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Gl ubigerbeteiligung bei Bankrestrukturierungen in Europa Ist die Wende erreicht ? M nchener Seminare November 2013 Hans-Joachim D bel Finpolconsult, Berlin – PowerPoint PPT presentation

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Title: Gl


1
Gläubigerbeteiligung bei Bankrestrukturierungen
in EuropaIst die Wende erreicht ?
  • Münchener SeminareNovember 2013
  • Hans-Joachim Dübel
  • Finpolconsult, Berlin

2
Creditor Participation in European Bank
RestructuringsA Corner Turned ?
  • Münchener SeminareNovember 2013
  • Hans-Joachim Dübel
  • Finpolconsult, Berlin

3
Discussion Topics
  • Bank liquidity and capital policies during crisis
  • Creditor participation before and during
    restructuring/resolution
  • Lessons policies and institutions for Europe

4
Bank Liquidity PoliciesTemporary Fix for Low
Bank Capital
  • Euro crisis
  • High EUR demand by banks hit by real estate and
    sovereign crisis, pullout of banks /
    institutions,
  • Note that country ranks have changed over time
    (Italy!).
  • ECB has been slow on bank capital
  • It took ECB until 2013 to call for comprehensive
    recapitalizations ( Asset Quality Review),
  • Resistance against bail-in ?Draghi letter of
    July 2013,
  • Lots of unintended consequences...

Eurosystem Net Lending / Borrowing of Selected
Countries, 2007-2009
Source Osnabrück University.
5
Bank Liquidity PoliciesYour Central Bank as an
ATM Machine..
Laiki Bank Large ECB ELA borrower, at peak EUR
9.8 billion (33 of assets), Some 50 can be
estimated to have used to pay out mostly large
deposits (IBU), senior and subordinated bond
holders, Asmussen did not reach 2/3 majority
in Gov Council to block Laiki ELA,?some
tightening of ELA rules Oct 2013 (reporting on
borrower/collateral, GC must take decision if
gtEUR 2 billion). Discredits Walter Bagehots
Lender of Last Resort rule?- lend without
limits, at penalty rate. Not quite bank
capital !!
Laiki Bank Deposits by Source 2010-2012
  • Source Central Bank of Cyprus, Finpolconsult
    computations.
  • ELA Emergency Liquidity Assistance,
  • IBU International Business Unit.

6
Bank Liquidity PoliciesTemporary Fix for Low
Bank Capital
  • USD crisis (of European banks..)
  • 2008 SIV/ABCP after pullout of US MMFs,
  • Ongoing European banks role in the global
    China/Petrodollar recycling,
  • The Fed shoots fast !!
  • After 2008 Steinbrueck interview closed window
    for HRE/Depfa,
  • After the 2011 US MMF run on French banks, the
    Fed passed on credit risk to the ECB (EUR-USD
    swap agreement).

NY Fed Term Auction Facility Lending to German
Banks, 2007-2010
Source Federal Reserve Bank of New York,
Finpolconsult computations. Cumulative
lending. SIV Structured Investment
Vehicles, ABCP Asset-backed Commercial
Paper, MMF Money Market Funds.
7
USD Target Debate
8
Bank Capital PoliciesEarly Bailout Cases Hypo
Real Estate/Germany
  • Public recapitalization 2009
  • Private deposit insurance fund de-facto
    insolvency by late 2008 (17 billion in potential
    losses),
  • Early public capital injection and squeeze-out of
    shareholders by June 2009,
  • Followed by second recap in same year,
  • And creation of Bad Bank in 2010.

HRE Total Liability Structure
Source Bank reporting, Finpolconsult.
9
Bank Capital PoliciesBad Bank Is Often Stealth
Public Recap
Bad Bank Model (Asset Swap Model)
  • Bad banks systematically untie the fate of junior
    (and senior unsecured) debt from the fate of
    assets,
  • Transfer pricing chosen may be right or wrong,
  • Why expose government to such risk?

10
Bank Capital PoliciesFMS Wertmanagement
  • Bad Bank
  • By October 2010 with entire Greek exposure !!
  • and with full public ownership, no transfer of
    junior debt (despite law)
  • de-fact third and most expensive - public
    recapitalization.

11
Bank Capital PoliciesClassic Bailout Citibank
  • Indeed, I was surprised when Tim started
    reaching out to me directly on the possibility of
    doing a good bank/bad bank structure for Citi.
  • Initially, he raised the idea of the FDIC setting
    up and funding a bad bank, without imposing any
    loss absorption on shareholders and bondholders.
    I was flabbergasted.
  • Why in the world would FDIC take all of the
    losses and let Citis private stakeholders take
    all the upside with the good bank?
  • During the second meeting, we discussed a
    proposal to have the common equity and some of
    the preferred shareholders help absorb losses.
    Our view was that all of the private preferred
    shareholders should convert and that the
    bondholders should take some losses as well.
  • ..That was a nonstarter for Tim. He wanted FDIC
    to take a hit.

Sheila Bair Bull by the Horns
12
Bank Capital PoliciesClassic Bailout Hypo Real
Estate/Germany
  • Financial result
  • Shareholders received cash,
  • Junior creditors were almost entirely protected,
    except hybrid coupons (EU rules) and UT2 haircuts
    (held by retail),
  • Ca 18 billion in public capital investment with
    perhaps 10 recovery expectation, reduced by
    almost EUR 4 billion outstanding junior debt.
  • Landesbanken
  • WestLB last minute junior bail-in did not use the
    bail-in legislation.
  • Germany estimate
  • EUR 50 (hybrid) 60 (sub) billion ?investors
    lost a fraction only,
  • Total loss for taxpayer could be ca EUR 100
    billion.

HRE Junior Debt Structure
Source bank reporting, Finpolconsult.
13
Bank Capital PoliciesBasel III Transition In the
Middle of Crisis
  • Basel III (Dec 2010)
  • Fights failure of Basel II to bail in junior
    debt,
  • New core capital definition no revaluation, all
    capital is permanent, hybrid is limited.
  • Strongly rising capital demands while second leg
    of financial crisis unfolds,
  • Incentivizes buybacks, early calls of Tier 2 and
    non-eligible Tier 1 instruments.
  • The PROBLEM
  • This is all fine for going concern banks ..
  • .. while it somehow ignores progress in bank
    restructuring / resolution law (UK, DE), which
    has widened the bail-in definition.
  • But what happens, when a bank in difficulties
    starts buying core capital by selling extended
    capital?

Source FitchRatings (2010)
14
Discussion Topics
  • Bank capital and liquidity policies during crisis
  • Creditor participation before and during
    restructuring/resolution
  • Lessons policies and institutions for Europe

15
When Gone Concerns Buy Core Tier 1 Liability
Management Exercises in Greece
Alpha Bank Liability Structure
  • Alpha Rationale for the Offers, May 2013
  • Eurogroup announcement of Nov 2012 liability
    management exercises should be conducted in
    respect of remaining subordinated debt holders so
    as to ensure a fair burden sharing
  • The Offers are made in order to provide
    investors with an opportunity to monetise their
    investments at the relevant Purchase Price on a
    voluntary basis.

Sources Alpha Bank, Finpolconsult LME deal
analysis.
16
When Gone Concerns Buy Core Tier 1 Liability
Management Exercises in Greece
Greek Bank Junior Debt RepurchasesCash offer
conditions to investors 2012, 2013
1 National Bank of Greece, 2 Alpha Bank, 3 EFG
Eurobank, 4 Piraeus Bank. EFG Eurobank DES
debt equity swap.
  • Is offering between 40 and 60 in cash on subs
    and hybrids in entirely voluntary LME fair
    burden sharing?
  • Greek government recap effectively replaces some
    70 of GGB losses (four large banks),
  • Once government is invested in shares,
    subordinated debt investors can expect to be paid
    par ? moderate acceptance,
  • Financial result Junior bank debt investors are
    largely exempt from GGB losses, ca EUR 2 out of
    3.5 billion per Q IV 2011 cash payment.

Sources bank reporting, Finpolconsult LME deal
analysis.
17
When Gone Concerns Buy Core Tier 1 Liability
Management Exercises in Cyprus
  • Laiki Bank
  • June 2012, first restructuring
  • Cypriot government invests EUR 1.8 billion (gt10
    GDP) into shares, before hybrids and subs are
    haircut/converted,
  • Financial result
  • Hybrid capital investors in are offered a
    voluntary equity swap, which only by December
    2012 becomes mandatory (still far too high number
    of shares).
  • Subordinated bond investors enjoy a highly
    concessionary deal (EUR 450 million subordinated
    bond)
  • Bond offer 72.5 exchange into senior bond with
    twice the interest level of deposits (MTM85),
    accepted by EUR 132 million,
  • Cash offer 55 cash offer, accepted by EUR 182
    million.

18
Laiki Bank Subordinated Bond LME SLE Capital
Loss EUR 150 mln 1/3
Source Laiki Bank Reporting, Finpolconsult. SLE
Subordinated Liability Exercise.
19
When Gone Concerns Buy Core Tier 1 Liability
Management Exercises in Cyprus
  • Laiki Bank (other)
  • In September 2012, EUR 330 million in senior
    bonds matured days before the PIMCO due diligence
    exercise started,
  • The June 2012 subordinated bond deal was
    partially clawed back in March 2013 through the
    mandatory debt-equity swap of senior unsecured.
  • Bank of Cyprus
  • In May 2011 called a subordinated bond of EUR 200
    million at par, at the first possible date,
  • Note Deutsche Bank had broken with this policy
    in 2008.

20
When Gone Concerns Buy Core Tier 1Creditor
Rotation Through LME
Bankia Funding Structure
  • Bankia
  • Large volumes of senior unsecured and covered
    bonds sold to foreign investors, these investors
    rotated with the ECB,
  • 2006/7 subordinated debt issued mainly to
    professional investors.

Sources bank reporting, Finpolconsult
computations.
21
When Gone Concerns Buy Core Tier 1Creditor
Rotation Through LME
Bankia Funding Structure, Expanded
  • Bankia
  • Since 2010, covered bonds were issued into ECB
    repo (i.e. disappear from balance sheet and ECB
    claims appear),
  • Foreign bank investors recycle proceeds into ECB
    surplus reserves.

Sources bank reporting, Finpolconsult
computations.
22
When Gone Concerns Buy Core Tier 1Creditor
Rotation Through LME
Bankia Cash Flow
  • Bankia
  • Cash payments to (largely professional)
    subordinated investors in 2010 and 2011 of ca.
    EUR 2 billion,
  • In parallel new subordinated debt and equity was
    issued, at this time mostly to retail
    investors/households,
  • 2012 cash paid had to be reinvested in equity
    (LME).

Sources bank reporting, Finpolconsult
computations.
23
Share Buyback as a Costly Policy to Support
Equity LME
  • Stabilizing LTRO-effect in Q I 2012 for share
    prices was used by Spanish banks for share
    buybacks.
  • Bankia
  • Offered hybrid investors shares at high exercise
    prices into collapsing share price trajectory,
    benefiting insiders who sold immediately.
  • Bank may have lost EUR three-digit millions in
    cash (Core Tier 1)
  • Reports for total year 2012 75 million loss from
    own share dealing operations.

Sources http//ftalphaville.ft.com/2012/06/26/105
6401/the-spanish-bank-buy-back-riddle/ Onvista.de.

24
When Gone Concerns Buy Core Tier 1Creditor
Rotation Through LME
SNS Reaal Cash Flow
  • SNS Reaal
  • 2008 public (senior) hybrid capital injection.
  • In 2009 the profit situation was still seen as
    healthy enough for SNS to buy back EUR 250
    million of the hybrids, most of which from
    government, and retire other junior debt,
  • In 2010, SNS Bank placed a EUR 500 million
    subordinated bond with a 10-year maturity,
  • 2011 large cash LME over EUR 420 million of old
    subordinated debt,
  • 2012 first possible call of 2003 issued hybrid
    capital securities exercised.

Sources bank reporting, Finpolconsult
computations.
25
Restructuring Debt Equity Swap or Haircuts?
Bankia Haircut Debt Equity Swap Combined
  • Spain (Bankia)
  • - Haircut DES
  • Group 1 mandatory SLE,
  • Group 2 first voluntary, then mandatory SLE.
  • - Pricing approach
  • market price (first law draft permitted 10
    over) vs.
  • liquidation value,
  • Ultimately negotiated.
  • Netherlands (SNS Reaal)
  • Expropriation
  • 100 haircut,
  • liquidation value.
  • Both approaches lead to same desired Core Tier 1
    effect.
  • Debt equity swap leaves possible economic upside
    on the table for investors, tied to asset
    performance.
  • Parallel to Coco debate
  • 0-1 (insurance) instruments carry significant
    legal risk, esp. if triggers are regulatory.
  • Alternatives?
  • CDS written by bond investors on initial bank
    portfolio,
  • Example KfW credit-linked notes program.

Source Finpolconsult SLE Subordinated
Liability Exercise Coco Contingent
Convertibles CDS Credit Default Swaps.
26
Restructuring Comprehensive Debt Equity Swap
Bank of Cyprus Debt Equity Swap
  • Bank of Cyprus extension of Spanish junior
    debt bail-in to senior unsecured
  • No initial haircuts of debt !! ?swap.
  • Allocation of sub, senior unsec, large deposits
    to thin equity classes,
  • Full voting rights for these classes,
  • High interest rates for preferred shares if bank
    performs,
  • Current main shareholder is Laiki Bank unwinding
    vehicle (18),
  • Issue ad-hoc seniority given to Cyprus public
    sector and ECB.

Source Finpolconsult.
27
Restructuring Good Bank Model (FDIC Standard)
Laiki - Good Bank, Purchase and Assumption (PA)
  • Cases
  • Laiki Bank, Good Bank PA combined with
    super-seniority of insured deposits.
  • Denmark (Amagerbanken), Greece (ATE, Hellenic
    Postbank).
  • Problem as with all PA is determination of sales
    price during stress. The larger the bank, the
    greater valuation risk (e.g. U.S. Washington
    Mutual).
  • Response Iceland - bridge banks to be sold
    later.
  • Would have required public funding in the case of
    Laiki.
  • Did Greek subsidiary PA to Piraeus cut losses or
    profit?

Source Finpolconsult.
28
Fiscal ExpenditurePrivate Sector Involvement, 3
Countries
Greek Banking Program
Spanish Banking Program, Group 1
Cyprus Banking Program
  • 2012/13 summary three countries three
    approaches.
  • Complete individual path-dependency, only MoU
    changed was Cyprus,
  • Greek OSI ratios gtgt Spain,
  • Cyprus outlier (but not for smaller banks).

Source Central banks, Analistas Financieras
Institucionales, Finpolconsult. Gap based on
target CT1, internal includes proceeds from
sales, accounting issues (DTA) pre-Sareb,
without impact of Good Bank-Bad Bank splits on
non-core banks, assumes some OSI in
debt-equity swaps.
29
Fiscal ExpenditureExpanded Country Sample
Estimated Private Sector Involvement in Capital
Gap Financing
  • Creditor participation ratios increasing over
    time , however with outliers
  • Amagerbanken an early case (fall 2010) with
    senior unsecured creditor participation,
  • Note In fall 2010, Ireland was not permitted to
    bail-in senior debt at Anglo Irish Bank, while
    Denmark did so,
  • Dexia a late case (second recap 2012), even after
    Spain, with large junior bondholder bailout,
    junior debt investors will receive in total some
    EUR 2 billion.

Source Finpolconsult.
30
Fiscal ExpenditureExpanded Country Sample
Dexia S.A. Junior Debt Structure
  • Deterrents to bail-in
  • First government recap often followed by second
    rather than bail-in gt avoids stigma of wasting
    taxpayer money (HRE, Dexia),
  • Fiscal capacity, program vs. non-program country
    (currently MPS Italy),
  • Restructuring delay, may hit the wrong
    creditors?Bankia, but did not deter SNS Reaal.

Source Finpolconsult.
31
Fiscal Expenditure vs. CostLoss Expectation of
Recaps
Fiscal Loss Based on 2012 Book Value
  • Question
  • What share value does government acquire with a
    given expenditure?
  • Chart assumes 100 price/book ratio of acquired
    bank stock, i.e. full capital gap has been
    detected and adequately provisioned for.
  • Result
  • 7 sample bank aggregate fiscal loss would have
    eaten up 30-35 of ESM capital.

Source Bank reporting, national central banks,
Finpolconsult.
32
Fiscal Expenditure vs. CostLoss Expectation,
Extended Country Sample
Fiscal Loss Based on 2012 CT1 Book Value
  • Additional result
  • SNS Reaal with small fiscal profit, based on
    (possibly heroic) assumption of no additional
    losses,
  • Deep bail-in cases (Laiki, Amagerbanken) show
    high loss for government as government gives up
    initial recapitalization,
  • Median expected loss ratio for government is 75.

Source Bank reporting, national central banks,
Finpolconsult.
33
Fiscal Cost of Bank ResolutionMethodology
Example, Spain
  • Recovery expectation matters !!
  • ECB repo is both super-senior and collateralized,
  • ECB ELA at least super-senior (Cyprus),
  • Hybrid capital safer than shares,
  • Share injection after bail-in safer than before
    bail-in,
  • DESs share economic value with investors,
    haircuts dont.
  • Spain
  • Historic expenditure inflated by large
    guarantees.
  • Very large ECB/ELA exposure, e.g. Bankia alone
    EUR 74.5 bln,
  • Potential bad bank (Sareb) fiscal cost are not
    properly accounted for (guarantees).

Spain, Banking Program Accounting under Authors
Subjective Expected Loss Assumptions
Source FROB, Bank of Spain, Autonomous Research,
Finpolconsult assumptions and computations. DES
Debt Equity Swap
34
Discussion Topics
  • Bank capital and liquidity policies during crisis
  • Creditor participation before and during
    restructuring/resolution
  • Lessons policies and institutions for Europe

35
Bank Restructuring Resolution LawWhat did take
Europe so long?
  • In the U.S, the 1991 FDIC Improvement Act marked
    the turning point a full 9 years after Garn St
    Germain
  • Abolition of Open Bank Assistance (direct
    recapitalization),
  • Least Cost Resolution Approach (from taxpayer
    perspective),
  • ALL deposits became super-senior (separate act),
  • FDIC became only required to transfer insured
    deposits in a PA ?bail-in of large deposits.
  • Europe IKB to Cyprus is 5.5 years.. (but there
    was a template!)

FDIC Least Cost Resolution Game Changer 1991
36
Lessons LearnedResolution and Restructuring
  • A European Directive by 2018 is too late !
  • 10 years after Lehman exempts all likely
    current crisis cases,
  • EU KOM rule (Aug 1, 2013) disallowing state aid
    without prior junior bond bail-in less effective
    without the Directive (MPS case).
  • Exceptions should be avoided
  • At least junior bond bail-in,
  • Include Covered Bonds overcollateralization,
  • Systemic risk backdoor should be closed ?main
    risk is fiscal collapse,
  • ECB precautionary recapitalizations?
  • Complete Banking Union architecture
  • Build the European version of U.S. FDIC, to
    create vested interest in shorter time to
    restructuring and deeper creditor participation,
  • ECB has conflicts of interest as de-facto bank
    investor and cannot be a monopoly bank regulator
    from a fiscal perspective ? shared supervision.

37
EU FDIC Concept(Source DG Markt)
Single Resolution Fund
manages
ECB National Supervisors
COM
notify
Single Resolution Board
puts under resolution / sets resolution framework
contribute
instructs
supervise
National Resolution Authorities
provides funding
resolve
Internal Market
All banks
Failed bank
38
Lessons LearnedJunior Bond Capital Availability
Reconcile Basel and fiscal definitions of bank
capital !!
39
Challenges Ahead
  • Securities portfolios
  • Self-inflicted sovereign-bank doom-loop by
    banks rejecting diversification,
  • ECB has not enforced diversification, LTRO
    without conditionality,
  • Whichever-is-lower ratings are accepted - usually
    Canadian DBRS,
  • Arbitrary repo policies (e.g. Cyprus sov).
  • Loan portfolios
  • Kick-the-can corporate loans (EBITltinterest
    40-50 in ES, IT, PT),
  • Insufficient mortgage profitability related to
    indexed loans (Euribor, ECB refi),
  • Underperformance and market risk are NOT
    generally covered by Asset Quality Review.
  • Slow bank recapitalization due to rejection of
    bail-in means that Eurosystem imbalances could
    remain high.

Irish Mortgage Portfolio Funding, Stylized
Source above - Osnabrück University, below -
Finpolconsult.
40
USD Target Debate
41
Slides in Reserve
42
Discussion Topics
  • Historic bank capital and central bank liquidity
    policies
  • Central bank liquidity as a substitute for bank
    capital,
  • Initial bank recapitalizations Basel III
    reaction.
  • Creditor participation in European bank
    restructurings
  • Before restructuring/resolution voluntary
    liability management,
  • During restructuring/resolution haircuts vs.
    debt equity swaps, Good Bank vs. Bad Bank
    resolution approach,
  • Government view fiscal expenditure vs. fiscal
    cost.
  • Lessons learned banking sector policies and
    institutions
  • Policies sequencing of recaps, rank of
    government in recaps, options for tying fate of
    historic assets to historic liabilities, bank
    bond guarantees,
  • Institutions Supervisory and Resolution
    Mechanisms, deposit insurance.

43
Bank Capital PoliciesBasel II Definitions Proved
Obsolete
  • Basel II diagnosis
  • There were EUR 1 trillion in subordinated debt
    and hybrid capital per 2007 for 100 of the
    worlds largest banks (Fitch).
  • Most of which was not used for recapitalization.
  • Reasons
  • Weak instrument setup create legal ambiguity
    (contractual, revaluation and termination
    clauses, tied to GAAP),
  • Connected insiders demand Open Bank Assistance
    (Unser /nuestro /µa? Lehman),
  • Insufficient options for bank supervisors to
    intervene outside the insolvency scenario.

Source FitchRatings (2010)
44
Bank Capital PoliciesBasel III Transition - A
Problem During Crisis
  • Basel III (Dec 2010)
  • New Core Tier 1 definition no revaluation, all
    capital is permanent, hybrid is limited.
  • Strongly rising CT 1 demands while second leg of
    financial crisis unfolds.
  • Incentivizes buybacks, early calls of Tier 2 and
    non-eligible Tier 1 instru-ments.
  • The PROBLEM
  • This is all fine for going concern banks ..
  • .. while it somehow ignores progress in bank
    restructuring / resolution law (UK, DE), which
    has widened the bail-in definition.
  • But what happens, when a bank in difficulties
    starts buying core capital by selling extended
    capital?

45
Greek Bank Subordinated DebtPull to Par !
Piraeus Bank
Expected gross 600 million CT1 effect
(disregarding the opportunity cost) from
voluntary LME looks ambitious. Piraeus May sub
LME had 10 acceptance.
Alpha Bank
EFG Eurobank
Nationalized EFT Eurobank is the only core bank
that has offered a debt equity swap per May 2013
to sub bond investors, but it was voluntary.
Other banks offered cash LME (Alpha 55c, Piraeus
55c). Alpha, Piraeus and NBG also offered cash
to hybrid capital investors (35-40c).
Compare to Anglo Irish 2010 sub LME investors
demanded 35-40, government offered 20,
demanding exit consent to punish
holdouts. Comparable legal situation (offshore
trust SPV-Issued) Liquidity management
exercises (Nov 12 CB report)
Source Onvista.de.
46
When Gone Concerns Buy Core Tier 1 Liability
Management Exercises in Spain
Bankia Liability Structure
Banco de Valencia Liability Structure
  • Voluntary LMEs became a popular sport in Spain
  • Late 2011 to June 2012 all banks got involved.
    Great diversity of offers.
  • Private banks partly aggressive (Santander with
    lg. haircuts) partly concessionary (Popular).
  • Some Cajas rather aggressive (Bankia voluntary
    DES, overleaf).
  • Yet, many Cajas offered or tried to offer
    concessionary deals to investors
  • Liberbank with EUR 1.2 billion capital gap in
    October offered in June 2012 to swap EUR 627 mln
    hybrids (preferentes) into 5 year deposits
    without haircut.
  • Late sweet Caja LME offers can be seen as having
    shifted mood in banking program sponsor countries
    in direction of SLE. Liberbank LMEs were
    intercepted by the Spain MoU.

Sources Banco de Valencia, Bankia reporting,
Finpolconsult computations. Note senior bonds
include covered bonds, which however largely
disappear from reporting as a technical effect
from large scale repo with the ECB.
47
When Gone Concerns Buy Core Tier 1 Liability
Management Exercises in Slovenia
Novo Ljubljanska Banka Cash Flow
Novo Ljubljanska Banka Liability Structure
  • Large LMEs of the two largest Slovenian banks
    during 2012 let to severe loss of bail-inable
    capital
  • NLB 2012 gain in CT1 of EUR 110 million. EUR 430
    million reduction of subordinated debt. Also
    reduction of senior unsecured debt by EUR 1,130
    million.
  • Maribor 2012 loss of EUR 90 million in
    subordinated debt.
  • Insufficient subordinated and senior unsecured
    debt, ex deposits, by restructuring date to
    support Good Bank approach.
  • ?Government-sponsored bad bank.

Source Bank Reporting, Finpolconsult.
48
Bank Capital PoliciesBad Bank Is Often Stealth
Public Recap
Bad Bank Model (Asset Swap Model)
  • Problems
  • Systematically unties the fate of junior (and
    senior unsecured) debt from the fate of assets.
  • Requires new equity provider for the bad bank
    (government, incl implicit e.g. Sareb).
  • Demands definition of a transfer prices today,
    despite great uncertainty?risk of
    subsidiesGermany Landesbanken 90 transfer
    price with gaps to be amortized by the selling
    bank over 20 years. Ireland/Spain far lower
    transfer prices, against full protection of the
    bank.
  • Low asset price growth environment creates risk,
    there are major differences between the 2010s and
    1990s (Sweden success story).

49
Fiscal Expenditure vs. CostLoss Expectation,
Extended Country Sample
Fiscal Loss Based on 2012 CT1 Book Value
Cash Drain to Junior Debt Investors and Policy
Score (Stylized)
  • Same methodology as before
  • Additional result
  • SNS Reaal with small fiscal profit, based on
    (possibly heroic) assumption of no additional
    losses,
  • Deep bail-in cases (Laiki, Amagerbanken) show
    high loss for government as government gives up
    initial recapitalization in order to claw back
    junior and partly senior debt,
  • Shallow bail-in cases (HRE, Dexia) vice versa,
  • Median expected loss ratio for government is 75.
  • Deep bail-in legislation may cure impact of long
    restructuring delay, but at high costs
  • SNS Reaal, Laiki, Bankia have hit new junior or
    senior creditor generations.

Source Bank reporting, national central banks,
Finpolconsult.
50
Holding on or Selling Now?Greek Warrant Policy
for Core Banks
Alpha Bank HFSF Warrant Pricing
Fiscal Loss Based on Target CT1 Book Value
  • Target CT 1 includes pre-provision income
    estimate for 2012 2014/15.
  • Greek banks have optimistic PPI estimates
    compared to Spain, prompting government to price
    warrants above stressed book values.
  • E.g. Alphabank at target CT 1 level 10 (44c)
    150 2012 book (30c).
  • Is forgiving a potentially large upside optimal
    fiscal policy?
  • Greek government locks in historic
    recapitalization losses, but cuts additional loss
    expectation,
  • GGB haircuts essentially treated as if they were
    an external shock to banks.

Source Bank Reporting, national central banks,
Finpolconsult.
51
Fiscal Cost of Bank ResolutionQuasi PSI-Reversal
in Greece, Cyprus MoUs
  • Greek program has produced both far higher cost /
    GDP and even higher cost / expenditure than
    Spain.
  • Cost expenditure inflated by clear political
    intention to shield system from GGB PSI losses.
  • Calculatory PSI reimbursement between 60 (NBG)
    and 100 (rest, based on 2012 CT1)
  • Result will likely be OSI.
  • Cyprus MoU II (Mar 13) saved ca half of the
    fiscal cost over MoU I (Nov 12)
  • EUR 5 bln under MoU II (mostly smaller banks
    EUR 1.8 bln Laiki) compared to
  • EUR 10 bln under MoU I.
  • Subject to additional evaluation of large
    Cypriotic banks Q II 2013.

Greece, Banking Program Accounting under Authors
Subjective Expected Loss Assumptions
Source Bank and press reporting, Finpolconsult
assumptions and computations. Note very limited
data officially provided by HFSF. Without bond
guarantees.
52
Some CounterfactualsEarly Intervention is Key to
Protect Government and Depositors
Alpha Bank
Bankia/BFA
  • Assume a 10 deposit bail-in/ zero fiscal
    bail-out rule.
  • Then the break-even restructuring dates were
  • Bankia Q IV 2010 Anglo Irish bank was
    nationalized in Jan 2009 !!
  • Banco de Valencia Q IV 2010
  • EFG Eurobank Q IV 2011
  • Alphabank Q I 2012
  • Laiki Bank 10 deposit threshold always missed,
    but the uninsured deposit ratio was 50..
  • Bank of Cyprus 10 deposit threshold always
    missed, but.
  • Piraeus only case in a 7 bank list where the
    deposit insurer would have had to disburse in a
    super-senior rank scenario.

Laiki Bank
Source Bank reporting. 7 caja reporting for
2010, Bankia senior bonds minus 50 assumed
covered bonds, assumed to be the average
uninsured deposit ratio outside Cyprus. CT 1
needs include early gov recaps. Finpolconsult.
53
Lessons Learned Bank Resolution Policies
  • Establish clear limits for government open bank
    assistance
  • Direct recapitalization so far means transfers
    to bank investors. Invest in higher ranks only
    (e.g. senior hybrid capital) to avoid deep
    subordination. Ex U.S. in Fannie Mae.
  • Generally avoid early government
    recapitalizations before at least junior debt has
    been bailed in. Early public recaps raise the
    threshold for future private investor bail-in, if
    losses widen.
  • Minimize delay to restructuring
  • Acting late may cost government and in the
    extreme case depositors dearly (Cyprus),
  • Acting late hits new junior/senior debt investor
    generations, and bails out old ones.
  • The macroeconomic benefits of delay (soft
    landing) are dubious.

54
Lessons Learned Bank Resolution Policies
  • Increase depth of bail-in while stabilizing
    investor relations
  • Promote explicitly layered and granular liability
    side (by law or contractual conditions),
    stabilizing ex-ante expectations,
  • Do not expropriate investors during bail-in
  • Limit haircuts to demonstrable losses (always
    observing that shares are haircut first),
  • Preferable bail-in approaches to match
    uncertainty are debt equity swaps into separate
    share classes for bailed in debt, or credit
    default swaps referencing the original portfolio,
  • Observe initial ranks. E.g. swap senior
    bonds/uninsured deposits into dated junior bonds,
    junior bonds into hybrid capital, hybrid capital
    into shares,
  • Depending on the situation after bail-in, permit
    shareholders to regain full control, e.g. through
    warrants or reconversions or prepayments of
    bailed-in capital,
  • If significant parts of the bank are to be
    unwound making bail-in infeasible, prefer the
    Good Bank over the Bad Bank approach,
  • Avoid ad-hoc rank changes in the neighborhood of
    any mandatory liability management, even if
    government is hit.

55
Lessons LearnedGeneral Bank Capital / Liquidity
Policies
  • General bank capital policy
  • Reconcile Basel III and Eurozone-fiscal
    definitions of bank capital (8 RWA?),
  • Revoking excessive focus on Core Tier 1 for gone
    concern banks is sine-qua non (Slovenia!!), rules
    for voluntary LME policies.
  • Bank liquidity policy
  • European Central Bank to curb lending to zombie
    banks, enforce restructuring.
  • Discussion over Target II can be largely retired
    if lending is to banks with sufficient capital
    levels (but see portfolio issues).

56
Banking Union Institutions
  • Banking Union architecture
  • Build the Second Pillar now (European version of
    U.S. FDIC), to create vested interest in shorter
    time to restructuring and deeper creditor
    participation,
  • ECB has conflicts of interest as de-facto bank
    investor and cannot be a monopoly bank regulator
    from a fiscal perspective ? shared supervision,
  • Three-party division of labor competition/state
    aid policy (KOM), liquidity policy (ECB),
    resolution/deposit insurance (TBD).
  • European resolution authority detail
  • Initial resolution authority ( de-facto deposit
    insurer) permitted to XX years learning curve,
  • Is (ex officio) bank supervisor from the start
    (existing models, e.g. Bafin / Bundesbank),
  • Handles pan-European bank-sponsored funds, on top
    of national funds,
  • Possible ESM backup under strict conditions (e.g.
    credit lines as U.S. Treasury to FDIC),
  • In the long-term, single European fund,
  • Integration of regional banks is paramount (given
    crisis causes) !
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