Structuring Bail-In Proposals?

Structuring Bail-In Proposals?

By Morrison & Foerster LLP

Excerpt: 2011 Emerging Issues 5849

SUMMARY: One important aspect of the international response to the financial crisis is the ongoing work in relation to proposals that banks and other financial institutions be required to issue debt with "bail-in" features, i.e. debt that is subject to write-down or conversion into equity in certain circumstances. This commentary sets forth possible structures that could meet these objectives.

 

Background

One important aspect of the international response to the financial crisis is the ongoing work in relation to proposals that banks and other financial institutions be required to issue debt with "bail-in" features, i.e. debt that is subject to write-down or conversion into equity in certain circumstances. The Financial Stability Board and Basel Committee for Banking Suspension are continuing to consider proposals in this regard, particularly in relation to institutions regarded as systemically important. A recent working document published by the DG Internal Market and Services of the EU Commission (the "EU Paper") set out various technical details of a possible EU framework for bank recovery and resolution. Amongst the more controversial aspects of the EU Paper is a proposal that a mechanism be introduced allowing relevant regulatory authorities of member states to require a bank to write down or convert to equity some or all of the debt owed to its unsecured creditors (subject to certain exemptions) upon the occurrence of specified trigger events.

Feedback to the EU Paper so far, including from the European Central Bank, has highlighted that such approach is likely to have a significant impact on the way banks obtain funding and should not be introduced without a full impact assessment being carried out. The EU Paper is therefore subject to development and change and the EU Commission may make significant changes to its approach following completion of the consultation process. We understand that concerns in relation to the EU proposals and the other international initiatives referred to above are already leading some investors away from unsecured senior bank debt and towards covered bonds. ...

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About the Authors:

Jeremy Jennings-Mares is a partner in the Morrison & Foerster's Capital Market practice. His practice specializes in structured products, derivatives and structured financings, including structured notes, derivatives, and medium-term note programs and other cross-border debt securities offerings. He is a contributor to Covered Bonds Handbook, published by Practicing Law Institute (2010).

Peter Green, a partner at Morrison & Foerster, focuses primarily on structured credit and structured products transactions. He represents investment banks, issuers, investors and other providers of financial services in relation to public offerings and private placements of debt instruments. He has advised in relation to the unwinding and restructuring of a number of such transactions.