Academic Forum Sponsors:

1. Academic Forum Sponsors: www.edwincoe.com

2. First Session: Banking and Financial Services I Chair: Prof. Stefania Bariatti, University of Milan, Italy

3. Protecting Vital Financial Services on Bank Failure in the United Kingdom Andrew Campbell, University of Leeds Paula Moffatt, Nottingham Trent University Rebecca Oliver, Norton Rose LLP

4. Protecting services rather than institutions – some questions… • Why? • What is the current UK bank insolvency regime? • How far does it protect financial services above institutions?

5. We will touch on… • Some recent history • – Northern Rock, the Banking Act 2009 • The purpose of bank insolvency proceedings • – The IMF/World Bank Report • The work of Eva Hupkes • – “Protect Functions, Not Institutions” 2004 • The big issues • – Including: moral hazard, SIFIs, too big to fail • The new UK regulatory framework for banks • Possible conclusions

6. The purpose of bank insolvency proceedings (World Bank, IMF) • To safeguard the stability of the financial system which includes: • Ensuring the smooth functioning of payment and settlement systems; • The protection of the depositing public; and • The protection of the credit intermediation function

7. Dr Eva Hupkes • Supervisors should aim to protect and preserve the systemically relevant functions undertaken by banks rather than the institutions themselves • No bank would then be too big to fail and so would never need a bail out

8. The new regulatory framework • The Financial Services Bill 2012 • No more FSA • Two new regulators: the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority (“PRA”) • Banks will be regulated by the PRA with ultimate oversight coming from the Bank of England

9. The Banking Act 2009 Special Resolution Regime involves: • The Bank of England • – as lender of last resort and • – as ultimate regulator of banks • The FSA (until replaced by the PRA & FCA) • The Treasury • – (with a power of direction over the Bank of England under the new regime) • The Financial Services Compensation Scheme (“FSCS”)

10. Some thoughts on the Banking Act 2009 • Expeditious action can be taken in relation to a bank that has not yet become insolvent • – So action can be taken before vital functions are affected • The SRR can be implemented without creditor or shareholder approval • – So action is not delayed • The private sector purchaser tool is flexible • – Different parts of a bank can be transferred to different purchasers, enabling the continuation of bank functions

11. Room for improvement? • The SRR has not yet been used for a large and complex bank • The real test as to whether functions will be preserved above institutions will be if a major UK clearing bank finds itself in difficulties • – Political challenges • – Practical challenges of transferring clearing and other functions

12. ESRB and ESMA as the EU’s regulatory answer to the crisis in the financial sector – a critical analysis Dr. Jessica Schmidt, LL.M.

13. I. Introduction

14. II. The main features of the ESFS 1. Overview

15. European Systemic Risk Board (ESRB) (Frankfurt) macro-prudential supervision European Supervisory Authorities (ESA) EBA European Banking Authority (London) EIOPA European Insurance and Occupational Pensions Authority (Frankfurt) ESMA European Securities and Markets Authority (Paris) micro-prudential supervision National Supervisory Authorities

16. 2. Macro-prudential supervision by the ESRB a) Tasks and powers of the ESRB • collect information and identify systemic risk • warnings and recommendations • cooperation with the other parties to the ESFS • coordination with international financial organisations

17. b) Organisation and structure of the ESRB Chair (= ECB President) General Board Steering Committee Advisory Technical Committee Advisory ScientificCommittee ESRB Secretariat (provided by ECB)

18. 3. Micro-prudential supervision by the ESA(in particular: ESMA) a) General Board of Appeal EBA European Banking Authority (London) EIOPA European Insurance and Occupational Pensions Authority (Frankfurt) ESMA European Securities and Markets Authority (Paris) Joint Committee of European Supervisory Authorities

19. b) Organisation and structure of ESMA aa) Organs Chairperson (Steven Maijoor) Board of Supervisors Management Board Executive Director (Verena Ross)

20. bb) Further organisational structure Panels Committees Securities and Markets Stakeholder Group Networks • standing committees e.g. Takeover BidsNetwork e.g. Review Panel • task forces

21. c) Scope of ESMA’s competences  scope of powers conferred on it by: • ESMA-Reg. • financial market legislation listed in art. 1(2) ESMA-Reg. (e.g. Market Abuse Dir. , Prospectus Dir. , MiFID , Transparency Dir., Credit Rating Agencies Reg.) • further legal acts(e.g. CDS-Reg.)

22. d) Tasks and powers of ESMA

23. aa) Function as supervisory authority for securities and markets (1) Regulatory and implementing technical standards • ESMA develops standards • endorsement by Commission (regulation or decision)

24. (2) Guidelines and recommendations (3) Fast track procedure to ensure compliance with EU law • step 1: ESMA investigation + recommendation to NSA • step 2: formal opinion by Commission • step 3: ESMA decision addressed to financial market participant

25. (4) Action in emergency situations (5) Settlement of disagreements

26. (6) Other tasks and powers pursuant to the ESMA-Reg. • collaboration with and support of the ESRB • building a common EU supervisory culture • peer reviews of NSA activities • general coordination function between NSA • function with respect to international relations • opinions

27. (7) Other tasks and powers on the basis of other legislative acts e.g.: • Credit Rating Agencies Reg. • CDS Reg. • draft OTC Reg.

28. bb) Tasks related to consumer protection and financial activities • promotion of transparency, simplicity and fairness in the market for consumer financial products or services • Financial Innovation Standing Committee • warnings • temporary prohibition or restriction of certain financial services

29. cc) In particular: art. 25 and 27 ESMA-Reg. Art. 25 ESMA-Reg. (1) The Authority shall contribute to and participate actively in the development and coordination of effective and consistent recovery and resolution plans, procedures in emergency situations and preventive measures to minimise the systemic impact of any failure. … Art. 27 ESMA-Reg. (1) In the areas of its competence, the Authority shall contribute to developing methods for the resolution of failing key financial market participants in ways which avoid contagion, allow them to be wound down in an orderly and timely manner, and, where applicable, including coherent and credible funding mechanisms as appropriate. …

30. III. Evaluation of the new system 1. Legal basis • art. 114 TFEU • problem: “Meroni”-jurisprudence of ECJ

31. 2. Macro-supervision by the ESRB 3. Micro-supervision a) Basic concept: “integrated network” b) “Silo-based structure” c) Tasks and powers of the ESA

32. 4. Conclusion

33. Bank Resolution Regimes in Europe Michael Schillig

34. Commission Communication of 2010 • First step: Crisis prevention, recovery and resolution • Second step: Harmonised bank insolvency regimes • Third step: Integrated resolution regime

35. Banking Act 2009 (UK) • Special Resolution Regime Restrukturierungsgesetz 2011 (Germany) • Rescue and reorganisation procedures • Transfer order Draft Directive: Recovery and Resolution • Preparatory and preventive measures • Early intervention • Resolution tools and powers • Minimum harmonisation

36. Scope • Draft Directive, Art 1 • Credit institutions and investment firms Restrukturierungsgesetz 2011 (Germany) • Credit institutions and investment firms • Banking Act 2009, s 2 • Deposit taking banks only • Investment Bank Special Administration Regulations SI 2011/245

37. Resolution Authorities • Draft Directive, Art 3 • Up to the Member States Restrukturierungsgesetz 2011 (Germany) • BaFin • Banking Act 2009 • PRA/FCA • Bank of England • HM Treasury

38. Preparation and Prevention • Draft Directive, Arts 4-22 • Recovery plans, resolution plans, resolvability assessment, group financial support • United Kingdom • Pilot project, draft core rules for RRPlanning • ICB ring-fence proposal: compatible with group financial support? Restrukturierungsgesetz 2011 (Germany) • Rescue and reorganisation procedures • Regulatory powers

39. Early Intervention • Draft Directive, Art 23-25 • Breach of prudential requirements: additional powers • ‘significant deterioration’: ‘special manager’ Restrukturierungsgesetz 2011 (Germany) • ‘special manager’, KWG, §45c • No specific trigger event, only proportionality • Liability for negligence: compatible?

40. Resolution Tools and Powers • Draft Directive • ‘sale of business’ tool, ‘bridge institution’ tool, ‘asset separation’ tool • ‘bail in’ tool • Banking Act 2009 • Stabilisation options: transfer to private buyer or bridge bank, temporary nationalisation • Bank insolvency and bank administration Restrukturierungsgesetz 2011 (Germany) • Transfer order

41. Conditions for resolution • Draft Directive, Art 27 • Institution is failing or likely too fail • Breach of capital requirements • Cash flow or balance sheet insolvency • Requires extraordinary public funding • No other option to prevent failure • In the public interest (resolution objectives) • Resolution objectives

42. Conditions for resolution • Banking Act 2009, ss 7, 8 • ‘threshold conditions’, FSMA, s 41, Schedule 6 • No other option • To protect financial stability, confidence in the banking system or depositors Restrukturierungsgesetz 2011 (Germany) • ‘Threat to the institution’, KWG, §§48a, 48b • Capital < than 90% of the required minimum • ‘Threat to the financial system’

43. Sale of business • Draft Directive, Arts 32, 33 • Power to transfer shares, assets, rights or liabilities • On commercial terms • Banking Act 2009, s 11 • Share transfer instrument / property transfer instrument • Compensation scheme order Restrukturierungsgesetz 2011 (Germany) • Transfer order, KWG, §48a • Transferee’s consent in notarial form

44. Bridge institution • Draft Directive, Arts 34, 35 • Legal entity owned by public authorities • Managed with a view to sell to private buyer • Banking Act 2009, Art 12 • Company incorporated and owned by the Bank of England Restrukturierungsgesetz 2011 (Germany) • Transfer order • (shelf) bridge bank formed by Resolution Fund, RStruktFG, §5

45. Asset separation • Draft Directive, Art 36 • Toxic assets transferred to management vehicle • Managed with a view to sell or wind down • Banking Act 2009 • Bridge bank option may be utilised Restrukturierungsgesetz 2011 (Germany) • Transfer order • Only the ‘good part’ may be transferred • Toxic assets stay behind

46. European System of Financing Arrangements • Draft Directive, Arts 90-99 • National resolution funds • Borrowing between national funds • Mutualisation in the group context Restrukturierungsgesetz 2011 (Germany) • Restructuring Fund, RStruktFG • Ex ante contributions • Financial support for transferee only • Salary cap of EUR 500.000 per year

47. Draft Directive: Bail in tool, Arts 37-55 • Trigger • Conditions for resolution Scope: eligible liabilities • All liabilities, except: • Guaranteed deposits • Secured liabilities • Short term debt with maturity < 1 month • Client assets and client money • Employees, trade creditors, tax and social security

48. Draft Directive: Bail in tool • Scope (continued) • Derivatives may be excluded • Minimum requirement • To be determined by resolution authorities Application • In accordance with order of priority • Appointment of administrator • To implement ‘business reorganisation plan’

49. Draft Directive: Bail in tool • Issues • Compatibility with ICB proposal • Trigger: ‘death spiral’ and shorting • Bail in bonds and CDS • Recapitalisation through issue of new instruments • contagion

50. Conclusion • Transfer powers and ‘too big too fail’ • Bail in and contagion • Resolution fund and moral hazard • Has the case for special treatment of banks sufficiently been made?