidity / profitability / asset quality
• Stress test or sensitivity analysis on critical parameters
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Measures to restore viability:
examples
Towards a
viable core
bank
Deleveraging:
Run-off of non core portfolios
Accelerated if capital consumption acceptable
Sale of activities / business segments
Timing optimised to minimise cost
Open process to identify buyers
Behavioural changes
Improved processes and governance
Margin requirements
De-risking of activities
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Viability is not a given
Orderly
resolution
is the only
option for
non viable
banks
Ordinary liquidation:
Extremely rare in the crisis
Suitable for very small / non systemic banks
Run off of bank activities over time
Timing optimised to minimise cost
No new activities or production is essential
Good bank / bad bank
Identification of best assets / activities the good bank
Liquidation or run off for the rump
Sale of bank as a whole
Must lead to exit of the bank as standalone entity
Can be very expensive
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Burden sharing: examples
Stakeholders
have to
contribute to
the
restructuring
costs
(to partially
relieve
taxpayers…)
Internal to the bank:
Divestiture of entire businesses (also profit making)
Divestiture of actitivites / portfolios
Profit skimming / claw back mechanisms
With stakeholders (1)
Equity injected at deep discounts
Hybrid capital subject to minimum remuneration
With stakeholders (2)
Ban on discetionary coupon payments
Ban on early calls of hybrid capital
Specific requirements for buy backs
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Reasons to limit distortions of
competition
Level playing field
• State aid should not unduly disadvantage sound banks or banks
that have received less State support
Moral hazard
• State aid should not support excessive risk taking
Internal market
• Support for national champions (or lemons) and discriminations
towards non domestic institutions puts the internal market at risk
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Competition measures: examples
The market
structure
emerging
from the
crisis will
shape the
banking
landscape
for the long
term
Structural measures:
Divestiture of entire businesses (beyond viability)
Divestiture of actitivites / portfolios
Carve outs of parts of the bank
Behavioural measures
Acquisition bans
Limitation of aggressive practices, advertising
Market opening measures
Bank specific: to operate as platform for new entrants
At national level: improving broader competitive landscape
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Monitoring
Monitoring
of the
restructuring
plans is key
to proper
execution
Restucturing plans can last up to 5 years
Time period clearly excessive in normal circumstances
Necessary in crisis times e.g. to avoid fire sales
Monitoring is time and resource consuming
Maitaining specific knowledge and focus is a challenge
Recourse to monitoring trustees as mitigating action
Need to adapt if circumstances change
Change in external factors may require modification of the plan
Internal failure to implement not accepted as a reason to
change
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The record so far
48 cases
decided
35 cases
on-going
• 17 of which leading to disappearance or liquidation of
the bank
• 1 leading to an order to recover the aid granted
• 4 appeals at European Court of Justice
• 3 cases previously closed and reopened after new aid
• Number of on-going cases growing
• Concentration in peripheral / program countries
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State aid control and sovereign crisis
States and banking systems are intertwined
• If one falls, so does the other
• The link can go both ways:
• from the banks to sovereign (Ireland, Spain)
• from sovereigns to the banks (Greece, Portugal, Italy?)
The crisis has increased the mutual dependence
• Banks assume sovereign risk as ‘lenders of last resort’ for government paper
• States assume bank risk through guarantees and capital
In all cases, return of banks to viability is key
• Crisis resolution crisis requires restoration of a robust banking system – starting
with the restructuring of viable institutions
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Same principles – new challenges
The three pillars are always valid
• Restore long term viability
• Burden sharing
• Limit distortion of competition
But the context has completely changed…
• Macro situation (e.g. continuous NPLs increases) postpones viability also for sound
banks
• Sovereigns have limited capital and funding available for restructuring or resolution
• Market conditions for restructuring actions are challenging: heightened risk aversion,
rock bottom market valuations, absence of buyers, whole financial systems in distress
…and the process too
• Earlier involvement in the design of the plans
• In a multilateral context (national authorities, ECB, IMF)
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Meeting the challenges
Several
goals
to
pursue
at the
same
time
Preserving the system:
Coordinating restructuring of the whole system
Miminising impact of restructuring on sovereign
Need to maintain credit flows
Maintaining competition
Need to maintain balance between aided and
non aided entities
Risk of ending with an all-public, non
competitive banking sector
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Lessons learned
Sovereign Define the core of the bank going forward:
stress
Core bank needs undivided attention of
cannot be management
the
Run off of on-core bank minimising cost
excuse
for
Maintain focus on long term perspective
inaction
Market structure resulting from the crisis
likely to stay for the foreseeable future
Need to maintain competitive landscape to
ensure credit to the real economy
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Thank you for your attention!
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