CROSS BORDER BANK INSOLVENCY FROM A EUROPEAN UNION PERSPECTIVE Erwin Nierop/ Pedro Gustavo Teixeira The views expressed do not necessarily correspond to those of the European Central Bank

Basic principles of EU law Universality (vs territoriality): home-country has exclusive jurisdiction on bank, branches and assets Unity (vs ring-fencing): bank and its branches, assets and liabilities elsewhere are treated as a single entity 22/02/2019

Basic principles of EU law (cont.) Equal treatment of creditors across the EU: no preferential treatment of local creditors Mutual recognition: Decisions of the competent authorities (courts, supervisors, administrative authorities) are recognised across the EU 22/02/2019

Scope of application of home-country laws Procedural and substantive effects of a decision of the competent authorities to declare a bank insolvent Lodging of creditors’ claims Verification of creditors’ claims Ranking of creditors’ claims 22/02/2019

Scope of application of home-country laws (cont.) Assets to be included in bankrupt estate Distribution of proceeds The effects of a court judgement and legal proceedings 22/02/2019

Employment contracts (lex contractus) Exceptions Employment contracts (lex contractus) Rights on immovable property (lex rei sitae) Netting (lex contractus) Repos (lex contractus) Transactions in regulated markets (lex contractus) 22/02/2019

Rules on settlement finality No retroactive effect of decision declaring insolvency of a participant in a system (“zero hour” rule) Insolvency of participant in a system is subject to home-country law However, rights and obligations in connection with participation in a system are subject to the insolvency law which the parties to the system have chosen for the system Collateral provided to a participant in a system (pledgee) or a central bank is not affected by insolvency proceedings against the pledgor Rights of a holder of collateral will be governed by the law where the collateral is recorded on a register, account or centralised deposit system 22/02/2019

Collateral law Validity and enforceability of substitution, top-up collateral and close-out netting is ensured Certainty on the law applicable to establishment and realisation is also ensured 22/02/2019

EU legislation, as implemented in national legislation, provides for Summary EU legislation, as implemented in national legislation, provides for high degree of universality full unity (no ring-fencing) the legislation itself is of course only applicable within the European Union but could perhaps serve as an example for cross-border bank insolvencies in globalised financial markets 22/02/2019

Outlook: principles for a multinational treaty or convention Common standards for cross-border bank reorganisations and insolvencies Recognition of the universality principle Recognition of the unity principle: Increased remote access and increased mobility of assets seems to support the equal treatment of creditors without discrimination on the basis of location of creditors and/or assets 22/02/2019

Outlook: principles for a multinational treaty or convention (cont.) No retroactive effect of insolvencies (zero hour rule) Validity and enforceability of netting arrangements Irrevocability and finality of cash and securities transfer orders in connection with the participation in payment and securities settlement systems Easy and rapid realisation of collateral in case of default of the pledger in the context of payment and securities settlement systems 22/02/2019

Thank you! 22/02/2019