Special bank resolution and shareholders' rights: balancing competing interests

Abstract

Purpose -An effective bank resolution regime requires taking action while the bank still has positive net worth and shareholder claims still have economic value. Such actions raise a number of legal issues with respect to the rights of shareholders. This paper aims to consider how to strike a balance between the need to protect the legitimate rights of shareholders and the need for a prompt and rapid action and a failure resolution mechanism that minimizes disruptions to the financial system and preserves market discipline. Design/methodology/approach -The paper examines the nature of the shareholders' rights and the legal protection afforded to them. In the European context, the relevant sources of law are the European Convention on Human Rights and the applicable community legislation. It considers different options for resolution within this framework ranging from a pre-packaged resolution decided by the shareholders ex ante to the outright divestiture of the shareholders once certain regulatory thresholds are breached while the bank still has positive net worth. Findings -The curtailment of shareholder rights should seek to generate appropriate incentives for shareholders and other stakeholder and achieve broad objectives of enhancing predictability and maintaining public goods, while at the same time providing for due process, proportionality and adequate compensation. Practical implications -The paper presents options on how to reform existing frameworks in order to facilitate bank restructurings in a crisis. Originality/value -The paper discusses key elements that policy makers need to consider in the design of a regulatory framework for early intervention and resolution.

CCP resolution, loss allocation and shareholders’ rights

“…With a view to their fundamental rights, where a resolution action would consist in a shareholder’s divesture with a positive net worth, Hupkes (2009) highlights that shareholders should be paid an adequate compensation. Interestingly, the author notes that such compensation could consist in a monetary payment or take other forms which would give the former shareholders a claim on the future earnings of the bank .…”

“…preserving the public interest and the taxpayers’ money), possibly involving resolution actions while a bank or, in our case, a CCP has still positive net worth and is not yet insolvent, and the rights of shareholders [Alexander (2009), Babis (2012) and Zhou et al (2012)]. Different options have been investigated by Hupkes (2009) in the case of banks, ranging from a pre-packaged resolution decided by the shareholders ex ante to the outright divesture of the shareholders once certain regulatory thresholds are breached, with the bank still having a positive net worth.…”

“…Attinger (2011) further notes that any resolution regime – and any option that we will envisage later in this paper – to be lawful must satisfy the requirements of human rights provisions, namely, the First Protocol to the European Convention on Human Rights (ECHR) and Article 17 of the Charter of Fundamental Rights of the European Union (the “Charter”) . Following notably Hupkes (2009), this means in practice that any interference between the resolution regime and shareholders’ rights has to meet the following key principles: be duly justified by an overriding public interest; be provided by law (i.e. the resolution regime needs to be transparent and predictable such that any interference with property rights is not arbitrary); and respect the principle of proportionality (i.e.…”

Developing a Framework for Effective Financial Crisis Management

“…In many instances the steps to recapitalise a bank are initiated by the prudential supervisor. But the success of the rights issue offered by the institution will essentially be dependent on the market's confidence in the institution (Ferran 2008;Hupkes 2009). If it is not evident, the FSN players may intervene with public funds to recapitalise the institution.…”

Retail ring-fencing of banks and its implications

“…UK corporate insolvency law was inadequate in dealing with the financial crisis. Corporate insolvency law 'deals only with institutions that are already drained of economic value' (14). This is too late for banks.…”