Bank Recovery and Resolution: What About Shareholder Rights?

Abstract

In the post-financial crisis regulatory reforms emphasis has been placed on creating recovery and resolution frameworks for banks, which ensure that the costs of failure are primarily born by shareholders, instead of taxpayers and the wider economy. Supervisors have (or will have) extensive powers on banks, e.g. to remove and replace directors, to appoint “special managers”, to transfer shares and assets of banks to third parties, and even to cancel existing shares and issue new shares in order to “replace” existing shareholders. This paper focuses on bank recovery and resolution in the European Union and in the United Kingdom. Four key issues are examined. First, the interaction between recovery and resolution tools and shareholder rights, such as property rights (including pre-emption rights) and governance rights (including appointment of directors, shareholder approvals, and procedural rights). Second, the paper studies whether interference with shareholder rights in the context of bank crisis management is justified as a matter of policy and as a matter of law. Third, the paper examines appropriate safeguards for shareholders and the extent to which such safeguards exist in bank recovery and resolution. Finally, the paper discusses possible practical implications from the perspective of bank shareholders, such as reduced interest in long-term investments in banks, or exacerbation of shareholder moral hazard when a bank approaches the triggers for resolution.

Keywords: banking regulation, crisis management, resolution, shareholder rights, Banking Act 2009, Bank recovery and resolution directive

JEL Classification: G2, G21, G28, G3, G38, K2, K20