José Pedro Fazenda Martins, Vieira de Almeida & Associados, Portugal
1. Legal framework
The framework for closed bank resolution was adopted in 2012 by Decree-Law nº 31-A/2012 and was amended in the wake of the BES-affair, by Decree-Law 114-A/2014 and Decree-Law nº 114-B/2014, which entered into force early August 2014, with the purpose of entitling the Banking regulator (“Banco de Portugal”) to impose resolution measures on banks, inter alia, to create a new legal entity that takes forward the banking activity (“bridge-bank”) and leaving all the trouble in the “bad bank”.
Resolution measures may involve stripping of assets and liabilities from the distressed or failing bank to a bridge-bank (the so called “good bank”).
The total amount of liabilities to be transferred to the new entity cannot exceed the amount of assets at its disposal.
Banco de Portugal is entitled to incorporate and adopt the articles of association of the good bank by a sole decision of its Board. The share capital of the good bank is subscribed by the so-called Resolution Fund (which is self-funded by the industry, which is also a legal public entity, can, in certain circumstances, receive loans and guarantees from the State) and the bank is entitled to take up banking business without the previous inscription in the Commercial Registrar, continuing the activity of the original troubled bank. No authorisation of the Competition Authority is required for this purpose.
Third parties rights based on change of control or acceleration clauses cannot be exercised against the good bank, in order to protect the integrity of the assets allocated to it.
The Board of the bridge bank is appointed by Banco of Portugal, under a proposal of the Resolution Fund.
The good bank is brought up to be sold or unwound. Its terminus is set by the law (2 years), but Banco de Portugal can avoid any risk of a fire sale postponing the terminus up to a maximum of 5 years, in order, for instance, to allow the closing of any negotiations for the sale. Disposal of the assets or of the shares of the good bank can be made totally or partially. Partial disposal of shares should be put into perspective: the law should be construed as allowing selling in tranches to different acquirers of the whole share capital of the bank. However, it does not allow the bank to survive as a bridge bank for a non-specified period of time with only a minority part of the share capital in private hands.
3. Bad-bank and bail-in
The Banco de Portugal is entitled to select assets and liabilities to be transferred to the good bank. The remaining (bad) assets and liabilities will be kept in the troubled bank, which loses its banking licence and becomes a special vehicle to be liquidated.
There are, however, some assets and liabilities bound by the law to remain in the bad bank’s perimeter, namely the obligations of the original bank before qualifying shareholders, former members of the Board of Directors and Supervisory Boards and other closely related persons, including some members of their families. This includes, inter alia, cash deposits held by these persons with the original bank, which, to some extent, can be deemed a legal sanction imposed on these persons or entities. Creditors (according to their ranking) and shareholders’ rights which were not transferred to the good bank are only enforceable against the bad-bank.
The amount of assets kept in the bad-bank are generally insufficient to satisfy all these interests. However, in practice, this means creditors and shareholders bail-in the bank.
The extension and perimeter of the bail-in is variable and depends on the decision of Banco de Portugal. For instance, in the recent case of BES, Banco of Portugal spared senior bondholders and unsecured deposit holders from bailing-in the bank, by transferring their rights to the perimeter of the good-bank.
4. Bail-in and common winding up procedures
The law sets forth the “no creditor worse-off position” principle according to which, as a result of a resolution measure, no creditor can be subjected to a loss higher than the loss he would incur if the original bank had been wound up.
For such purpose, any difference is transformed into a credit towards the Resolution Fund, shifting some of the burden of the specificity of bail-in measures to the banking system as whole.
Nevertheless, this is crucial to avoid any sort of criticism based on expropriation of creditors caused by the asset stripping required to create the good-bank.
Resolution measures protect taxpayers and mitigate systemic risk, imposing losses mainly on shareholders, other equity product holders and junior bondholders.
Thus, from now on, investors in securities issued by banks have a different and better perception of risk, which is, in fact, similar to the risk taken by investors in other companies. This could have some impact on capital markets in the short run, but will reduce moral hazard and contribute to healthier functioning of those markets in the long run.
José Pedro Fazenda Martins, Vieira de Almeida & Associados (email@example.com)