International approaches to the regulation of insolvency of financial institutions

Before the events of the global financial crisis of 2008–2009 the approach to the question of the insolvency of financial institutions and, in particular, credit institutions was not to hinder their bankruptcy and liquidation in the event of signs of insolvency (bankruptcy). The idea was to ensure that the relevant procedures were put into effect at the earliest stage possible, which would allow us to more fully satisfy the claims of creditors and ensure the liquidation procedures themselves. In addition, the need to create mechanisms aimed at protecting depositors (both individuals and, in a number of countries, legal), and in some cases other retail consumers of financial services (for example, retail investors, policyholders) was recognized.

The crisis of 2008–2009 forced to adjust these approaches. In October 2011, the Financial Stability Board [1] issued a document entitled “Key attributes of effective insolvency regimes for financial institutions” [2](hereinafter – Key Attributes). The appearance of this document was primarily due to the fact that in connection with the increase in the number of international (operating simultaneously in several countries) financial institutions, cross-border bankruptcy issues have become increasingly important. In addition, it was necessary to standardize the experience of resolving the insolvency of financial institutions accumulated over the past decades in different countries. Note that the term “resolution resolution” is used simultaneously in two meanings, known to Russian law:

  • 1) and as measures to prevent bankruptcy,
  • 2) and how the bankruptcy proceedings, liquidation of a financial institution.

The document posed a dual challenge for countries: first, to try to preserve those institutions that are vital for the functioning of the economy, and second, to simultaneously reduce budget expenditures. As stated in the document itself, “their [key attributes] use should allow the authorities to reconcile the failure of financial institutions in an orderly manner without putting taxpayers at risk of loss in connection with providing support for solvency while ensuring the continuity of their important economic functions.” Basically, losses should be borne by shareholders and (a new idea in the matter of settling financial institutions!) By uninsured creditors (i.e. creditors whose claims are not protected by existing deposit insurance systems).

The bankruptcy resolution regime is considered in the Key Attributes as an addition to the existing mechanisms for the protection of depositors, policyholders and retail investors, i.e. the least protected groups of the population whose attitude towards the financial system, confidence in the financial system largely determine the level of its stability. The basic idea is not new, it sounds trivial, but nonetheless determines the content of the activities of financial authorities: to achieve a quick return, to unfreeze the assets of such groups of the population.

Key attributes divide all financial institutions into systemically important financial institutions (SZFR) and others. The former occupy a special place in the financial system – not only because of its size, but also because of the nature of the functions performed. In a sense, the idea of ​​Key Attributes is a modification of the old concept too big to fail (“too big to be bankrupt”). Only now can this concept sound like too important to fail (“too important to be bankrupt”). At the same time, the idea of ​​“significance” covers all areas of the financial sector – banking, insurance, as well as the work of payment and clearing systems.

The efforts of the financial authorities in this regard should be aimed at ensuring the continuity of such institutions. The concept of continuity, in turn, means that the NWFI must perform its socially and economically significant functions, regardless of changes in ownership, management and other elements of the management system.

The main question is how losses of financial institutions should be covered. The general principle proposed by the Key Attributes is as follows: the risk of loss of regulation by the regulatory system should be borne by the owners of financial institutions (and in this connection – we note from ourselves – it is extremely important to analyze their financial condition on an ongoing basis!) And then to subordinated, unsecured, uninsured creditors naturally taking into account the principle of priority.

According to the idea of ​​Key Attributes, government spending on maintaining financial institutions should be minimized. Moreover, by their actions, the state should not give rise to false illusions that it will be ready to provide financial support to financial institutions that have fallen into a difficult situation.

Given that the insolvency of financial institutions involves a very sensitive area in terms of social and economic interests of the population, the Key Attributes draw attention to the form of regulation of the relevant procedures: these procedures should “ensure the maximum possible speed and transparency, as well as predictability through legal and regulatory procedural clarity and preliminary planning for an orderly resolution. ”

An important factor for a modern financial system, which functions as a global financial system, is the cooperation of the financial authorities of various states and international financial institutions in overseeing the activities of financial organizations in general and in resolving their insolvency in particular. This cooperation should be based on a fair exchange of information. Due to the fact that information obtained as a result of supervision of financial institutions, not only contains elements of a trade secret (for example, information about the financial situation of an organization), but also other information protected by law, the Key attributes (following other documents of the Basel Banking Supervision Committee, IOSCO and other international cooperation organizations of supervisory authorities) direct the authorities of the state to ensure that the country’s legislation provides the relevant financial authorities with the authority to exchange information.

Incidentally, in the Russian Federation, the Bank of Russia has in accordance with the Law on the Bank of Russia [3]powers to exchange information with the banking supervisory authorities (Art. 51), supervision over the securities market (Art. 51.1). Thus, the Bank of Russia has the right to provide the central bank and (or) other supervisory authority of a foreign state, whose functions include banking supervision, the information and / or documents they need for banking supervision, including information containing bank secrets from credit organizations, banking groups, bank holdings and other associations with the participation of credit organizations in the course of their performance of supervisory functions, including conducting inspections of their activities, with the exception of eny, constituting a state secret (v. 51). In addition, the Bank of Russia exchanges information and (or) documents, including confidential, including containing information

  • 1) with the Multilateral Memorandum of Understanding regarding consultation and interaction and the exchange of information of the International Organization of Securities Commissions;
  • 2) an international treaty of the Russian Federation;
  • 3) a bilateral agreement with a foreign financial market regulator providing for the exchange of information, if the legislation of the foreign state provides for a level of protection of the information provided that is not less than the level of information protection provided for by the legislation of the Russian Federation (Article 51.1).

Key institutions pay particular attention to cases when a financial institution is international, i.e. represented in two or more countries. Experience shows that the financial authorities of the country of origin of the institute and its branch (or a company under control) seek, first of all, to settle the issue with respect to creditors – citizens, legal entities of the respective country, paying little attention to the priority of distribution of property. Cross-border bankruptcy issues are extremely complex and far from optimal settlement. But even more far from settlement are the implementation of measures to prevent the bankruptcy of such a cross-border financial institution. Key attributes insist in this regard that

Particular attention in the procedures for resolving insolvency, as already noted, should be paid to “systemically important financial institutions.”

The ideology of impact on the NWFI includes several components:

First, the NWFI should have a self-recovery and resolution resolution plan, including a group resolution resolution plan, which, in turn, should be checked on an ongoing basis as top-level corporate bodies, involving special companies (for example, auditing), and relevant financial institution.

Note that in the Russian Federation for the banking sector, the issue of the mandatory development of self-healing plans and financial sustainability plans by systemically important credit institutions was resolved in 2014, when changes to Art. 57 of the Law on the Bank of Russia [4] . In accordance with the norms of the cr. 57 The Bank of Russia is entitled to require credit organizations to develop and submit plans for reproducing

development of financial sustainability, including measures to ensure compliance with the requirements of the regulations of the Bank of Russia, as well as making changes to plans to restore financial sustainability, ensuring compliance with the requirements for their content. At the same time, systemically important credit organizations are obliged to develop and submit to the Bank of Russia plans for restoring financial stability, as well as make changes to plans for restoring financial stability.

Secondly, the supervisory and insolvency authorities (if they are separate bodies) must make efforts to:

  • • promote financial stability and ensure the continuity of the NWFI services;
  • • to ensure an adequate level of protection for investors, other persons protected by special systems, who are consumers of NWFI’s services;
  • • cooperate with the financial authorities of other countries, assess the impact of actions in general and in the particular case of resolution of insolvency of the NFFI on the financial stability of other countries and on global stability in general.

Key attributes provide that supervisors and insolvency authorities should have at their disposal a wide range of powers aimed at quickly and effectively alleviating the problems of a financial institution.

These powers include the authority to remove the highest corporate bodies (in particular, the sole executive body, his deputies, members of the collegial executive body), as well as the ability to hold the relevant managers, as well as board members, to be liable for damages variable remuneration.

The supervisory authority (resolution settlement) should have the right to introduce special management institutions to restore the financial institution’s activities or other ways of resolving its insolvency (such as what is implemented in the Russian Federation within the framework of the concept of a temporary administration for managing a financial organization, which Bike Russia can with the Bankruptcy Law (as amended by the Federal Law of December 22, 2014 No. 432-FZ “On Amending Certain Legislative Acts Russian Federation you the Russian Federation and the Annulment of Certain Legislative Acts (Provisions of Legislative Acts) “) [5] .

The authority (or its designated administrator for managing a financial institution) should have broad powers to manage the assets and liabilities of a financial institution. In certain cases, these powers are related to the possibility of writing off subordinated liabilities and the cost of capital, as well as to perform other actions necessary for financial recovery or termination of the activities of a financial institution. At the same time, legislation should allow for the transfer of assets and liabilities to a sustainable financial institution. In some cases, but according to the Key Attributes, it is advisable to create a so-called temporary bridge-institute [6] for transferring and continuing to perform certain essential functions and viable operations of a failed financial institution.

As part of the resolution procedures, the rights of shareholders of a financial institution undoubtedly suffer – first of all, the rights to participate in management, including the rights to perform corporate actions (for example, the right to approve transactions).

Key attributes orient to the possibility of introducing a moratorium on meeting the demands of creditors – at least those of them that do not fall under the iodine system of special protection (such as the deposit insurance system). However, a special reservation is made that this moratorium, in order to maintain financial stability, should not extend to operations with the central counterparty [7] and a number of other operations necessary for the functioning of the financial market, for example, provided for by netting agreements [8] . Note that the moratorium on satisfaction of creditors’ claims as a tool for financial recovery is provided for in the Bankruptcy Law (art. 189.38), but it needs to be improved [9] .

Key attributes suggest using in a relationship for resolving the failure of financial institutions such a rather interesting tool, unknown to Russian law, as the right of the supervisory authority (administrator appointed by it) to temporarily suspend the exercise of the right to early termination of obligations. We are talking, in particular, about restricting other institutions to demand early fulfillment of obligations on loans received, bond issues and other instruments, even if the conditions for their placement contained relevant covenants giving the right to demand early fulfillment of obligations.

As a last resort, an insolvency resolution body should be empowered to carry out rehabilitation as a means of ensuring the continuity of the NWFI’s operation, either by recapitalizing an insolvent financial institution, or by capitalizing a newly created entity or bridge institution into which these functions were transferred after closing. liquidated financial institution.

Key attributes are given special attention to protecting the rights of creditors, formulating a peculiar principle: “no creditor is worse”, which implies respecting the order of fulfillment of obligations to creditors of one group. In this case, a deviation from the general principle of equal (pari passu)attitudes towards one class of creditors, with transparency regarding the reasons for such a retreat, if it is necessary to reduce the systemic impact of financial institution ruin or to maximize value in the interests of all creditors as a whole. In particular, capital should first be directed to cover losses, and no losses should be borne by ordinary debt holders until all subordinated debt (including all instruments of regulatory capital [10] ) is written off completely (regardless of whether this loss coverage through write-off is accompanied by a conversion in equity participation).

Lenders should be entitled to compensation if they do not receive at least what they would receive if the company was liquidated under the applicable insolvency regime (the protective mechanism “no lender is worse than liquidation”).

The most important question is the question of financing financial recovery procedures or continuing the functioning of the North-West Federal District. Key attributes suggest not to rely solely on public monetary funds, on financing at the expense of taxpayers and to reduce, if possible, the amount of such financing.

When temporary sources of funding are required to continue to perform critical functions during an orderly resolution, the resolution authority or the authority that provides temporary funding should provide for the possibility of replenishing any losses incurred:

  • • at the expense of shareholders and unsecured creditors, subject to the protective mechanism “no lender is worse than liquidation”;
  • • at the expense of the financial system more broadly (if necessary).

However, any provision of temporary funding by the authorities must be subject to harsh conditions that minimize the risk of moral harm and which should include the following:

  • • Provision of temporary funding is necessary to maintain financial stability and makes it possible to best achieve the goals of an orderly resolution of the insolvency, if private sources of financing have been exhausted or are unable to achieve these goals;
  • • the imposition of losses on holders of capital and associated costs, as far as is justified, on unsecured and uninsured creditors and the industry through subsequent ( ex-post) fees, insurance premiums or other mechanisms.

In the development of the idea of ​​shifting the financial consequences of insolvency of a financial institution not only to shareholders, but also to creditors at the international level, several approaches were discussed.

First, the possibility of writing off a subordinated loan or its transformation into shares was recorded. This approach is reflected in the Basel III agreement as a condition for including a subordinated loan in tier 1 capital. In the Russian Federation, this approach was implemented in the Law on Banks [11] , in accordance with Art. 25.1 of which there are two mechanisms for writing off (a milder version – conversion) of requirements for subordinated debt.

In particular, if the standard of sufficiency of own funds (capital) of a credit organization is lower than the level of obligations of a credit organization determined by the Bank of Russia but to return the principal amount of a subordinated loan (deposit, loan) or under the terms of a bonded loan, obligations for financial sanctions for failure to fulfill obligations on subordinated loans (deposits, loans, bonds) up to the amount necessary to achieve value ratios with bstvennyh funds ( capital ) of said level ratios shea value of own funds (capital), established by the Bank of Russia in accordance with the Law on the Bank of Russia.

In addition, the Bank of Russia can file a credit institution with a requirement to exchange or convert subordinated claims of creditors, as well as claims for financial sanctions for non-fulfillment of obligations in the event of non-fulfillment of the specified terms of exchange or conversion established by a credit agreement (deposit) or bond issue terms.

Secondly, the idea of ​​the so-called bail-in is discussed The bail-in concept was developed by the Financial Markets Council and the Basel Committee on Banking Supervision. Its meaning is to develop a restructuring mechanism in which the losses of the bank, in respect of which financial restructuring is carried out, are covered by its shareholders and creditors (and not the state).

There are two main ways to implement the “bail-in” mechanisms :

  • 1) through debt cancellation (at the legislative level) – a regulatory legal act is adopted, which provides that, under certain conditions (recorded in a regulatory legal act), the losses of creditors are forcibly written off (fully or partially);
  • 2) by converting debt instruments into ordinary shares (issuing conditionally convertible bonds (called CoCos)), which are debt obligations that are automatically converted into shares or debt obligations, part of which face value is written off, upon the occurrence of a predetermined event) (on contractual level). Thus, part of the organization’s debt is transferred to capital, thereby, on the one hand, the current debt decreases, on the other – capitalization increases.

The main task of the developed “bail-in” concept is to enable each jurisdiction to introduce mechanisms for restructuring banks without conflict with national legislation and any restrictions. Today, the “bail-in” mechanisms in one form or another are reflected in the laws of Denmark, Germany, and the USA (Dodd-Frank law), are planned for implementation in Switzerland, Sweden and the United Kingdom. In practice, the “bail-in” measures during the reorganization of banks were implemented in Russia (as part of the restructuring procedures of a number of credit institutions in 1999–2000), Denmark, Kazakhstan, and Cyprus.

The bail-in tool was used by the Cyprus authorities in 2013 to resolve the insolvency of the Bank of Cyprus and Laiki Bank as part of measures aimed at strengthening the island’s economy. Other measures included the sale of national foreign exchange reserves, as well as raising funds from the EU and the IMF.

In accordance with the plan of measures for rehabilitation, the funds of Bank of Cyprus depositors are more than 100%. Euros in the amount of 37.5% of the excess over this amount were automatically converted into Class A shares of Bank of Cyprus with the right to vote and the right to dividends. Funds in the amount of 22.5% of the excess were temporarily frozen and could be converted into bank shares later. The remaining 40% of excess is frozen to maintain liquidity of the Bank of Cyprus.

The Central Bank and the Ministry of Finance of Cyprus on July 30, 2013 announced the completion of the recapitalization process of the Bank of Cyprus. At the same time, the share of uninsured deposits convertible into equity capital amounted to 47.5%.

The general rules for the use of the bail-in tool , which provides for the financing of measures for financial recovery at the expense of the owners and creditors of a credit institution, are laid down in the European Union Directive on the settlement and restoration of banks’ activities 2014/59 / EU [12] (effective January 1, 2016 city, but the EU member states are entitled to use the mechanism until this date).

According to this document, the bail-in tool can be used for the resolution of insolvency to all liabilities, unsecured assets or collateral, and does not apply to deposits insured in the deposit insurance system, short-term interbank lending or claims of a clearing organization, payment and settlement systems, liabilities resulting from fiduciary transactions (client assets), liabilities to pay wages, pensions or taxes.

The directive establishes the so-called “cascade of responsibility”: first of all, to cover losses, stocks and other capital instruments are used, then subordinated liabilities and, lastly, evenly “senior debts” ( senior debts), including funds on deposits of small and medium-sized businesses and in deposits of individuals exceeding the insurance coverage of 100 thousand euros).

It is important to note that the coverage of bank losses in accordance with the Directive will be carried out according to the principle “not to worsen the position of creditors and depositors in comparison with the bank liquidation procedure”.

Let us note another feature of the Key Attributes: the document is aimed at resolving the bankruptcy of all financial organizations, although in some cases pay attention to the features of some of them (for example, credit and insurance organizations). Of particular importance as objects of regulation Key attributes are attributed to systemically important financial institutions without reference to the “industry” of their affiliation.

Thus, it is necessary to state that the global financial crisis of 2008–2009. forced us to take a fresh look at the problems of bankruptcy of financial institutions (and, above all, systemically important financial institutions) and look for new approaches to resolving their insolvency. Some of the tools offered by the international community are reflected in the legislation of the Russian Federation and the practice of the Bank of Russia, as well as the Deposit Insurance Agency, which is the main “sherpa” (guide) in the resolution of insolvency of credit institutions and partially non-state pension funds. However, a more comprehensive approach to the resolution of the insolvency of all financial institutions is required, with special rules for the NFMR outlined. This is the task