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Academic Forum Sponsors:. www.edwincoe.com. Second Session: Banking and Financial Services II Chair: Prof. Bob Wessels, University of Leiden, The Netherlands. Failure of Three Icelandic Banks Martine Gerber-Lemaire. Table of contents

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  1. Academic Forum Sponsors: www.edwincoe.com

  2. Second Session: Banking and Financial Services II Chair: Prof. Bob Wessels, University of Leiden, The Netherlands

  3. Failure of Three Icelandic Banks Martine Gerber-Lemaire

  4. Table of contents • Overview of Luxembourg’s law on the reorganisation and insolvency regimes applicable to banks • Pragmatic approach of the Court: the cases of the Three Icelandic Banks (Kauphting, Glitnir and Landsbanki) 4 l Martine Gerber-Lemaire l 28/06/2012

  5. No specific early intervention system tailored to banks • Two specific procedures provided by the law on the financial sector dated 1993 and applicable to banks: • the suspension of payments and • the winding-up 2. Luxembourg proceedings 5l Martine Gerber-Lemairel 28/06/2012

  6. Triggering event for early intervention measures (Basel III, Mifid, AML) • The CSSF (prudential regulator) shall enjoin to remedy the existing situation or cease any practice that is contrary to the relevant legal, regulatory or statutory provisions • The CBL is responsible for the micro-prudential supervision of the liquidity management and risks of banks (joint inspection with CSSF) 6 l Martine Gerber-Lemaire l 28/06/2012

  7. Triggering event for reorganisation • Inability to raise credit or insoluble liquidity crisis, whether or not the bank is unable to pay creditors. • The bank’s inability to meet its commitments • Withdrawal of the bank authorisation although the withdrawal decision has not been declared definitive. 7 l Martine Gerber-Lemairel 28/06/2012

  8. Triggering event for judicial winding-up • After a suspension of payments period, it is apparent that no reorganisation plan would be able to restore the situation which caused the suspension of payments • The financial situation of the bank is undermined to such an extent that it can no longer meet the commitments which it owes to all its debtors, obligees and holders of participatory rights 8 l Martine Gerber-Lemairel 28/06/2012

  9. Triggering event for judicial winding-up • The CSSF has withdrawn the authorisation granted to the bank and the decision to withdraw has become final and definitive 9 l Martine Gerber-Lemairel 28/06/2012

  10. 3. Pragmatic approach of the Luxembourg Court (scope, duration) • Extensive interpretation of the scope ratione personae of suspension of payment proceedings: the case of Lehman Brothers • Extensive interpretation of the 6 months period of suspension of payments: the case of Kaupthing 10 l Martine Gerber-Lemairel 28/06/2012

  11. 3. Pragmatic approach of the Luxembourg Court • Judicial determination of the administrators’ duties • The reorganisation plan and the differential treatment of creditors according to their rank 11 l Martine Gerber-Lemaire l 28/06/2012

  12. 3. Pragmatic approach of the Luxembourg Court • Banks’ judicial liquidation and application of certain commercial code provisions 12 l Martine Gerber-Lemairel 28/06/2012

  13. One proceeding and three different issues • The issue for Kaupthing Bank: bad bank – good bank split (Banque Havilland) • The issue for Glitnir: the voluntary winding-up • The outstanding case of Landsbanki: the judicial winding-up 13 l Martine Gerber-Lemairel 28/06/2012

  14. The scandal of equity release loan • Landsbanki: a judicial liquidator • in turmoil • Could the Landsbanki Victims Action Group be successful ? • Judiciary control + 50 Mio Euro guarantee 14 l Martine Gerber-Lemairel 28/06/2012

  15. ‘A thin line between legitimate and incompatible state aid’ Dr Alexandra Kastrinou

  16. The interaction between state aid & rescue • State aid may play critical role during restructurings • Examples of forms aid in insolvency: • Waivers of VAT under the French safeguard procedure./Article 44 of Law 1892/90 in Greece. • Emergency legislation aimed at the rescue of various football clubs. • But fine line between legitimate (Northern Rock) and incompatible aid (Olympic Airlines).

  17. State aid rules • Article 107 Treaty on the Functioning of the EU A 107(1) Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market. BUT: State aid is essential so as to maintain economic and social stability and in genuinely exceptional circumstances will be authorised. • A 107(3) The following may be considered to be compatible with the internal market: (b) aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State; Conditions: Notification Non-discriminatory Appropriate Temporary Proportionate Participation of the recipient

  18. State aid & the Banking Crisis • What caused it: poor governance, gaps in the legislation, unique nature of the industry? • Government intervention is blatantly evident in the banking sector: Justification: Too big to fail- threat of systemic crisis. • Forms of aid: capital injections(RBS), state (tax-payer funded) guarantees, impaired asset relief, brokered merges (HBOS-Lloyd’s), nationalisations (Northern Rock, B&B). • The UK example • Northern Rock: • The European Commission decided that the emergency liquidity support did not constitute incompatible aid because: • (1) the beneficiary bank was (still) solvent when it obtained the liquidity; • (2) the liquidity facility is fully covered by a high quality collateral which was subject to a (daily adjusted) “haircut”; • (3) the central bank (the Bank of England in the case of Northern Rock ) charged “penal” interests on the facility; and • (4) the central bank granted the facility at its own initiative (i.e. not upon instruction or on behalf of the public authorities).

  19. Too BIG to fail? • The post-Lehman Brothers approach and the fear of a ‘domino/spill-over effect’ • State aid rules relaxed to prevent systemic failure: • Bail outs approved subject to a cost benefit comparison • Large scale intervention deemed necessary to avert collapse of the banking sector and to avoid fuelling unemployment and catastrophic effect on national economic activity. • Social cost lower than the cost of failure. • The UK ‘pragmatic’ approach in ‘exceptional’ circumstances: the HBOS-Lloyd’s merger. • Prior to the takeover, HBOS was on the brink of collapse because of its high-risk lending practices and excessive use of leverage. The takeover bid was conditional on the receipt of state aid necessary as to rescue HBOS. • LBG received a  state recapitalization of £17 (UK gov. equity ownership=43.5%). The  aid enabled Lloyds TSB to acquire HBOS and significantly increase its market shares. • s.58 Enterprise Act 2000?

  20. …or simply too big? • The current political and economic climate challenges the EU competition policy. • State aid is: • Encouraging a ‘moral hazard’ /rewarding failure & excessive-irresponsible risk; • Distorting competition-discrimination against healthy banks- i.e. Barclays & HSBC who refused assistance; • Accumulation of public debt- impact on the tax-payer; • Harms the recipient’s prospects of recovery; • Prolonging the crisis.

  21. Some views! • Relaxed application of state aid rules: • Does the flexible approach adopted by the Commission towards State aid demonstrates that it encourages the preservation of financially distressed banks, who are unable to engage in real and healthy competition • …or simply the need to adjust?? • State aid= effective tool during restructuring- but is it adequate? • Need for reforms: • State aid rules: Communication on State aid modernisation ( 8 May 2012) • "Economic forecasts currently indicate that growth in the EU will remain low for some time. In this environment Europe must tap the full potential of a competitive internal market and, in a context of fiscal consolidation, governments must focus their spending on growth-enhancing priorities. I expect our state aid reform to help public authorities make more efficient use of scarce public resources and design public support to firms so that it helps achieve the EU's growth objectives while limiting competition distortions.” • b) Approach of policy makers • c) Enhancement of supervision and regulation

  22. A balancing exercise between costs & benefits of rescue. Absolute respect to economic principles is not desirable for many (but mainly) political reasons. Nevertheless, rigid application of state rules would disregard the ‘special nature’ of the interlinked financial sector. • Deviation from the State aid rules, should be with caution and should involve fierce review exercises. • State aid is a tool not the ‘medicine’ to treat the financial crisis-structural reforms of banks needed. Conclusion

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