Stricken Banks’ CEOs Risk Ouster in EU Deal on Crisis PlansJim Brunsden and Ben Moshinsky
European Union lawmakers and national officials reached a tentative agreement on plans to give regulators the power to fire executives of ailing banks.
Regulators would be handed sweeping powers to parachute in “temporary administrators” in a last-ditch bid to bring a bank back from the brink of collapse, according to a document obtained by Bloomberg News.
Authorities would have discretion to fire individuals or the “management body of the institution, in its entirety” when there is “a significant deterioration” in the bank’s financial situation and other steps have failed to turn the situation around, according to the document. Such action could also be taken when the bank has been guilty of “serious violations of law, regulations or bylaws, or serious administrative irregularities.”
The measures are a component of the EU’s blueprint for tackling failing banks and taking taxpayers off the hook for bail-outs. The draft law, proposed last year by EU financial services chief Michel Barnier, would also empower regulators to impose losses on senior creditors and require nations to create so-called resolution funds that could stabilize crisis-hit lenders.
A tentative deal on the bank-management replacement plan was struck by European Parliament lawmakers and Lithuania, which holds the rotating presidency of the EU, at a meeting earlier this month. The provisional accord on manager replacement requires confirmation at a subsequent negotiation meeting.
Talks are continuing on the bank resolution law, which requires approval by the parliament and by national governments to take effect. EU leaders last week renewed calls for a deal on the legislation by the end of this year.
The negotiations “are making good progress on all fronts, and we are confident of getting a political deal on the draft law by the end of the year,” Chantal Hughes, a spokeswoman for Barnier, said in a telephone interview.
A spokesman for Lithuania’s EU presidency declined to comment and Gunnar Hoekmark, the EU parliament legislator leading work on the plans, declined to comment.
The financial crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc. saw a wave of top management departures at stricken banks.
Fred Goodwin, the former chief executive officer of Royal Bank of Scotland Group Plc resigned in 2008 after the U.K. injected 20 billion pounds ($32 billion) of taxpayer money into the lender to prevent its collapse. Adam Applegarth, the former chief executive officer of Northern Rock Plc, quit in 2007, prior to the company’s’ nationalization in February 2008.
The planned EU powers would allow regulators to send in managers even before a bank has failed. Such steps could be taken as an early intervention measure in a bid to turn the company around, and so stave off more extreme regulator-imposed steps like forced creditor writedowns or the breaking up of the firm.
Regulators “may, based on what is proportionate in the circumstances,” appoint a temporary administrator either to replace a stricken bank’s management or to work alongside the existing team, according to the document. Such appointees wouldn’t normally be in place for more than one year. Their powers would have to be “in conformity with the applicable company law,” including on treatment of shareholders.
“There’s no justification for parachuting in special managers at an early intervention stage,” Gilbey Strub, head of resolution and crisis management at the Association for Financial Markets in Europe, said in an e-mail.
“It could confuse the market and disrupt the bank’s execution of its recovery plan,” she said. Once a bank has failed, and the regulators have been called in, then it’s “a different story.”
AFME represents international lenders including Deutsche Bank AG, HSBC Holdings Plc and UniCredit SpA.
Under the draft plans, the powers of supervisor-appointed bosses would be boosted once a bank has breached its minimum capital requirements and needs to be either rescued or wound down.
In such cases regulator-appointed “special managers” would have “all the powers of the shareholders, senior management and the management body of the institution,” according to the document.
Powers available to a special manager at this stage include deciding on capital raising and takeovers, and reorganizing the bank’s ownership structure, according to the document.
The practice of regulators parachuting managers into banks that are getting into trouble has “historical roots” in France and Italy, according to a European Commission study published last year. As many as twenty special administrators or managers had been appointed in France in the previous eight years, according to the commission’s data.