2. Thursday 1 July 2010 Welcome

3. Welcome to the Conference Patricia Godfrey, Nabarro LLP Prof Bob Wessels, Leiden Law School

4. Welcome to Leiden Law School Internationalisation of education and research in law in Leiden Prof Carel Stolker, Dean, Leiden Law Faculty

5. Session 1: Supervision and Early Intervention by Supervisors Chair: Paul Omar, University of Sussex

6. The future of financial markets regulation – a policy perspective Michiel Boots Netherlands Ministry of Finance

7. Contents 1.Aim and scope of financial regulatory reform 2.Different forums 3.Status of current proposals 4.Addressing the fundamental paradox

8. Prevention: aim is to create a healthy, more sustainable sector with less complexity, interdependence and vulnerability How? Prudential rules: Capital Requirements, Leverage Ratio, Accounting, Remuneration Policies Increase supervisory scope: European Supervisory Structure, Colleges of Supervisors on a global scale, AIFM (hedgefunds)-Directive, Macroeconomic perspective in prudential supervision 1. Aim and scope of financial regulatory reform

9. 2a. European Legislative Forum – EU Level 1 – European Commission (initiator of legislative proposals) – European Parliament and European Council (co-legislation) Level 2 – EBC, ESC and EIOPC: Member States represented by ministries – Tasks: Comitology & Advice to European Commission Level 3 – CEBS, CESR, CEIOPS: Member States represented by supervisors (NL: DNB / AFM) – Tasks: Supervisory Convergence, Information Exchange, Comitology & Advice to Commission

10. 2b. Different forums at a global level Basel Committee (Central Banks and Bank Supervisors: Design of Banking Regulation Guidelines) FSB (mostly Bank Supervisors and Central Banks: predominantly strategy and coordination of financial regulation) IASB, FASB (Independent standard setters for Accounting, IFRS and US GAAP) IOSCO (mostly Securities Supervisors, international securities forum, coordination and issuance of guidelines) G20 (20 largest economies, broad mandate)

11. 3a. Status of current proposals: Prudential rules Capital requirements –Basel 3 into CRD IV (European implementation 2012) Accounting –Convergence IFRS and US GAAP (G20 Pittsburgh, finalisation 2011) Remuneration –Remuneration review (FSB, European and global Possible further steps Contingent Capital: Useful crisis-management instrument in going concern – or purely in gone concern situation? Macro-prudential measures (IMF role?)

12. 3b. Status of current proposals: other (possible) regulatory measures Crisis management: aim to reduce complexity of financial institutions and reduce the impact of failure Increase cooperation and coordination at European level –European Supervision (pending legislative proposals 2010, ESA’s) –EU Crisis Management Framework (legislative proposals 2011, Cross-border Stability Groups) Possible further steps Early Intervention Tools: Use of intervention ladders Recovery and Resolutions Plans (‘Living Wills’) Burden Sharing?

13. “Capitalism without failure is like religion without sin” But: are the consequences of failure (of a systemically important financial institution) acceptable to us? Challenge: can we ensure that ALL commercial financial institutions can fail, whilst minimising the consequences of failure for the economy as a whole? 4. Addressing the fundamental paradox

14. How to address the paradox? – Alignment of incentives in markets and between participants – Restoring natural order of financial support (State comes last) Concrete proposals – Resolution Funds? – Living Wills? – Contingent Capital and SIFI Surcharges? – Narrow Banking or other Structural Reforms (Volcker Rule?) 4. Addressing the fundamental paradox

15. Million dollar question When – NOT if – the next crisis comes, will we be better prepared?

16. Renewed approaches to supervision of the banking sector in the EU Rogier Raas

17. February 2009: Larosière report Key findings: Lack of adequate macro-prudential supervision Ineffective early warning systems Competence problems Home/host regulator model not always effective Lack of frankness and cooperation between regulators

18. Key findings (cont’d): Lack of consistent supervisory powers across member states No means for regulators to take common decisions

19. Regulatory reform: European System of Financial Supervisors (ESFS) European Systemic Risk Board (ESRB) European Banking Authority (EBA) European Insurance and Occupational Pensions Authority (EIOPS) European Securities and Markets Association (ESMA) Replaces CESR, CEBS and CEIOPS

20. European Systemic Risk Board Responsible for macro-prudential oversight Objective: improve effectiveness of early warning systems by linking micro- and macro-prudential analyses ESRB can issue warnings and recommendations on a “comply-or-explain” basis “Reputational body”: no binding powers Limited powers to obtain information

21. EBA, ESMA and EIOPS: powers and responsibilities Develop binding proposals for (non-controversial) technical standards. Move towards a “single rulebook” Resolve disagreements between regulators Coordinating role in emergency situations National regulators remain responsible for day-to-day supervision of financial institutions

22. Commentary Martine Gerber, Partner, Oostvogels Pfister Feyten, Luxembourg

23. Early Intervention Measures Dr. Bart P.M. Joosen

24. Outline of presentation Early intervention measures in the context of Cross-Border Crisis Management; Overview of international initiatives; Existing regulatory framework for early intervention measures; Less is more: do we need additional rules?

25. Early intervention measures in the context of Cross-Border Crisis Management Early Intervention Measures Bank Resolution Early remedial actions of banking supervisors aiming at correcting irregularities at banks Resolution of ailing banks aiming at maintaining financial stability, continuity of banking services and revitalisation of the bank managed by resolution authorities Insolvency Winding up Proceedings/ Liquidation

26. Early intervention measures in the context of Cross-Border Crisis Management Primary focus is on the early intervention measures for banks; A significant part of the recommendations and advice is on cross border banking groups, i.e. groups of multiple credit institutions each organised as legal entity; Some of the international reports make vague distinctions between early intervention, bank resolution and insolvency; The threefold distinction is set forth in the most clearest fashion in the EC Communication of October 2009.

27. Early intervention measures in the context of Cross-Border Crisis Management Early intervention measures may include: Raising (private) capital; Modification of business lines of banks; Divestiture of assets, to be taken in a context of a bank’s going concern in order to assist a bank to return to a normal course of business and to avoid that the bank enters into a resolution stage.

28. Overview of some international initiatives May 2007: Public Consultation on the European Directive on the reorganisation and winding up of credit institutions This consultation confirmed the desire to expand the scope of application of the European framework to cross-border banking groups too. April 2008: Report of the Financial Stability Board on Enhancing Market and Institutional Resilience Particularly Chapter V (Strengthening the authorities’ responsiveness to risks) and Chapter VI (Robust arrangements for dealing with stress in the financial system)

29. Overview of some international initiatives February 2009: The High Level Group chaired by Jacques De Larosière casts its report to the European Commission Chapter VI (Crisis Management and Resolution) deals with the Framework for distressed banks and comments on early intervention measures March 2009: The Committee of Banking Supervisors (CEBS) issues its report on Mapping of supervisory objectives and powers, including early intervention measures and sanctioning powers

30. Overview of some international initiatives September 2009 Basel Committee on Banking Supervision, Cross-border Bank Resolution Group issued its Report and Recommendations October 2009 European Commission Communication on An EU Framework for Cross-Border Crisis Management in the Banking Sector June 2010: CEBS’s Advice on the EU Framework for Cross-Border Crisis Management in the Banking Sector

31. Existing regulatory framework for early intervention measures “Early intervention measures are activated by ongoing prudential supervision.” “Prudential supervision is based on quantitative and qualitative analysis of the situation of a credit institution in order to determine its individual risk profile and to identify and solve potential problems at an early stage”. Source: CEBS, Mapping of supervisory objectives and powers, March 2009

32. Existing regulatory framework for early intervention measures Among other provisions on this subject matter, article 136 of the Capital Requirements Directive (2006/48/EC) states: “1. Competent authorities shall require any credit institution that does not meet the requirements of this Directive to take the necessary actions or steps at an early stage to address the situation. For those purposes, the measures available to the competent authorities shall include the following: a)obliging credit institutions to hold own funds in excess of the minimum level laid down in Article 75; b)requiring the reinforcement of the arrangements, processes, mechanisms and strategies implemented to comply with Articles 22 (Governance arrangements, add. BJ) and 123 (sound, effective and complete strategies and processes, add. BJ); c)requiring credit institutions to apply a specific provisioning policy or treatment of assets in terms of own funds requirements; d)restricting or limiting the business, operations or network of credit institutions; and e)requiring the reduction of the risk inherent in the activities, products and systems of credit institutions.”

33. Existing regulatory framework for early intervention measures The European Commission believes that this existing framework should be complemented with the following measures: Powers for authorities to require preparation of firm-specific contingency and resolution plans (‘Living wills’); Promoting good governance to make it simpler and easier to address future crisis; The power to require submission of a group restoration plan, change of management of the bank or a specific representative; Develop common indicators/thresholds to define in a common way when and how early intervention should take place; Review of supervision of cross border branches; Transfer of assets to assist groups in managing liquidity positions.

34. Less is more: do we need additional rules? Consultation by the EC resulted into 64 responses; General observation is that the introduction of new measures for early intervention is widely supported; The framework should also be applicable to cross border operating banks through the branch model (home state— host state supervision); The framework should not only apply to Systemically Important Banks; The framework for early intervention measures should consist of identical measures in the ‘flexible toolkit’; Early intervention measures should however be imposed based on principles of minimum harmonisation in view of the differences in the EU Member States; Triggers for early intervention should not be automatic and should incorporate sufficient levels of flexibility and discretion for the supervisory authorities.

35. Less is more: do we need additional rules? Some personal comments: There is a danger of overregulation in view of the endless range of proposals tabled in the various international committees/institutions; There is little coordination or oversight on overlapping measures (e.g. contingent capital is named as early intervention measure, whereas the relevant instrument is also debated in the proposals for improved capital adequacy); The 2006 rules of the CRD have proven to be a dead letter of law, rarely applied and often overlooked in practice; the possibilities of the existing laws have therefore not been exhausted yet; The existing rules should be a sufficient regulatory framework, what is needed is a change of supervisory practices and the attitude towards crisis management of the supervisory authorities.

36. See for a further overview: Hanneke Wegman, Improving the Monitoring of Cross-Border Banks in the EU: Towards a Common Framework on Crisis Management, European Company Law 7, no. 2 (2010), pp. 59-67 For any questions: (b.joosen@planet.nl)

37. Coffee Break

39. Session 2: Supervision and Early Intervention by Supervisors (continued) Chair: Eric Selander, Swedbank, Sweden

40. Banks under pressure British government proposes new tougher rules The British coalition government, with Chancellor George Osborne, is planning to introduce a special bank tax for the British banks. Meanwhile the Bank of England will be given greater regulatory powers to monitor the finance market. In a speech yesterday evening at the annual dinner at Mansion House in London with representatives from the finance and banking sector the coalition government’s Chancellor of the Exchequer, George Osborne, warned that the banks need to take their share of the responsibility and pay for the damage that the financial crisis has caused to the British economy. It is only fair that the banks should help pay off the budget deficit of £156 billion, approximately SEK 1,800 billion, via the introduction of a bank tax. An independent banking commission will also be tasked with investigating the possibility of forcing the major British banks to break up into smaller entities. The focus will be on the banks separating savings bank operations from investment banking activities. The commission’s report will be complete within one year and its conclusions may then determine the future of major banks such as Barclays and Royal Bank of Scotland. George Osborne also wants to restore overall regulatory and supervisory responsibility for the British finance market to the Bank of England, BOE, under the leadership of BOE Governor Mervyn King.The British Financial Supervisory Authority, FSA, which currently holds this responsibility and reports to the British Treasury, will in future supervise individual banks and report to the Bank of England. This means that George Osborne has had to back down from his intention to completely abolish the FSA, which was established in 1997 by the then Chancellor Gordon Brown because the BOE was not considered to have successfully managed its supervisory responsibility during the collapse of investment bank Barings in 1995. This time the FSA has been criticised for not doing enough to prevent or limit the extent of the financial crisis. Caption: Mervyn King, Governor of the Bank of England. (Source: Dagens Industri, 17 June 2010)

41. Swedbank FR&R Risk/ Time Preparation for credit decision credit decision A) Supervision/ control/ Guiding principles B) Identification and intervention Formal restructuring Bankruptcy C) Extra ordinary administration Banks/ Financial Institutions Risk/ Time A) Supervision/ control/ Guiding principles B) Identification and intervention Formal restructuring Bankruptcy C) Extra ordinary administration Establish bank/ financial instituitions 1.Strengthening A 2.Stengthening/ make it clearer B 3.Develop/ Improve C

42. Questions Supervision and early intervention What’s the problem? What’s new? Is this enough? Extraordinary administration Legal problems? (Local constitutional law, European Convention on Human Rights, Second Company Law Directive 77/91/EEC)

43. CONCLUSION It will happen again

44. Response to Commentary Michiel Boots & Rogier Raas

45. Role and Function of the European Banking Authority Alexander Bornemann

46. Views do not necessarily reflect those of the German Federal Ministry of Justice

47. Overview Roles of EBA in the New Financial Architecture The Need for Coordination of Crisis Management Activities Coordination vs. Decision Making Powers EBA’s Emergency Powers Perspectives for EBA’s Role in the Crisis Management Process EBA’s Role under the Banking Directive’s Provisio n Relating to Early Intervention EBA’s Future Role in the Early Intervention Process

48. Roles of the European Banking Authority (EBA) in the New Financial Architecture

49. 2 Dimensions of Financial Architecture Integration Home-Country Control, Mutual Recognition & Voluntary Cooperation and Coordination between National Authorities R EGULATION SUPERVISION I NTERPLAY W/ OTHER P ILLARS OF F INANCIAL A RCHITECTURE Inter alia: - Macroprudential Analysis and its Translation into Microprudential Action and vice versa - Monetary Policy - Resolution Mechanisms Maximum Harmonization 28 th Regime Home Country Control, Mutual Recognition & Institutionalized Procedures for Cooperation and Coordination Centralization / “Federalization” of Supervisory Functions Minimum Harmonization

50. Maximum Harmonization Inter alia: - Macroprudential Analysis and its Translation into Microprudential Action - Monetary Policy - Resolution Mechanisms Minimum Harmonization 2 Role of EBA in Financial Architecture Voluntary Cooperation and Coordination between National Authorities 28 th Regime Legally Binding Procedures for Cooperation and Coordination Centralization / “Federalization” of Supervisory Functions Furthering harmonization by developing draft technical standards (Art. 7) issuing general guidelines and recommendations (Art. 8) building a common “supervisory culture” (Art. 14) Furthering harmonization by developing draft technical standards (Art. 7) issuing general guidelines and recommendations (Art. 8) building a common “supervisory culture” (Art. 14) R EGULATION S UPERVISION I NTERPLAY W/ OTHER P ILLARS OF F INANCIAL A RCHITECTURE

51. The Need for Coordination of Crisis Management Activities

52. Shortcomings in the Current Framework Lack of consistent and effective intervention and resolution mechanisms Responsibility overlaps and gaps in a decentralized supervisory system set limits to effective and efficient dealing with risks stemming from integrated financial markets Cooperation failures in emergency situations Harmonization of tools and coordination/integration of intervention functions needed

53. Consequences for Supervisory Architecture The principle of Home Country Control revisited Instruments to ensure and encourage coordination –Supervisory Colleges (Banking Directive) –Cross-Border Stability Groups (MoU/CBA, FSB) Centralizing/collectivizing decision-making processes Limits to a “federalization” of tasks and powers –Legal constraints imposed by TFEU –Fiscal autonomy of Member States

54. Coordination vs. Decision Making Powers

55. EBA’s involvement will substantially facilitate and improve coordination among nat’l authorities, in particular –by reinforcing the supervisory colleges’ coordination function –by way of its power to request and disseminate information (Article 20) –by way of its general coordination function (Article 16) including facilitation of information exchange carrying out of (non binding) mediation Including the ESRB into the flow of information However, in order to prevent coordination failures, the backing of binding decision making powers might be necessary in individual cases

56. EBA’s Emergency Powers

57. EBA’s Emergency Powers under Article 10 … Emergency Situation –“adverse developments which may seriously jeopardize the orderly functioning and integrity of financial markets or the stability of … the financial system” Facilitation and Coordination of Action, in particular with respect to the Gathering and Dissemination of Information Decision-Making Power vis-à-vis Nat’l Authority –Determination of Emergency Situation by Council –“Exceptional Circumstances”

58. … are Subject to the Safeguard Clause (Article 23(3)) Member State Objection –to be raised w/in three working days –stating and explaining why and how EBA’s decision impinges on MS’s fiscal autonomy –suspends EBA’s decision Decision by Council –by simple majority –to be taken w/in ten working days –if no decision is taken, suspension of EBA’s decision is terminated

59. Dilemma and Possible Way Out Preconditions for EBA actions (“exceptional circumstances” in an “emergency situation”) likely to give rise to successful Member State objection (based on budgetary consequences to be expected) Dilemma inescapable until solid financing and burden sharing arrangements will have been established Creation of a European resolution fund or of a system of European resolution funds as a possible way out (in the long term)

60. Perspectives for EBA’s Role in the Crisis Management Process

61. Limited Powers in Resolution Context Due to the safeguard clause, EBA’s emergency powers to take direct action vis-à-vis nat’l authorities (Article 10(2)) will probably be of no practical importance In particular, EBA would not have the power to prompt effective action in a situation that requires the resolution of an institution or resolution-like action However, the safeguard clause would not impair EBA’s coordination functions under Articles 10(1) and 16

62. Powers in Earlier Stages of Crisis Management The safeguard clause would not bar EBA from taking action where fiscal impacts are unlikely On the other hand, absent “exceptional circumstances” in an “emergency situation”, EBA would not be able to draw on its emergency powers EBA’s action would, therefore, have to be based on its general powers (Articles 9, 11 et seq.)

63. Availability of “General Powers” While some of EBA’s powers will have their foundation in the EBA Regulation, some will require additional authority through secondary legislation Among the powers requiring separate authority are: –the power to bindingly settle disagreements among national authorities (Article 11) –the power to issue (draft) technical standards (Article 7)

64. EBA’s Role w/ respect to the Early Intervention Instruments provided for by the Banking Directive (as to be amended by “Omnibus-I” Directive)

65. EBA’s Powers under the Banking Directive (as to be amended by the “Omnibus-I” Directive) No power to settle disagreements among Member State authorities w/ respect to early intervention tools EBA could, theoretically, draw on its power to enforce community law by issuing (specific) recommendations and by having the Commission endorse such recommendation (Article 9) –However, as of today, the degree of harmonization of early intervention tools (Article 136) is rather low and indeterminate –Therefore, this power would most likely be ineffective

66. EBA’s (Potential) Future Role w/ respect to Early Intervention Instruments

67. EBA’s Future Role will largely depend on the configuration of the early intervention tools and the powers that the European legislator will assign to EBA It seems possible that the legislator will authorize EBA to bindingly settle disagreements between national supervisors that relate to the taking of early intervention measures If the legislator will provide for a clearly defined (minimum) set of early intervention tools and corresponding triggers/threshold conditions, EBA could also act on the basis of Article 9

68. (Potential) Roles of EBA along the Different Stages of Crisis Management StageCoordi- nation Decision Making Ensuring preparedness for potential future crises x(x) Ensuring awareness of problems on micro and macro level x(x) Intensifying supervision and taking corrective action vis-à-vis weak institutions x(x) Resolving institutions in (danger of) default and addressing systemic risk x/

69. Early Intervention Measures Simon Lelieveldt De Nederlandse Vereniging van Banken

70. Agenda The interconnection of markets, supervision and regulation: experiences from Dutch history Which weaknesses in institutional design came to the fore as a result of the crisis ? How does early intervention and supervision fit in the post-crisis regulatory package/puzzle Main challenges with respect to early intervention by bank supervisors

71. Interconnecting markets – regulation - supervision 1900-1927 Growth, shake-out and consolidation in the Dutch bank sector; Informal supervision of De Nederlandsche Bank via monetary channel Crisis of 1929 Need for bank supervision law – parliamentary discussions Mutual agreement banks – central bank – reporting 1939: failure Mendelsohn  monthly reporting 1947-onwards Supervision and monetary policy by central bank (public)

72. Interconnecting markets – regulation - supervision 1952-1977 Bank failure Texeira de Mattos – Interbank Deposit Insurance Agreement Cooperative development NBV- DNB of liquidity/solvability rules 1978-1991 Mortgage market developments  liberalization of market BankAssurance Concept – mergers 1992-2001 Implementation of second EU Bank Directive – Barings – FSA set up Redesign of Dutch legal and supervision structure: change from focus on institution to prudential vs conduct of behaviour (Twin Peaks model)

73. Weaknessess in institutional design 2001–2009 - Focus on low interest rates by monetary authorities  search for yield - Search for yield  increase in risk appetite and distortion in risk pricing - Government sponsored enterprises  distortion of markets  weak spots - Late implementation of Basel 2 in US  problems unnoticed - Weak supervisory operations in US spills over via markets - Media pressure spills over into bank supervision - Crisis Management for EU-wide operating institutions - Maintaining and improving resilience in bank sector - Macro-economic instabilities impact markets - Lehman failure demonstrates interconnectedness - Northern Rock – another redesign for bank supervision in UK - Sovereign crisis: trust in government funding Euro-zone under pressure

74. The post crisis package/puzzle (for FSB) 1- Identify and monitor macro-economic vulnerabilities 2- Monitor and stimulate cooperation between governments and supervisors 3- Set up international crisis management and early warning 4- Guard and ensure suitable incentive structure with respect to salaries 5- Improve resilience and robustness of financial sector: - Capital and liquidity buffers - Improved risk management - Change in accounting rules - Reduction of deposit insurance limit to pre-crisis levels - Development of systemic supervision (risk boards) - Reduction of risk in OTC trade and improvement of transparancy - Extension of supervision to all participants in the market - Regulation and supervision of credit-rating agencies

75. Early intervention amids the post-crisis measures To solve and change the current structures, an analytical approach is required, yet the crisis can be viewed as the result of overspecialisation Important to avoid the policy reflex: i.e. the assumption that all diagnosed problems require newer rules and further partial solutions All new measures build on (and assume) the same basis: good (early) and prompt supervision

76. Early intervention: costs and benefits Yearly cost of supervision for banks: € 40 million Cost of deposit Insurance for banks: Van Der Hoop: € 6 million Icesave: € 205 million Indover: € 1 million DSB Bank: € 600 million Solid supervision and early intervention is key

77. Early Intervention in the Netherlands Formal interventions can be: Cease and desist order, Administrative fine, Fine, Direction, Funding plan, Restructuring plan, Recovery plan, Silent receivership, Administratorship, Cancellation of registration, Reporting for criminal prosecution. Overview of all formal measures taken by DNB 20052006200720082009 Total142199148427567 banks10000

78. Suggestions for improving operational supervision A quick response and perhaps more immediate use of formal tools Good expertise and staff that can act as counterparts for bank management A culture that values and rewards operational and prompt supervision rather than analysis

79. Commentary Martin E. Lybecker, Partner, Wilmer Cutler Pickering Hale and Dorr LLP, Washington. Bogdan Olteanu, Vice President, Central Bank of Romania

80. Response to Commentary Alexander Bornemann & Simon Lelieveldt

81. Overview of intervention measures Vincenzo De Sensi, Studio Visentini, Italy. Patrick Molloy, Matheson Ormsby Prentice, Ireland

82. An Overview of Italian intervention measures Vincenzo De Sensi

83. Introduction The baseline idea of our system is to keep an administrative control on the banks not solely over the ordinary carrying on of banking activity, but also when there is a crisis situation The banking crises are regulated by a special banking law n. 385 of 1993 and cannot be resolved by the measures laid down by the ordinary civil and bankruptcy law The Italian banking law provides for several progressive levels of intervention to face troubled banking situations

84. Intervention measures These progressive interventions depend on the degree of the crises The levels of intervention are the following: 1.specific measures of an extraordinary nature (for example prohibition on starting up new operations or closing of branches); 2.appointment on a temporary basis of a special administrator before the commencement of the Extraordinary Administration; 3.Extraordinary Administration; 4.Compulsory Winding- up.

85. Trigger events The trigger events for these interventions are defined in a general way by the banking law because the Bank of Italy has a large discretionary power in order to decide the most suitable solution The two underlying reasons are the following: 1.hard indicators may be circumvented; 2.each crisis situation is different and so it cannot be foreseen ex ante

86. Early interventions and Extraordinary measures Bank of Italy can adopt the above said extraordinary measures to ensure a prompt intervention on the chartered banks The extraordinary measures can be applied on the Italian banks and branches or subsidiaries of European or non European banks The trigger events which legitimate the Supervisor’s early intervention are: violations of the rules laid down by the law, the Supervisor or the statute; irregularities in the administration and, when there is a branch or subsidiary of a non European bank, a fall in the bank’s liquidity

87. Violation of the rules The banking rules are intended to ensure the capitalization and the stability of the banks, to safeguard the depositors and savers and to guarantee a “healthy and prudent” administration of the bank Their violation causes the risk of damage and has a negative impact on the system So the early intervention by the Supervisor through the special measures prevents the crisis and impedes widespread risk

88. Extraordinary Administration The Extraordinary Administration is the main intervention to avoid an insolvency situation It is a temporary measure which should prevent the crisis and resolve the irregularities in the administration in order to carry on ordinary activity This proceeding has a recovery function so as to minimise the risk of a bank’s difficulty degenerating into a crisis situation

89. Trigger events for the Extraordinary Administration First of all it should be highlighted that this proceeding can be adopted on the chartered bank only The trigger events of this proceeding are: 1.either great irregularities in the administration of the bank 2.or great violations of law or administrative and statutory rules 3.or great predicted future losses in the capital

90. Commencement of the Extraordinary Administration When these trigger events occur the procedure is the following: 1.Bank of Italy submits a proposal to commence the Extraordinary Administration to the Minister of Economy; 2.consequent decree of the Minister of Economy which revokes the board of directors and suspends the function of the general meeting; 3.appointment of the extraordinary organs which are the administrator and the supervisory committee It is relevant to note that the above procedure is closed and the organs of the bank do not take part in it. In fact the commencement of the proceedings is notified to the organs of the bank by the special administrator after his appointment

91. Effects and duration of the Extraordinary Administration The vital banking activity is not suspended during this proceeding The extraordinary administrator carries on normal business in place of the board of directors in order to correct the irregularities in the administration and to restore compliance with regard to the law, statutes or rules laid down by the Supervisor The duration of the proceedings is for one year from the date of commencement and may be extended for six months only

92. Implementation of the EC Directive 2001/24/EC in Italy The EC Directive 2001/24/EC was implemented in Italy by the law n. 197 of 2004 which modified the banking law n. 385 of 1993 As you know the aim of this Directive was to guarantee that the reorganization measures or winding - up proceedings on cross-border bank crisis have direct effect in all Member States without any further formalities The Italian decree in accordance with this basic principle states that: 1.reorganization measures or winding - up proceedings which are adopted by a Member State have direct effect in Italy without any further formalities 2.And reorganization measures or winding up proceedings which are adopted in Italy have direct effect in the Member States without any formalities

93. Exceptions to the universal principle The Italian decree n. 197 of 2004 provides for some exceptions to the principle of universal application thus rendering the law of the home Member State ineffective in Italy in regard to certain matters The most important exceptions are the following: 1.employment contracts and relationships 2.contracts which affect immovable property 3.rights on immovable property or goods subject to registration The sole law applicable in these cases shall be Italian law and not the law of the home Member State which has adopted one or more reorganization measures or winding up proceedings

94. Information The duty of information on the opening of one or more reorganization measures or winding - up proceedings is one of the most relevant provisions of the Italian decree n. 197 of 2004 In this regard the Italian decree states that: 1.Bank of Italy has to inform the competent Authorities of the host Member State of its decision to open one or more reorganization measures or winding - up proceedings on an Italian bank which has branches or subsidiaries in other Member States 2.Bank of Italy can submit a petition to the competent Authorities of the home Member State in order to open a reorganization measure on the branch or subsidiary which is in Italian territory 3.Bank of Italy has to inform the competent Authorities of the other Member States when it decides to commence reorganization measure on the branch of the non European bank

95. In conclusion The Italian banking law is oriented to preserve and to restore the credit institutions in crisis situations Bank of Italy is empowered to face crisis situations through administrative and discretionary functions which allow prompt interventions to avoid systemic risk The Extraordinary Administration is in our system the main reorganization measure which is aimed at restoring the ordinary banking activity and the financial well being of the bank The directive 2001/24/EC was implemented in Italy by decree n. 197 of 2004 and affected the single bank solely and not the banking group In any rate this directive and its implementation may hopefully be a starting point towards the harmonization of the cross - border crisis banking laws in the European Union

96. INSOL Europe Academic Forum & Centre For European Company Law – Joint Insolvency Conference – 1 July 2010 Irish Banks – NAMA and other intervention measures Patrick Molloy, Partner, MOP

97. Causes of Irish banking crisis Regling and Watson report on Irish crisis: macroeconomic conditions: 1990s: very successful phase of economic growth 2000 – 2007: GDP per capita growth continues to outpace other EU countries but underlying developments less healthy: full employment wage acceleration – highest wages in EU highest prices in EU – loss of competitiveness market share of international trade drops credit boom

98. Causes of Irish banking crisis Financial sector developments: following euro adoption ability to get cross border funding increases – fueling lending boom funding from deposits plays lesser role new entrants to Irish market increase competition for lending: 100% LTV loans low rates – ECB tracker rates etc errors of judgement in bank management and governance allow vulnerabilities to develop problems lay in plain vanilla property lending rather than exposure to complex financial instruments

99. Credit growth of Irish banking system

100. Compound annual loan growth for certain financial institutions – 2003 to 2006

101. Government strategy to provide relief to banks September 2008 – State guarantee for banks introduced Recapitalisations of AIB, Bank of Ireland and others Nationalisation of Anglo Irish Bank Asset relief programme - National Asset Management Agency (“NAMA”) announced April 2009 and legislation introduced in November 2009.

102. State guarantee schemes 2008 Scheme (which is due to expire soon): “covered liabilities” of “participating institutions” (Bank of Ireland, AIB, Anglo Irish Bank, EBS Building Society and others) guaranteed by Minister for Finance for period to 29 September 2010 covered liabilities were fairly all encompassing: retail and corporate deposits if not subject to deposit protection schemes interbank deposits senior unsecured debt covered bonds dated subordinated debt

103. State guarantee schemes 2009 “ELG” Scheme: certain eligible liabilities (including deposits) of up to five (5) years in maturity incurred by participating institutions during the period from the commencement date of the ELG Scheme (9 December 2009) to 29 September 2010 covered eligible liabilities: deposits (again if not subject to deposit protection schemes) other liabilities must be approved and must not contain cross default or cross acceleration events of default – those that may be considered include certificates of deposit, commercial paper, bonds and notes (once senior and unsecured in each case) therefore all subordinated debt excluded

104. NAMA – the National Asset Management NAMA - independent statutory body with its own board of directors and employees. Purpose of NAMA is to acquire, manage and realise certain bank assets, facilitate the restructuring of certain credit institutions which participate in the NAMA proposal (“Participating Institutions”) and take all steps necessary or expedient to protect, enhance and realise the value of assets transferred to NAMA. Participating Institutions: Allied Irish Banks, Bank of Ireland, Anglo Irish Bank, EBS Building Society and INBS

105. Assets to be acquired by NAMA Assets to be acquired are land and development loans and associated loans (e.g. to same debtors or cross collateralised) (estimated €80bn book value) NAMA business plan indicated that approximately 40% may be cash generating (subject to due diligence) Land and development loans “with a value of less than” €5m with AIB, BoI and Anglo will not transfer (but may transfer in case of EBS and INBS) Loans entering balance sheet post 31 December 2008 will not transfer (so may be refinanced or restructured after that date)

106. Breakdown of Loans by Institution per NAMA Business Plan

107. Breakdown by Asset Location

108. Key estimates per original NAMA business plan 50% drop in Irish property prices since early 2007; overall 47% drop assumed (incl overseas markets) 47% drop yields current market value of loans to be €47bn (based on figure for loans at time of €77bn) “long-term economic value” calculated at €54bn (€47bn plus 15% uplift). 30% haircut on €77bn “book value” Recovery in asset prices to break even: 10% over 10 years

109. Transfer Process 14,000 to 15,000 loans being transferred (involving circa 1,500 borrowers) Due diligence/valuation process means loans are transferred in tranches Tranche 1 - €15.3bn in loans bought for €7.7bn in State guaranteed bonds (ie 50% – and price includes 11% “long term economic value” uplift on current valuation) Tranche 2 about to complete – all loans must be transferred by February 2011

110. Asset Management Largest 150 borrowers: will be managed directly by NAMA (all credit decisions taken by them and “effected” by original institutions) administration of loans (collection of interest, principal, etc.) to remain with segregated units in original institutions under supervision of NAMA

111. Asset Management Other borrowers: NAMA to assess and group borrowers based on creditworthiness and other factors Action to be taken subject to approval of NAMA Credit Committee and Board (ie it would seem management function to stay with original institutions) Routine credit decisions to be made by original institutions on basis of delegated authority

112. Transfer mechanism By operation of law (i) acquisition occurs on the date NAMA specifies on terms specified by Nama under its statutory powers and (ii) all contracts relating to asset deemed to be assigned to NAMA and it acquires benefit of all certificates of title, opinions, warranties, reports, powers of attorney and other such items – notwithstanding any legal (including contractual) or equitable restrictions or consent requirement

113. Effect of transfer NAMA “steps into the shoes” of participating institution and effectively takes on all its rights and obligations relating to the asset and the debtor and any other person concerned – unless obligations and liabilities are stated to be excluded in acquisition schedule any undocumented consents/warranties/undertakings given by a participant bank not disclosed to NAMA will not be binding on it

114. Foreign bank assets if the foreign law permits the transfer, the participating institution shall do everything required by law to effect the transfer – if acquisition by service of acquisition schedule not recognised if transfer not permitted, all that is permitted by law must be done to give NAMA the greatest interest possible – and asset held in trust for NAMA

115. Powers of NAMA Existing powers bank would have to protect its position/enforce have been strengthened considerably This has obvious consequences for borrowers but also banks outside NAMA process However assurances have been given that intention is not to override existing intercreditor/priorities arrangements

116. Powers of NAMA – Statutory receivers Power to appoint statutory receiver: can’t be displaced by an examiner and appointment of examiner won’t affect his powers or cause a de- crystallisation of charge over assets under his control appointment/renumeration/enforcement/powers not subject to usual restrictions statutory receiver must exercise all reasonable care to obtain the best price reasonably obtainable for property at time of sale but not obliged to sell at any particular time or at all

117. Other Powers of NAMA compulsory acquisition powers Indications are that may be used sparingly and to cover “ransom strips” NAMA must first make a reasonable attempt to acquire land by agreement requires court application sales of loans assets may be conducted free of contractual restrictions power to discharge prior charge foreclosure powers

118. Other rights/powers of NAMA acquired bank asset will not be rendered void because of failure to register security, breach of negative pledge or series of other matters which may otherwise render it void ability to enter into agreements to develop to secure the best return reasonably possible (NB €5bn cap on “other” borrowings) in case of development land, will acquire rights of banks and borrowers vis a vis contractors etc

119. Other rights/powers of NAMA Avoidance of transactions: application to court for order to declare disposition void where shown to satisfaction of court that effect of disposition was to defeat, delay or hinder the acquisition by NAMA of eligible bank asset or to impair the value of such an asset or any rights that NAMA would have acquired court must determine that it is just and equitable to made such an order and will have regard to person who has in good faith and for value acquired an interest in the asset the subject of the disposition

120. NAMA – what does the future hold? 7 to 10 years to “work out” assets – many commentators now believe it could be profitable Government Debt as % of GDP to rise to 90% by 2011 Institutions will be left with considerable liquidity and in a position to go back to the personal and commercial lending that the country needs to restore the economy ESRI: Irish GNP for 2010 forecast to be same as 2009 with 2.75% growth in 2011 (after a record 11% contraction in 2009)

121. Q&A from the floor