Aug 082014

Foreign policy overshadowed financial policy in the headlines this week, but two key stories from the banking sector are worth noting.

In Europe, the Bank of Portugal unveiled a plan to rescue Banco Espirito Santo.  The restructuring plan will divide the bank into two separate entities effectively creating a “good bank” and “bad bank”.  Shareholders and junior bondholders will bear the brunt of the losses.  ISDA ruled that it isn’t a bankruptcy credit event, thus the CDS will not be paid out.  In 2016, a tougher set of bail in rules for creditors will apply, which could wipeout senior bondholders, as well.

In the US, regulators rejected the top bank’s “living wills”, which are to show how they could be wound down in a crisis without inflicting widespread damage to the economy.  The FDIC and Fed released a joint statement, though the regulators were split on their response, the FDIC taking a harsher stance.  Both regulators must agree in order to implement punishments, such as more stringent capital or leverage ratio requirements.


Banco Espirito Restructure

The implications of bail-in rules for bank activity and stability.  Opening speech by Benoît Cœuré, Member of the Executive Board of the ECB (2013)



Biggest US Banks Told to Simplify Their Living Wills

CFP Senior Fellow David Kass quoted in the following article:

Federal Reserve Press Release


Big banks still a risk

 (7/31) Hearing on Examining the GAO report on Expectations for Government Support for Bank Holding Companies


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