BBVA Paper on Resolution Regimes in Latin America

AAEAAQAAAAAAAAD6AAAAJDExNGQ4Y2MzLWI2MTUtNDIyMC1iNDUwLTgyMWZhODVlY2ViYwThe research arm of BBVA, the Spanish bank, has just released a comparative study on resolution regimes in Latin America, assessing the extent to which they comply with the Key Attributes of Effective Resolution Regimes for Financial Institutions.

“Latin America has ample experience in dealing with banking and financial crises, for example during the 1980s and 1990s. As a result of this, the laws of many countries in the region comprise detailed resolution regimes whose main goal is to deal with banking failures in an orderly way, preserving financial stability and avoiding bank runs. As opposed to Europe and the USA, Latin America has barely been affected by the recent financial crisis. As such, countries from this region do not feel the rush to implement regulatory reforms in this field. Currently, the majority of the resolution frameworks are very advanced although they are not fully aligned with the KAs.”

The Key Attributes were agreed after the financial crisis with a view to empowering the regulators to rehabilitate or wind down failing banks without using government resources.

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Renzi’s short-term fix to the banking challenge in Italy

dbacd017-1709-4c94-8e6b-15e770bbb1fcItaly’s decision to issue guarantees to assist banks in selling their portfolios of bad loans shows the political limits of bail-in, a regulatory tool intended to transfer the risks of banking from taxpayers to the creditors and shareholders of banks, argues the FT’s editorial.

“Italy’s financial system produces too many bankers and not enough credit, Matteo Renzi has long argued. The deal the Italian prime minister has reached this week with the European Commission, over government guarantees to assist banks in selling their portfolios of bad loans, while far from perfect, could eventually help to address both problems. However, even if this helps to calm markets and defuse acombustible political situation, it will be no substitute for broader reforms to a fragmented and inefficient sector.”

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Novo Banco’s selective bail-in a test to the EU’s new resolution regime

b34ac93a-e64b-4881-9c68-a7f053f0d039.imgBank of Portugal’s selective transfer of bonds from Novo Banco back to Banco Espírito Santo is the first test to the “no creditor worse off” rule under EU’s new bank recovery and resolution regime. It remains to be seen whether this measure was a one-off now that the Single Resolution Board has taken over from national resolution authorities.

“Portugal’s central bank has offered to partly compensate Novo Banco bondholders who lost money when their securities were transferred to a “bad bank” last month in a bid to ease tensions with the government and furious international investors.”

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Novo Banco: picking losers

Investors should price in the risk that EU authorities may exclude from bail-in bondholders of the same class, the Financial Times’ Lex column argues.

“Banks in urgent need of capital have no easy options. State bailouts sow moral hazard and raising equity or selling assets is hard, particularly at a moment of public weakness such as the aftermath of a failed stress test. The fashion now is for bondholders to step up and absorb losses, almost as if they owned equity. Fairness and prudence require that losses be dispersed evenly across all bondholders — so the hit is painful to all, but lethal to none.”

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Investors cry foul over bank bail-ins

New EU bail-in rules spread fear among large depositors and senior bondholders, the FT reports.

40107a74-07b0-4bde-8886-8ed32c4e623c“In both the Greek and Italian cases, banks were rushed into recapitalising before the new EU regime came into force on January 1, which could have meant losses for large depositors. When depositors have been bailed in before — such as in Cyprus three years ago — it has caused public fury and economic instability.

However, it is the Portuguese situation that has most upset investors. The central bank chose five senior bond issues out of a total of 52 to move from Novo Banco to the “bad bank” it set up to hold its toxic assets after a bailout in mid-2014.”

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Eurozone bank bond issuance to stagnate

Bank bond issuance falls in the face of low growth, but new rules on total loss-absorbing capacity (TLAC) may prompt the need to refinance existing debt, the FT reports.

a8602ef1-de1f-452b-a667-7c21d558fae2“The need for banks to raise capital and other “loss-absorbing” securities may in fact provide some support for new issuance, in particular through refinancing. Zoso Davies, an analyst at Barclays, suggested that new regulation — specifically a need for banks to increase their total loss-absorbing capacity (TLAC) — will be supportive of the need for banks to refinance existing debt, rather than letting it expire. He estimates bank issuance will rise as a result.”

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