Thesis Cross-border resolution of banking groups: old demons, current progress, future challenges PNEVMONIDIS, Ilias Abstract This contribution focuses on the development of bank resolution regimes as a credible antidote to the ‘too big to fail' problem. The main objective of the analysis is to demonstrate the repercussions and challenges resulting from the implementation of bank resolution schemes on a cross-border level. This work is a selective survey of specific legal questions, which remain relatively unaddressed by academic literature and international standard-setting bodies (e.g. bank resolution triggers or safeguards for bank creditors under bank resolution) or still problematic (e.g. resolution planning or cooperation and information exchange between resolution authorities), in particular when applied in a cross-border context. The author aims to shed more light to the complexities of cross-border bank resolution while trying to answer to the fundamental question: have we ended the ‘too big to fail' problem? Reference PNEVMONIDIS, Ilias. Cross-border resolution of banking groups: old demons, current progress, future challenges. Thèse de doctorat : Univ. Genève, 2014, no. D. 895 URN : urn:nbn:ch:unige-483624 DOI : 10.13097/archive-ouverte/unige:48362 Available at: http://archive-ouverte.unige.ch/unige:48362 Disclaimer: layout of this document may differ from the published version. 1 / 1 Cross-border Resolution of Banking Groups: Old Demons, Current Progress, Future Challenges Ilias Pnevmonidis Thèse de Doctorat Sous la direction du Professeur Luc Thévenoz (Références à jour au 1er janvier 2015) Faculté de droit de l’Université de Genève Imprimatur No 895 “As you set out for Ithaca hope your road is a long one, full of adventure, full of discovery” Konstantinos Kavafis, Ithaca, 1911 This work is the result of a four-year ‘journey’ in the passionate world of international banking practices and the cross-border aspects of financial crisis management. It has not been an easy task navigating past the ‘Laestrygonians’ and ‘Cyclops’ of financial crashes but I hope this work can shed some more light on the complexities of cross-border bank resolution. I owe my deepest gratitude to my Phd director, Prof. Luc Thévenoz, for his faith in this ambitious project, his continuous guidance and support during these four years. I am also grateful to Prof. Anne Héritier Lachat for opening new windows for me in the field of bank supervision and cross-border regulatory cooperation. I am heartily thankful to Prof. Henry Peter for his collaboration in the preparation of the chapter on resolution triggers and his comments on corporate law aspects of bank resolution. I would also like to thank Prof. Corinne Zellweger- Gutknecht for taking the time to read this text and providing me with very useful remarks. I feel indebted to all the persons that have been available for interviews during the research process. Special thanks go to Dr. Eva Hüpkes, whose work has been an inspiration for my PhD thesis and who gave me the honour of becoming part of the jury of my PhD defense. I am very grateful to Prof. Rashid Bahar, Dr. Hans Kuhn, Dr. Reto Schiltknecht, Christopher McHale and Roger Künzle for the valuable time they all dedicated to my questions. Finally, I would like to thank Mrs Kate Welch as well as my friend Colby Mangels for proofreading various versions of this text. Remaining language mistakes and typos are solely my fault. This work is dedicated to my family and friends: for always encouraging me to reach new limits, for pushing me to become a better person, for celebrating the good moments and for being there during every crisis. Summary Summary .......................................................................................................................... 1 List of abbreviations ......................................................................................................... 3 Introduction ..................................................................................................................... 5 The 2008 financial meltdown .................................................................................................... 5 The development of bank resolution regimes as an antidote to the TBTF problem ................... 10 The purpose and the interest of this contribution .................................................................... 13 Plan of the analysis ................................................................................................................. 15 Part I: The international proliferation of bank resolution schemes ................................... 17 Chapter 1: Three stories of horror and one story of hope on bank failures ................................ 17 1.1 The Fortis case: the story of a disorderly cross-border resolution ......................................................... 17 1.2 Lehman Brothers: the bank collapse that shook Wall Street and the global financial system .............. 22 1.3 UBS crisis: the orchestrated intervention that rescued the Swiss banking sector ................................. 30 1.4 Banco Espirito Santo: when bank resolution works reasonably well ..................................................... 35 Chapter 2: Bank resolution definition and regulatory developments with regard to bank resolution regimes .................................................................................................................. 41 2.1 Defining bank resolution ........................................................................................................................ 41 2.2 Domestic bank resolution regimes ......................................................................................................... 47 2.3 Transnational debates on bank resolution ............................................................................................. 66 Part II: The main aspects of bank resolution practices ..................................................... 95 Chapter 3: Bank resolution objectives ..................................................................................... 95 3.1 Distinctive characteristics of bank resolution objectives ....................................................................... 95 3.2 Prioritisation of resolution policy objectives ........................................................................................ 101 Chapter 4: Resolution triggers ................................................................................................ 104 4.1 Definitions ............................................................................................................................................ 104 4.2 Current regulatory approaches to triggering events ............................................................................ 108 4.3 The quest for a suitable trigger ............................................................................................................ 115 4.4 Competent ‘whistleblowers’ of an imminent crisis .............................................................................. 128 4.5 Concluding remarks on resolution triggers .......................................................................................... 131 Chapter 5: The competent resolution authorities .................................................................... 132 5.1 Bank supervisors as resolution authorities .......................................................................................... 133 5.2 Central banks exercising supervisory and resolution tasks .................................................................. 137 5.3 The lead resolution authority ............................................................................................................... 141 Chapter 6: Main resolution tools ............................................................................................ 145 6.1 Bridge financial institutions .................................................................................................................. 145 6.2 Sale of business tool ............................................................................................................................. 152 6.3 Asset separation tool ............................................................................................................................ 160 6.4 Bail-in within bank resolution ............................................................................................................... 164 Chapter 7: Shareholders’ and creditors’ rights under bank resolution ...................................... 184 7.1 The role of shareholders in bank resolution ........................................................................................ 185 7.2 The treatment of creditors’ rights under bank resolution schemes .................................................... 199 7.3 Essential safeguards under bank resolution for shareholders’ and creditors’ rights ........................... 208 1 7.4 Concluding remarks .............................................................................................................................. 224 Chapter 8: Resolution planning .............................................................................................. 226 8.1 ‘Know thyself’ and ‘prepare your own funeral’ .................................................................................... 226 8.2 Distinction from analogous crisis management requirements