New banking resolution regime is going to endure the test of practice in Portugal – the BES case as a test case in the context of the building of the European Banking Union – key developments to be followed in the course of 2014.
In the wake of a quick succession of events leading to the deterioration of the results of Banco Espirito Santo, SA (BES), one of the leading and more traditional Portuguese banks the management of which was largely controlled by the Espirito Santo family (present in the financial sector for various decades) after the privatization in the nineties of the 1975 nationalized bank, the Bank of Portugal (BoP) has decided on the 3rd of August of 2014 to apply a resolution measure to BES. This measure implies that the general activity and assets of BES are transferred to a new bank, to be designated as ‘Novo Banco’, to be duly capitalised and rid of problematic or toxic assets (while problematic assets and liabilities of other Group Espirito Santo entities that led to the mounting losses are discontinued and remain in a so called bad-Bank).
Such application of the banking resolution regime introduced in Portugal in 2012, through Decree-Law nº 31-A/2012, of 10 of February promises to be a landmark case in the context of the EU and of the ongoing process of building a European Banking Union and corresponds to a demanding test in terms of the implementation of such 2012 national regime. Curiously, through that regime the Portuguese State anticipated the adoption at EU level in 2014 of banking resolution regimes (on account of requirements arising from the Memorandum of Understanding entered into in 2011 with the European Commission, the European Central Bank and the International Monetary Fund). Such regime contemplates basically two alternative resolution measures, corresponding to the total or partial sale of the activity of a credit institution to other credit institutions or to the transfer of assets and liabilities to bridge banks. As aforementioned, it is this second alternative resolution measure that is at stake, which involves for the first time the use by the BoP
of the extensive powers it acquired in the 2012 reform. The procedure will involve the recapitalization of the Novo Banco newly established whose share-capital is to be held by the so called Banking Resolution Fund (which is part of the new European financial stability model). However, as this Fund was only established in 2012 the recapitalization will have to rely on temporary loan of the Portuguese State to the Fund. Key issues to be followed through the rest of 2014 have to do with the practical interplay between the key actors in this process, the BoP, the Resolution Fund, the Novo Bank and the Bad Bank, the ability to timely and duly identify all relevant liabilities and of efficiently applying an actual Bail-in solution, as per the principles arising from the ongoing process of the European Banking Union (and accordingly of preventing or at least limiting actual financial exposure on the part of the Portuguese State). Further steps in the process leading to other restructuring and in particular the context of a future sale of Novo Banco will also lead to interesting questions related with the application of EU law (including state aid regimes). The case also emphasizes the importance of timely restructuring measures of banking institutions as discussed by Charles Goodhart in the CIRSF- Conference of 19 June in Lisbon.