Contributed by Arnold Buessemaker
Part III in a Review of Burden Sharing under the German Act for the Restructuring of Credit Institutions (Restrukturierungsgesetz, Restructuring Act)
In the previous entries, I discussed the two procedures under the German Restructuring Act (Gesetz zur Restrukturierung und geordneten Abwicklung von Kreditinstituten) by which a bank can adopt a plan for addressing its financial instability – the Restructuring Proceeding (Sanierungsverfahren) and the Reorganization Proceeding (Reorganisationsverfahren). This entry will discuss the power of BaFin to act without the consent of a system relevant bank to stabilize the financial markets.
The Ultima Ratio: Transfer Order (Übertragungsanordnung) by BaFin
By supplements to existing instruments under the German Banking Act, the Restructuring Act considerably extends the measures available to BaFin to stabilize a system-relevant bank even without the consent of the bank’s management, creditors, and shareholders if this is required to defend the stability of the financial markets.
The most drastic of the measures available to BaFin is the (partial) transfer – by administrative order – of the bank’s system-relevant assets and liabilities to another private bank or a “bridge bank.” Such bridge bank may be established by the Restructuring Fund, a fund to be newly created under the Restructuring Act and financed by contributions from the banking sector (see below). The transfer of system-relevant business to the bridge bank could pave the way to a liquidation of the remaining assets of the (no longer system-relevant) rest-bank in regular insolvency proceedings.
Transfer Order as Ultima Ratio
The transfer order is ultima ratio, if
- the bank is in jeopardy of insolvency (Bestandsgefährdung), and this causes a jeopardy for the financial markets (Systemgefährdung), the same conditions as are required for the initiation of a Reorganization Proceeding, and
- no other means are available to eliminate such jeopardy for the financial markets in the same secure way.
BaFin has a certain discretion comparable to the U.S. business judgment rule in applying the transfer order. However, where financial assistance from the Reorganization Fund may be sought in relation to the transfer order (i.e., to finance the bridge bank on the receiving end of a transfer of a bank’s system-relevant business), BaFin may only issue the transfer order in consensus with the steering committee (Lenkungsausschuss) established for the financial markets stability fund. The steering committee is an interministry committee consisting of one representative each from the Federal Chancellery, the Federal Ministry of Finance, the Federal Ministry of Justice, and the Federal Ministry of Economics and Technology, as well as one member proposed by the Länder. In addition, a representative of the Deutsche Bundesbank will belong to the steering committee in an advisory capacity.
Although ultima ratio, BaFin could attempt to speed up negotiations on a reorganization plan pending between the bank and its creditors by merely threatening to issue a transfer order in the event the parties do not agree on a reorganization plan.
Hive-Down of a Bank’s Business to a Bridge Bank
When the transfer order becomes effective, the bank’s assets, liabilities, and legal relationships captured by the transfer order transfer to the bridge bank. In the event the bank subsequently becomes insolvent, all such transfers cannot be challenged (Anfechtung) by an insolvency administrator or otherwise.
If the value of the assets and liabilities transferred is positive, the bridge bank must provide consideration to the bank; if it is negative, the transferring bank must provide consideration to the bridge bank. The consideration offered by the bridge bank will usually consist of shares in the bridge bank. However, it is payable in cash if the issuance of shares is unacceptable for the bridge bank or jeopardizes the purpose of the transfer order. This could be the case if the issuance of shares would provide the bank with a controlling influence over the bridge bank, requiring regulatory consolidation.
The bridge bank remains jointly liable for those of the bank’s liabilities that re not not transferred to the bridge bank. In order to achieve the legislative goal of separating the system-relevant business from the rest, such liability is limited to the amount that the respective creditors would have received had the transfer order not been implemented. This effectively limits the creditors’ claims to a hypothetical insolvency quota.
Transfer of Foreign Assets, Protection Against Terminations by Counterparties
From the German law perspective, the transfer order effects a transfer by operation of (German) law (universal succession) of all assets and liabilities concerned, even of those that are subject to foreign law. To the extent the underlying foreign law does not recognize such transfer by operation of law, the bank is obliged to effect a transfer that complies with the relevant foreign law requirements. Until such foreign law transfer becomes effective, the Restructuring Act provides for a trust relationship between the bank and the bridge bank, pursuant to which the bank administers the relevant assets/liabilities for the account and in the interest of the bridge bank. Creditors of such assets will no longer be able to pursue their claims against the bank. It remains to be seen whether a foreign court or an arbitration court, which may have jurisdiction over such an issue, will give effect to these provisions.
The amended German Banking Act provides that counterparties may not terminate legal relationships transferring to the bridge bank just because of such transfer. However, terminations may still occur where the relevant contractual termination provision does not refer to the transfer of the legal relationship or where it allows a termination based on the nature or quality of the receiving bridge bank.
Transfer Order to Members of a Bank Group, Financial Services Holding Group or Financial Services Conglomerate
The amended German Banking Act authorizes BaFin to issue a transfer order not only with regard to individual banks, but also with regard to bank groups (Institutsgruppen), financial services holding groups (Finanzholding-Gruppen), and financial services conglomerates (Finanzkonglomerate). BaFin may issue a transfer order to the respective holding company (übergeordnetes Unternehmen) of such a group, in case the own funds (Eigenmittel) on a consolidated basis fulfill the legal requirements by less than 90% or if such situation is imminent. It also may issue such a transfer order if the requirements for the issuance of a transfer order are fulfilled by an individual member of the group, and the crisis of this member creates a risk for the other members of the group and thereby for the financial market, such risk being assumed for group members domiciled outside of Germany, if, inter alia, the relevant foreign group member does not fulfill the requirements as to its own funds or liquidity applicable in the jurisdiction of domiciliation, or the opening of insolvency or comparable proceedings regarding the foreign group member is imminent.
Legal Remedy Against a Transfer Order
BaFin’s transfer order may be challenged in the higher administrative court within a period of four weeks from its notification in first and last instance.
The bank’s request for a transfer consideration higher than determined in the transfer order or the bridge bank’s request for an indemnification higher than determined in the transfer order in the event the value of the transferred assets is negative can only be pursued with the aim to amend the consideration/indemnification, but not to void the transfer order.
The successful challenge of a transfer order in the higher administrative court does not affect the validity of the hive-down. The hive-down can only be repealed to the extent such repeal
- would not risk jeopardizing the financial markets (Systemgefährdung),
- would not put at risk protected rights of third parties, and
- would not be impossible.
Creation of a Restructuring Fund
The primary aim of the Restructuring Act is to shift the burden of the costs of the restructuring of system-relevant banks from the taxpayer to the banking sector to the greatest extent possible. For this purpose, a restructuring fund is being established at the Federal Agency for Financial Market Stability (Bundesanstalt für Finanzmarkstabilisierung, “FMSA”) (the “Restructuring Fund”). The Restructuring Fund will be funded by contributions from the banking sector.
In order to keep the management of system-relevant banks from pursuing “too big to fail” strategies while relying on the Restructuring Fund’s assistance in the event of a crisis, the Restructuring Fund may not provide assistance to a system-relevant bank in crisis. It may only assist a bridge bank or other entity on the receiving end of a transfer of the system-relevant business from such bank. As a result, the bank’s shareholders and those creditors whose claims do not transfer to the bridge bank do not benefit from the Restructuring Fund’s financial assistance.
Practical Relevance of the New Restructuring Tool Set and Conclusion
The new tool set introduced by the Restructuring Act responds to the recommendations of the EU Commission (see communications of October 2009, May 2010 and October 2010) and of the Basel Committee on Banking Supervision (see Consultative Document of August 2010) advising EU Member States to develop national bank resolution frameworks in order to destroy the implied state guarantee for system-relevant banks. The EU Commission plans to present legislative proposals for an EU framework for crisis management in the financial sector in spring 2011.
It remains to be seen whether the new tool set established by the German Restructuring Act will be sufficient in practice to prevent a systemic crisis. The German Restructuring Act may not have completely achieved its main goal – to credibly destroy the implied state guarantee for German systemic banks. The EU Commission’s legislative proposals for an EU framework, which will be presented in spring 2011, may require to further improve the new tool set.