The new EU directive for dealing with banks and financial institutions is what we in UK have been doing for years, says Tony Groom, CEO of K2 Business Rescue
Six years after the onset of the global financial crisis the European Council and Parliament has adopted The Bank Recovery and Resolution Directive (BRRD) to establish a fund and provide the framework and tools for the recovery and resolution of financial institutions – an attempt to ensure that a similar global contagion can never happen again.
It sets out a Europe-wide mechanism for dealing with a potential bank failure known as the Single Resolution Mechanism (SRM) and details the creation of a fund, the Single Resolution Fund (SRF) which will tie up billions of Euros across Europe in preparation for supporting the resolution tools.
Individual governments are required to implement the SRM framework by the end of 2014. The SRF is due to be in place by end of 2015 but it is contentious both in terms of who will provide the funds and concerns that it may promote moral hazard by lenders.
The SRM is divided into three phases: preparation & prevention; early intervention; and resolution.
Four resolution tools are defined as: sale of business, asset separation, bridge bank and a bail-in tool. These allow authorities to take action without shareholder consent such as selling assets, separating them by allocating them to a good bank or bad bank, transferring (bridging) assets to another institution, or restructuring liabilities by either writing them down or converting them into equity.
These are all tools that insolvency and turnaround professionals in UK are familiar with. The key difference relates to agency and mandate where in UK these tools are only available in a formal insolvency procedure.
They are however similar to the abandoned London Approach and the more recent Vienna Initiative. The London Approach worked in the 1980s when the Bank of England was able to exercise authority over lending institutions by coordinating banks during a restructuring. This however became almost impossible to manage when alternative lenders were prepared to adopt a hold-out or ransom approach during negotiations.
The Vienna Initiative was a European Bank Coordination response in 2009 to non-performance and out of the money loans that emerged following the 2008 crisis. It was updated in 2012 but fundamentally it was only ever advice without the ability to enforce its proposals, unlike the BRRD that must be enacted by EU countries this year.
The BRRD offers scope for the UK insolvency and turnaround profession which has been experiencing a lack of work over the past few years.
The SRM requirement for European financial institutions to carry out preparation and prevention is an opportunity to do what insolvency and turnaround practitioners have long advocated. Prevention plans must be credible and will be scrutinised by regulators which is ideal for a highly regulated industry. While strategy and scenario planning may have been the preserve of consultants, insolvency scenario planning is different and unlike most management consultants, practitioners understand regulation and compliance.
Early intervention is also high on the wish list of practitioners who want to save businesses or at least optimise the outcome for creditors. Banks have been reluctant to request independent business reviews which has resulted in bank panel firms experiencing a decline in work. Such a directive could result in this decline being reversed.
The restructuring tools available for resolution involve legal, financial and operational experience that already exists in UK. The BRRD provisions for writing down and compromising debt and for debt-to-equity conversion might be new elsewhere in Europe but they are familiar tools that are often used by UK practitioners.
The framework would seem to want to provide for powers that avoid formal insolvency. This is similar to the rarely used provision in most debentures that allows for the appointment of a “special manager” to act alongside or even replace existing managers. This is similar to the role of a chief restructuring officer and again is an area where UK has a considerable number of experienced practitioners.
Our challenge is to promote the skills and experience of UK practitioners to financial institutions throughout Europe and take advantage of the BRRD as an opportunity.
Posted on 17th June 2014 by
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