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Tom Garske, associate partner at Citihub Consulting, discusses what the benefits of using schemes to abide by the provisions of the EU Bank Recovery and Resolution Directive (BRRD) are to banks.
Directive 2014/59/EU (BRRD) sets forth a common framework of recovery tools and crisis management planning for how banks need to cope in times of financial stress.
Banks have long been working on resolution and recovery planning, devising ways in which they can sustain themselves without the use of public funds or government bailouts should they need to proceed towards bankruptcy. These plans are very detailed and scrutinise all aspects of a bank’s business model—measuring risk, limiting investment of their own funds, restructuring business models, understanding how technology is inter-linked, and ultimately ensuring that banks would finally know their entire eco-system. The establishment of BRRD ultimately describes how to avoid failure in a crisis and how to mitigate systematic impact in the event of insolvency.
Some key areas on which banks have focused include:
The Co-Op’s financial troubles had considered closure or the sale of its operations that were supported by the schemes under BBRD. The bank gave up majority ownership and used the bail-in provision to shore up its financial situation—this pushed bond holders (hedge funds) into new ownership of equity and debt.
Although the hedge funds provided quick relief, the effort to turnaround the operational efficiency of the bank staggered as on-going issues of lawsuits, regulatory fines, and poor business strategies have hampered the turnaround.
Using schemes will most likely be of interest for small to mid-tier banks as a means of working out their troubled assets. Large banks or globally systematic important financial institutions have the required resources and investment means to create elaborate resolution plans and can maintain the necessary capital reserve requirements that are meant to avoid such bailouts needed by the Co-Op.
While the Co-Op’s issues were already rooted as BRRD was being understood and implemented by the industry, it has provided some understanding for how an institution might implement its resolution and recovery plans and the difficulty surrounding the complexity of such an event. We can expect that regulatory scrutiny will continue and the lessons learned from the Co-Op will also drive how the banking industry will look to utilise schemes for effective living will planning in the future.
The resolution scheme determines what resolution tools are employed to remedy the financial distress. The options available under the BRRD include:
Recovery is never going to be seamless as it is complicated and can take years to show improvements. This will impact future investors and potentially clients’ willingness to stay the course of repositioning.
The publics’ distrust of financial institutions may start to favour or fuel the growth of crypto currencies and internet bank.
Continuous BRRD reform will challenge all financial institutions and the cost to maintain the planning could lead to mergers on the lower tier players as they look to maintain banking services. This could also lead to divestitures where banks look to specialise more in lieu of offering suites of services.
Interviewed by Lucy Trevelyan.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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