Judicial Review

The exercise of extensive powers by authorities during the recovery and resolution process may interfere with constitutionally protected fundamental rights of stakeholder in a multitude of ways. Particularly relevant are the right to conduct a business and the right to property under the EU Charter of fundamental rights, as well as the takings clause under the US constitution. A balance needs to be struck between the aims and objectives of bank resolution and the rights of investors and the requirements of due process. This is normally achieved through expedited and limited judicial review. This chapter assesses whether and to what extent the respective procedures are in line with constitutional and fundamental rights requirements.

Early Intervention

The Financial Stability Board recommended that all national supervisors should have the mandate and powers to identify risks and intervene early in order to prevent unsound practices and take appropriate measures to reduce the impact of potential stresses on financial institutions and to safeguard against systemic risks. Accordingly, the BRRD and SRM contain new powers for the competent authorities to intervene early before an institution’s financial and economic situation has deteriorated to a point where resolution is the only viable alternative. The chapter starts with some theoretical reflections, focusing on the incentives of the actors involved. It then discusses the early intervention framework under BRRD and SRM and national transposition in the UK and Germany. It also covers the US prompt corrective action framework and early remediation under Dodd–Frank.

Winding-Up and Liquidation

Liquidation procedures may be relevant for unprofitable or defunct subsidiaries, even though other parts of a financial group may be successfully restructured. For certain types of financial companies, liquidation may be the only available process. The chapter provides an overview of the liquidation proceedings available for financial institutions in England, Germany and the US. It focuses on the English compulsory winding-up procedure and bank insolvency, the German general insolvency procedure with an enhanced role for BaFin as the competent authority, and the liquidation of broker-dealers in the US through a Chapter 7 stockbroker liquidation and under the Securities Investor Protection Act of 1970 (SIPA liquidation).

Financial Reform Efforts since the Global Financial Crisis—An Overview

The chapter provides an overview of the current state of the reform efforts in the jurisdictions under consideration with a focus on the institutional architecture, banking regulation, shadow banking, and financial market infrastructure. It briefly reviews the generally accepted causes of the global financial crisis and the eurozone crisis, as well as the reform agenda at global/international level. It summarizes the reform efforts in the EU and the US that are of particular relevance for the recovery and resolution of credit institutions and investment firms. These reform efforts form the context in which the new recovery and resolution regime must be viewed.

Recovery and Resolution Planning

Recovery and resolution planning represents an international consensus and is expected to significantly improve supervision, in particular with regard to systemically important institutions. With differences in detail on both sides of the Atlantic, the recovery and resolution planning regime is integrated into the ongoing supervision of an institution and essentially consists of recovery plans to be drawn up by institutions, resolution plans developed by resolution authorities, and the ongoing assessment of resolvability of institutions. Intra-group financial support agreements may play a significant role in this context. The chapter provides a critical assessment of these concepts with a focus on the political and cognitive obstacles (depiction-difficulty).

Introduction

The Introduction provides a brief summary of the background for the reform legislation on recovery and resolution in the European Union and in the United States, with a particular focus on the ‘too-big-to-fail’ problem. It gives an overview of the content of the Bank Recovery and Resolution Directive, the Single Resolution Mechanisms for the eurozone, and the Orderly Liquidation Authority under the Dodd–Frank Act. It further seeks to provide some terminological and conceptual clarity as regards the subject matter of the book, notably with a view to delineating supervision, resolution, and corporate insolvency. The structure of the book is summarized in outline.

The International Dimension: Cross-border Groups

The difficulties associated with the supervision and failure resolution of cross-border financial groups were among the key issues that came into renewed focus as a result of the global financial crisis. The cross-border dimension affects the recovery and resolution process in its entirety from the initial planning phase right through to liquidation. The chapter summarizes the elements of cross-border group law mentioned in previous chapters. It looks briefly at the US framework and the changes introduced through the Dodd–Frank Act. It discusses international jurisdiction of authorities and courts, the applicable law that governs proceedings, and the recognition and effects of foreign proceedings, in particular, in accordance with Directive 2001/24/EC on the reorganization and winding up of credit institutions and investment firms and the UNCITRAL Model Law on Cross-Border Insolvency. It also analyses the new European framework for co-operation in the cross-border group resolution context.

Corporate Rescue and Reorganization

The jurisdictions under consideration provide a range of options for effectuating corporate rescue or reorganization. Some of these procedures are long-standing and applicable across the board; others are new and financial institution-specific. In England and Wales, administration has been used successfully to restructure financial institutions in the past; the bank administration procedure is new and largely untested, whereas the investment bank special administration regime (SAR) has already been applied in several cases. Germany’s brand-new pre-insolvency procedures apply to credit institutions only, but do not look very promising when it comes to the restructuring of large, systemically important financial institutions. Chapter 11 of the US Bankruptcy Code is regarded as very effective. It was put to the test when Lehman Brothers filed for bankruptcy in the autumn of 2008. Many commentators believe that it has coped well. However, there is always room for improvement and an exciting reform debate is underway.

Overview and General Preconditions

The chapter provides an overview of the available resolution tools and powers in the jurisdictions under consideration. The remainder of the chapter focuses on the general preconditions for and effects of resolution proceedings, It covers the resolution triggers, notably the so-called ‘regulatory threshold’, and discusses the institutional framework for the initiation and control of the resolution process. Further key considerations are the independent ex ante and ex post valuations of the institution at issue and the write-down and conversion of capital instruments, as well as the general effects of resolution proceedings on the financial contracts to which the institution is a party.

Banking Sector and Corporate Structures—The Scope of the Recovery and Resolution Framework

The financial system is populated by a wide variety of different institutions, within and across jurisdictions. Their structure and legal nature is largely path-dependent on the applicable regulatory regime, which in turn may be the result of historical accident rather than conscientious planning. This chapter seeks to delineate the scope of application of the recovery and resolution frameworks. In this context it is necessary to have a closer look at the structure of the banking and financial sectors in the jurisdictions under consideration. Despite considerable convergence, significant differences remain. This has consequences for the prevalent corporate and organizational structures, which, in turn, have important implications for recovery and resolution planning and for the application of resolution tools and powers. Structural reform efforts seek to further improve resolvability.