CFS W ORKING P APER No. 2013/04 The Capital Structure of Banks and Practice of Bank Restructuring Hans-Joachim Dübel Center for Financial Studies Tel: +49 69 798-30050 Goethe University House of Finance Fax: +49 69 798-30077 Grüneburgplatz 1 60323 Frankfurt am Main www.ifk-cfs.de [email protected] CFS Working Paper Series The Center for Financial Studies, located in Goethe University’s House of Finance in Frankfurt, is an independent non-profit research center, funded by the non-profit- making organisation Gesellschaft für Kapitalmarktforschung e.V. (GfK). The CFS is financed by donations and by contributions of the GfK members, as well as by national and international research grants. The GfK members comprise major players in Ger- many’s financial industry. Established in 1967 and closely affiliated with the University of Frankfurt, it provides a strong link between the financial community and academia. CFS is also a contributor to policy debates and policy analyses, building upon relevant findings in its research areas. The CFS Working Paper Series presents the result of scientific research on selected topics in the field of money, banking and finance. The authors were either participants in the Center´s Research Fellow Program or members of one of the Center´s Research Projects. If you would like to know more about the Center for Financial Studies, please let us know of your interest. Prof. Michalis Haliassos, Ph.D. Prof. Dr. Jan Pieter Krahnen Prof. Dr. Uwe Walz Center for Financial Studies Tel: +49 69 798-30050 Goethe University House of Finance Fax: +49 69 798-30077 Grüneburgplatz 1 60323 Frankfurt am Main www.ifk-cfs.de [email protected] The Capital Structure of Banks and Practice of Bank Restructuring Eight Case Studies on Current Bank Restructurings in Europe Final Report Study commissioned by Center for Financial Studies University of Frankfurt By Hans-Joachim Dübel Finpolconsult, Berlin Assistance Malte Daniels Ioana Bejan Berlin October 8, 2013 List of Contents Executive Summary .............................................................................................................................................. iv Introduction ........................................................................................................................................................... 1 Focus and Purpose ................................................................................................................................... 1 Case Selection .......................................................................................................................................... 1 Methodology and Data .............................................................................................................................. 2 Structure .................................................................................................................................................... 3 Bank Case Studies .................................................................................................................................................. 4 Anglo Irish Bank ........................................................................................................................................ 4 Hypo Real Estate .................................................................................................................................... 10 Amagerbanken ........................................................................................................................................ 18 Bankia ..................................................................................................................................................... 22 Dexia ....................................................................................................................................................... 31 SNS Reaal Group ................................................................................................................................... 37 Cyprus Popular Bank (‘Laiki’) .................................................................................................................. 43 Alpha Bank .............................................................................................................................................. 52 Synopsis of Empirical Findings ............................................................................................................................. 59 Participation of the Capital Structure in Financing the Capital Gap ........................................................ 59 Expected Loss From Participation .......................................................................................................... 61 Expected Loss Distribution - Government vs. the Capital Structure/Private Sector ............................... 62 Synopsis of Policy Lessons ................................................................................................................................... 63 Macro level (regulatory forbearance and creditor participation policy) ................................................... 63 Micro level (bank restructuring policy and investor relations) ................................................................. 64 Annex .................................................................................................................................................................. 68 Abbreviations .......................................................................................................................................... 68 Glossary .................................................................................................................................................. 69 Literature ................................................................................................................................................. 70 Additional Data and Material ................................................................................................................... 72 Finpolconsult – Bank Capital Structure and Restructuring Europe ii Acknowledgements The author thanks Jan Pieter Krahnen and Tobias Tröger of the Center for Financial Studies at the Uni- versity of Frankfurt for providing financing for this research project. He is indebted to numerous contacts in policy institutions, banking and capital markets institutions and the research community that contributed to the study through additional data, review and discussion. Note This study is a companion piece to “Creditor Participation in Banking Crisis in the Eurozone – A Corner Turned?”, June 28, 2013. Both studies were written jointly under a co-finance scheme. This study therefore contains occasionally verbatim passages from the earlier published study. Finpolconsult – Bank Capital Structure and Restructuring Europe iii Executive Summary This study presents an empirical analysis of capital and liability management in eight cases of bank re- structurings and resolutions from eight different European countries. It can be read as a companion piece to an earlier study by the author covering the specific bank restructuring programs of Greece, Spain and Cyprus during 2012/13. 1 The study portrays for each case the timelines between the initial credit event and the (last) restructuring. It proceeds to discuss the capital and liability management activity before restructuring and the restructur- ing itself, launches an attempt to calibrate the extent of creditor participation as well as expected loss by government, and engages in a counterfactual discussion of what could have been a least cost restructur- ing approach. Four of the eight cases are resolutions, i.e. the original bank is unwound (Anglo Irish Bank, Amagerbank- en, Dexia, Laiki), while the four other banks have de-facto or de-jure become nationalized and are await- ing re-privatization after the restructuring (Deutsche Pfandbriefbank/Hypo Real Estate, Bankia, SNS Re- aal, Alpha Bank). The case selection follows considerations of their model character for the European bank restructuring and resolution policy discussion while straddling both the U.S. (2007 - 2010) and the European (2010 - ) legs of the financial crisis, which each saw very different policy responses. The drivers of creditor participation identified in this study are: • delay between first risk realization and comprehensive restructuring - a negative driver. Restructuring delay provides room for evasion by creditors whose interests are aligned with those of bank managers trying to preserve future issuance options for near-insolvent banks against the odds. Redemptions, lia- bility management exercises and early calls have in this way reduced the bail-inable capital over time in a number of cases substantially (Anglo Irish Bank in 2009, Bankia, Dexia, Laiki, Alpha Bank). This is particularly true for hybrid capital and subordinated debt first in line to take losses. Also, restructuring delay favors creditor rotation, which has maneuvered retail customers (Bankia, SNS Reaal, Laiki) and government (universal) into riskier positions of the capital structure. • depth of participation imposed on the capital structure both before and during the restructuring - a posi- tive driver. Depth is associated with the legal options available to supersede liability instrument con- tracts outside insolvency, e.g. a conducive bank restructuring and resolution law (existed for the cases of Amagerbanken, Bankia, SNS Reaal,