Michael West reports on the introduction of bank resolution protocols
Financial regulatory lawyers returned from their holidays this year to a lot of calls on one topic – bank resolution. The implementation this year of the EU’s Bank Recovery and Resolution Directive (BRRD) combined with the Greek crisis has pushed an issue that’s been simmering for years back up the list of priorities for bank and investment firms’ legal teams.
So far BRRD’s roll-out by member states has been uneven, with the European Commission stating that 11 had yet to adopt appropriate measures in June and unforeseen complexities arising as rules interact with different national insolvency regimes, but consequences for advisers from the age of living wills are becoming more apparent.
The EU legislation – forged as a response to the 2008/09 banking crisis – require that plans are created for banks to allow for an orderly resolution, either through bailing in creditors or selling off parts of the business, to avert a full collapse.
The directive is also a stepping stone for eurozone banks, with the separate Single Resolution Mechanism due to come into force in 2016, which will create a body in Brussels to oversee resolution measures for eurozone banks.
While bank collapses are obviously rare events – outside of banking crises at least – the preparations of such living wills promises an interesting stream of work for finance advisers.
‘BRRD is intended to remove the panic caused by bank insolvencies such as Lehman. A bail-in should result in a more orderly process in terms of recovery or resolution where required,’ says Tony Anderson, partner at Pinsent Masons.
Akin Gump Strauss Hauer & Feld restructuring partner James Roome observes: ‘The resolution of a failed bank is intended to be principally an administrative rather than a judicial matter. If a bank collapses in a member state, a lot of work will need to be done to design and implement the resolution steps but without any US-style court oversight.’
In theory this should mean a front-loading of work for lawyers on prevention and less of an avalanche after a collapse, though how that theory plays out in practice is debatable given that this is new territory.
The most significant mandates see law firms advising on the strategic division of the business, how parts of the bank would be sold off and the internal restructuring of assets. Pitching for the work can require assembling a diverse team, with experts needed to cover each of the banks’ major operations, and involves taking part in a time-consuming beauty parade to determine who will be gifted the work. But the final choice is set to reveal which firms are most favoured, argues Rob Moulton at Ashurst. ‘This kind of work is where you really find out where you stand on the trusted adviser list. It is bet-the-bank kind of work and they only entrust that to their closest counsel.’
‘This kind of work is where you really find out where you stand on the trusted adviser list. It is bet-the-bank kind of work and they only entrust that to their closest counsel.’
Rob Moulton, Ashurst
Even if firms miss out on the primary instructions, there is further work flowing from BRRD as resolution plans touch every part of the bank. Employment, outsourcing and IT contracts all require adaptation to formalise what would happen in a resolution scenario, and market standard documentation is yet to be developed.
While some of this can be handled by the larger banks’ in-house teams, they are obviously less often deployed on substantive incoming regulation. Pascal di Prima, partner at Simmons & Simmons, comments: ‘If you look at the big banks, they have decent in-house teams that can deal with many questions. So you help on a day-by-day basis at a very high level and on specialised topics, but if you look at the medium-sized and smaller banks they are overwhelmed by the regulation.’
But banks are not the only source of work, with the bail-in provisions seeing financial regulatory partners increasingly fielding calls from investors. White & Case partner Andreas Wieland comments: ‘We are seeing a lot of enquiries from institutional investors to understand what might happen if a banking crisis appears on the horizon. The market for bank regulatory instruments, Additional Tier 1 and Tier 2 instruments, are very sensitive to such developments. Once there are discussions, you immediately see it in the price because people are aware of the risks of being bailed in. It is different from the past when you could sit back and wait – markets have become much more sensitive.’
Combined, these new work streams paint a rosy picture for financial regulatory partners, whose main problem can be finding the experienced lawyers to do the work. But, after having previously had a low-profile in City law, financial regulation is finally winning a standing among practices and attracting some of the best young talent. And while other City finance practices are being squeezed either by the encroachment of New York terms or creeping commodification, prospects for financial regulatory specialists look good. Moulton concludes: ‘The question from banks used to be: “Can you help me do deals?” Now it is: “Can you help me manage my risk?”‘