A banking problem ? 

BANK RESTRUCTURING CONSULTANT

A bank in peril is not necessarily doomed ; simple ways out do exist without necessarily calling for public money. The undersigned has successfully carried out and finalized banks and finance companies restructuring missions in Nigeria, Ivory Coast, Algeria, Thaïland and Yemen.

Summary

Personal

  • Raymond Biré
  • French citizen

EDUCATION

  • Master business administration (Ecole Supérieure de Commerce de Paris, ESCP-EAP)
  • Bachelor private law, honour, (Paris Law University)
  • Master business law, (Paris Law University)
  • Harvard Business School, Advanced Management Programme

Banking crises and restructuring strategies

BANKS' RESTRUCTUTING CONSULTANT

STRATEGIES TO DEAL WITH BANKS' CRISES

A bank facing serious financial difficulties stemming mainly from non performing loans or eccentric derivatives should not be calling for government rescue.
With common sense and integrity, such difficulties could be overcome.
A primary role should be played by "bank restructuring" workouts which could avoid that tax payers carry the final financial burden of bank's own mistakes.

1-ASSESSMENT

Even in the case of a disastrous finacial state of affaires, a bank should not call for public money.

The more so, that these finacial difficulties, more than often, stemm from the bank itself.

Indeed the 2008 banking crisis was the result of : 

   1- an unacceptable volume of Non Performing Loans (NPL), 

   2- an unresonable amount of finacial intruments/derivative whose complexities were totally extravagant.

Regrettably both risks where not sufficentely provisioned.

With the implementation of Banks' restructuring missions such unpalatable outcomes cold be avoided.

A the end the tax payer would not be called upon to pay for mistakes which are not his/her.

A-Current situation

In the past banks' responsibilities were to assist companies and individuals to grow into given economic environments.
A couple of decades ago a strong drift from "actual economic considerations" to "virtual operations" has been witnessed : "the surge of derivatives / financial instruments" hence the popping up of continuous banking crises.

B-Causes

    1. External
        1. Growing trend of virtual financings through risky financial instruments instead of actual economical financings.
        2. Non implementation of existing banking regulations and lack of proper action by the controlling authorities themselves.
        3. External auditors' failings and in some cases their readinesses "to oblige Management".
        4. The current fashionable concept of "global banking" which presumes that today's bankers are experts in all fields, which is totally unrealistic.
        5. The "too big to fail" concept which ensures defaulting banks with an automatic support from governments.
        6. A non functioning judiciary which does not condemn banks' culprits, contrary to the provisions of the law.
    1. Internal
        1. Misleading accounting practices whose main purposes is to show unrealistic end results in order to boost banks' quotations in the finance markets.
        2. Poor performances of banks' control units, more particularly credit and derivativewise.
        3. Obvious lack of provisions for bad credits and extravagant derivatives.
        4. Excessive size of the derivatives' volumes when compared to the credit ones.
        5. Use of multiple accounting tricks : "titrisation, credit enhancements, R.W.A ..." with the sole purpose of hiding bad credits in order to avoid their required provisionning.

C-Misleading tags

In order not to mention the words "banking crisis" which have an unpalatable effect on citizens at large, political and economic leaders as well as economic affairs correspondents rather talk about :

  • the sovereing debt crisis,
  • the euro crisis, 
  • the economic recession,
  • deflation, ...

thus avoiding the true issue which is simply the banks' blatant weaknesses resulting from bad practices.

D-Wrong way out

It would be wrong to financially assist a country in a difficult situation, in order to help the bailing out of some banks in trouble.
Indeed, if the causes of troubles have not been thoroughly investigated nor corrected, the "after the fact" invested funds will be to no use :

"the same causes will end up with the same outcomes".

European banking supervision system

1-Originally

 

(A) EUROPEAN CENTRAL BANK (ECB) had initially, two functions:

(a) to establish banking regulations for the Euro zone, their implementation being afterwards controlled by the SSM.

(b) Supervision of the 122 largest banks representing 82% of banking assets of  the Euro zone.

 

(B) SINGLE SUPERVISORY MECHANISM (SSM) implemented on March 19, 2013.

It was a regulatory body in charge of controlling, on a second-degree, smaller banks in the Euro zone; these continued to be supervised, on  a first degree, by their national authorities.

 

(C) EUROPEAN FINANCIAL STABILITY FUND (EFSF)

(a) Created on May 9, 2010

(b) Objectives

 Providing financial assistance to  European countries in economic difficulties; it could:

(i) redeem  bonds on secondary markets,

(ii) participate in the rescue of endangered banks.

(iii) grant loans to countries in economic difficulties, only when, these were unable to borrow on finance markets at acceptable rates.

(c) Capacity

Initially of €440 billion; the EFSF has seen afterwards its capacity raised up to €1 000 billion through the issue of bonds on finance markets.

(d) End of activity: July 1, 2012.

 

(D) EUROPEAN FINANCIAL STABILITY MECHANISM  (EFSM)

(a) introduction

Had at his disposal monies stemming from an emergency funding program.

These funds were raised on  finance markets and guaranteed by the European Commission thanks to the use of  the European Union budget.

It worked under the supervision of the European Commission and was intended to preserve the financial stability of the European Union in providing financial assistance to the Member States in economic difficulties.

(b) Cessation of activity: July 1, 2012.

 

2-current STRUCTURE

 

(A) FUND FOR DEPOSITS GUARANTEE AND RESOLUTION (FDGR)

(a) Established on 31-12 - 2010;

(b) Deposits guarantees; countries of the European Union will:

(i) by 31-12-2010 provide  banks guarantees in favour of depositors with assets from €100,000 onward,

(ii) reduce to 5 working days the acknowledgment of banks insolvencies,

(iii)  implement the repayment by failed banks of customers deposits within 20 working days.

 

(B) EUROPEAN CENTRAL BANK (ECB)

Supervision, on a first degree, of the 128 largest banks of the European Union.

 

(C) EUROPEAN BANKING AUTHORITY (EBA)

Operational as of  January 1, 2011; its functions are:

(a) implementation of supervision rules for  European banks in lieu of ECB initial responsibilities,

(b) to carry stress tests for the most important banks of the Union.

 

(D)  EUROPEAN STABILITY MECHANISM (ESM)

Implemented on September 27, 2012; since July 1st 2012 it replaced:

(i) European Financial Stability Fund ( EFSF) and

(ii) European Financial Stability Mechanism  (EFSM).

It can raise up up to €700 billion on finance markets.

Functions:

(i) help out countries in financial difficulties,

(ii) rescue  private banks in troubles.

 

(E) SINGLE RESOLUTION MECHANISM (SRM)  

It is intended to consolidate the European banking system through a "continuous control  activity" which is entrusted to the ECB.

As an actor of the SRM, the ECB can take binding decisions in the course of its supervisions; 

ex: assessment of an adequate level of equity against estimated risks.

(a) Implementation

January 1, 2016 for all the components of  the system.

(b) Area

Is restricted to the 128 banks under the ECB direct supervision.

(c)Purposes

It is intended to allow orderly resolutions of banks failures with  the least possible cost to i) taxpayers and ii) the real economy.

(d) Components, the SRM consists of two bodies:

(i) COUNCIL OF UNIQUE RESOLUTION (CUR)

The European Central Bank reports to the COUNCIL OF UNIQUE RESOLUTION (CUR)  the likely failure of a bank.

When the conditions for a feasible resolution are met,  the CRU adopts a resolution scheme.

The resolution scheme is immediately sent to the European Commission.

(ii) FUND OF UNIQUE RESOLUTION      (FRU)

Is used for the resolution of failed banks.

It is funded by the banking sector with a capacity up to € 55 billion which should be reached in 2022.

The FRU will be built through "National compartments" which, after a transitional period of 8 years, will be merged together.

 

3-UMBILICAL CORD

Contrary to what has been emphasised, it will not be cut off : sovereign debts and those stemming from banks' bankruptcies will follow on being aggregated.
Indeed, for the time being when MES lends directly to banks in difficulties, it calls for Countries' guarantees ; what will be on this account the SRM policy ? 

 

4-SHARES 

Within the SRM overall financing resources, each country will be assigned its own share ;  on which  basis will it be ? 

 

5-BAILING OUT 

The people responsible for bailing out a bank are listed in the following order :
a) shareholders,
b) creditors, and
c) when considered necessary by governments' authorities, depositors may be called to help out a banks' rescue ; starting with deposit balances in excess of € 100 000. (Mr. Michel Barnier, European Commissary, statement dated 19th December 2013).
Deposits will be protected by Governments up to € 100 000 ; beyond there is no guarantee .
Protected deposits will be reimbursed within 7 days.
This is as good as despoliation and thus may entice holders of sizable deposits to look for more hospitable jurisdictions.
Coordination of European deposits'guarantees laws : in the light of the above, it looks like a deception. 

 

6-WRONG PRIORITY 

The financial rescue of a "bank in difficulty", appears currently to be, the number one consideration with little thought being paid to the actual causes of the disaster nor their remedies.
Should a thorough analysis of the jeopardized bank is not carried out department by department, and no appropriate actions are implemented to correct the evidenced wrong doings, subsequent invested cash will be to no avail :

"the same causes will produce the same results". 

 

7-CRIMINAL RESPONSIBILITY 

In some instances public financial risks and citizen's losses have been generated by some irresponsible banks executives.
It is necessary to remind to some banks managements that banks are responsible for carrying out essential public services hence those executives do carry personal responsibilities towards the society into which they operate.
When it is clear that either ineptitude or lack of responsibility or deceit from some banks directors have been the grass root for banks' failures, then, these executives' responsibilities should be called upon to justice by their governments. 

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