Thursday, September 26, 2013

Employees first – results second? - Vineet Nayar and his unconventional management style


About 2 years ago. I attended a conference lead by Vineet Nayar, CEO of HCL Technologies. I remember very well the setting: The room was packed with HR people admiring HCL Technologies and his CEO (“Vineet, this is so inspiring!”). At that time, I also found Vineet's speech excellent. However, I was somewhat wondering: Was is all true or only about selling the company?

This year, the summer in France was fantastic. One day, I was sitting on the beach and enjoyed the sun. I opened Vineet's book “Employees first – customers second” that has been waiting on my book shelf since the conference two years ago.

Vineet starts off with a story of a race-car driver he has met on a flight from New York to Frankfurt and whose car breaks fail during a race. What to do? “Speed up, accelerate past the other cars and then take whatever action is necessary.”

I am now on page 2 of the book and wonder if I should stop here. But I am on holiday and have time, so I keep on reading.


“Any transformation journey requires innovation both in what you do and in how you do it.”


The “Employees first, customers second (EFCS)” concept is about how you do things, not what you do.


“In any services business, the true value is created in the interface between the customer and the employee. Thus, when a company puts its employees first, the customer actually does ultimately come first and gains the greatest benefit.”





Vineet organizes his book in four parts, describing the phases of his EFCS concept:

  • First phase: Mirror-mirror – Creating the need for change
  • Second phase – Trust through transparency: Creating a culture of change
  • Third phase – Inverting the organizational pyramid: Building a structure for change
  • Recasting the role of the CEO – Transferring the responsibility for change


Mirror-mirror: Creating the need for change

This step of the HCL's transformation starts off in 2005. Even though HCL Technologies is doing pretty well (growing revenues), its competitors are doing even better – they grow faster and increase market share. In addition, at that time, the CIO (Chief Information Officer) function is changing dramatically (faster delivery and achievement of a competitive advantage) and, thus, profoundly readjusts HCLT's main customers.

Vineet decides to make his employees see the reality of the situation, create a dissatisfaction with their status quo, and nourish their hunger for change.


“I realized, with some surprise, that neither a point A nor a point B had been clearly defined. People had different views of where the company was and where is should be headed.”


Vineet criticizes that most companies define where to go (point B) but not where they stand today (point A). In his view, this is all the more surprising, as the status quo often represents “the elephant in the room, i.e. the truth everyone knows about but nobody speaks out loudly”.


“The pride we take in our work and in our past can make it difficult to hear the truth, let alone accept it.”


Looking into the mirror is carried out through talking face-to-face with employees, not by sending out memos. Here, the CEO distinguishes three groups of employees:

  • Transformers are waiting for a change since a long time.
  • For lost souls, everything the management proposes is hopeless and wrong.
  • Fence sitters constitute the largest group, rarely speak up in meetings, and rarely ask questions. They are in a watch and wait mode.

As you might expect, Vineet focuses his energy on the transformers. His idea is that they convince the fence sitters and that the lost souls either change or leave the company.


“Some people tend to think that a fault is always beyond their control and find an excuse for everything.”


“It took me a while to realize that far too many people at HCLT were focused on the past. […] The present was too frustrating. The future was too unknown.”


Trust through transparency: Creating a culture of change

Change often fails because employees don't trust their management, writes Vineet Nayar. At HCLT, Vineet combats such lack of trust through radical forms of transparency:

  • Against resistance from some managers (fearing that their managerial authority could be undermined), Vineet grants every employee access to financial data of every business line and the company as a whole.
  • On an on-line forum, every employee can publicly ask questions and receive answers about any topic whatsoever.


“People within the organization know very well what's wrong with a company.”


“We needed a big change, but it did not have to be the one I had proposed.”


“The trust quotient, particularly regarding business leadership, is at an all-time low around the world.”


“Lack of trust, we had discovered, was the most important “yes, but” of all.”


“The more transparent you are, the more you will bring your house in order because every dirt will be visible.”


“Increased transparency let to quicker action at the grassroots level. It also motivated the teams that were doing well.”


“By being open and acknowledging the imperfections that existed in the company, we had shifted the conversation away from what was wrong to what could be done about it.”


Inverting the organizational pyramid: Building a structure for change


“There were senior people on top; a thick layer of middle managers and enabling functions […] in the middle, and the front-line workers, who had the least power and influence, on the bottom. The command-and-control approach has characterized large organizations for centuries.”


The starting point for Vineet's strategy is that traditional top-down management doesn't make much sense today. The reason is that it doesn't allow fundamental change to take place. In addition, it means that those out of the value-zone (= the interface between customer and employee) have the most power in the organization which cannot favor value creation.

Turning the traditional approach upside down then means that bosses should be accountable to the value zone and not vice versa. To that end, Vineet takes three specific actions:

  • A smart service desk (SSD) allows front-line employees to open a ticket any time they confront a hierarchical problem with an enabling function. The ticket remains open until the conflict is solved and allows transparent problem-solving.
  • Front-line employees can publicly rate the quality of the service provided by a support executive.
  • Any employee can initiate a public 360 degree appraisal of any manager.

As you can imagine, HCLT's top management first resisted these measures. Vineet describes in his book very well how and why he was able to overcome such resistance.


“The SSD initiative essentially leveled the playing field. It didn't matter where the employee was in the hierarchy, his or her cause would be heard.”


“The many know more than the few. Collective wisdom outshines individual judgment.”


“The communication of an initiative was often as important as the initiative itself.”


“You must never completely believe what you see; you must always look beyond the immediate to understand what's going on.


Recasting the role of the CEO: Transferring the responsibility for change

Traditionally, HCLT functioned like a spider, i.e. the organization was centralized and dependent on the central CEO function. Vineet wants to transform the company into a starfish, i.e. a decentralized organization that can function in autonomy and replicates any governing body on a local level.

To illustrate his approach, Vineet describes the example where his employees develop an internal HCLT consulting project with a customer without informing the management. Nevertheless (and because the initiative is successful), they get applauded for their initiative. Nice story, I think, but, as an employee, you should probably be very careful when choosing your internal project before you share it with external clients.


“They [HCLT employees] had made a fundamental shift in the way they worked and how they added value for the customer without being directed to do so by me or any superior.”


Which specific initiatives were taken to recast the role of HCLT's CEO?

  • The CEO asks questions instead of pretending to know every answer. “Rather than hide my struggles or pretend I had the answers, why not seek help from the organization?”
  • Measure employees' passion instead of their satisfaction: “Doesn't satisfaction actually imply a complacent acceptance of how things already are? If I am satisfied, will I be interested in changing or improving anything?”
  • Create a value portal where employees can post new innovative ideas and share them with customers.

But why would Vineet limit his own function and sphere of influence? He highlights three reasons:

  • Concentrating power in the office of the CEO drains power away from the value zone.
  • The speed of change and its implementation gets suffocated by too much hierarchy.
  • The complexity of today's business is impossible to be managed by one individual or one individual company unit.


“The role of the CEO is to enable people to excel, help them discover their own wisdom, engage themselves entirely in their work, and accept responsibility for making change.”



I found the book interesting. The examples and stories are sometimes a bit stereotype, but that seems to be necessary to sell this kind of business book. Positive is the personal writing style and the attitude of the author who doesn't want to sell his doctrine but to share his experience.


HCLT's financial performance

Now back to my provocative title: Is Vineet's management and HR stuff worth it, from a purely financial perspective? My answer answer is yes!

My financial analysis shows that HCLT is among the best performing Indian IT service companies and constantly creates value.


“The beauty, ultimately, is in the experiments and the learning we gain from them.”


“Today, as much as my eyes have been opened, I wonder if I am still in the dark.”


Resource:


Thursday, September 19, 2013

IIF Meeting in Paris (V) – Global economy outlook

On June 25 and 26, 2013, the Institute of International Finance held its spring membership meeting in Paris. During a fifth roundtable, the participants discussed the changing landscape for institutional investors.


Hung Q. Tran, Executive Managing Director, IIF

 




In his introduction, Hung Q. Tran refers to the normalization of the global economic outlook.

The US economy is back to trend growth, namely due to a strong recovery of the household sector. He holds that the FED should stop supporting the US economy via accommodative monetary policies, in view of 2.5 % trend growth and less than 2 % inflation. However, as a consequence of a FED’s policy change, financial markets will, in the near future, most likely experience a high level of instability and volatility.

Positive evolutions in the European economy are declining economic imbalances among EU countries and improving current and fiscal account balances, especially in Southern European countries. Adverse developments exist as regards increasing unit labor costs, namely in France and Netherlands, as well as declining interbank lending.

In emerging markets, Hung expects a small decline of investment flows in 2013 and 2014, due to declining growth rates and lower profitability. A key concern for these countries is also the credit growth, especially where banks’ loan book quality is deteriorating and non-bank lending is exploding.

Finally, Hung identifies the declining marginal contribution of debt to growth as the major medium and long term challenge for the US and other developed economies: In other words, any new percentage point of debt will, over time, contribute less and less to economic growth.


Quotes

The extraordinary measures taken by the FED and all the central banks were in response to the extraordinary weaknesses of the economy after an extraordinarily severe financial crisis.”

In my view, tapering off has been long overdue.”

I think we have a long way to go to that normal [monetary policy] situation.”

The US household is now richer than ever before – higher than the peak before the financial crisis.”

The longer the recession persists, the more non-performing corporate loans will increase.”

The glass [the economic situation in Europe] is half fuller but still half empty.”

It cannot be said that China has a deepening financial sector – it is a bit too deep at the moment.”

The limitation of credit lending and the expanding financial sector is difficult to do with a soft landing.”

The global economy growing at 3 % is dangerous […] because any shock – national or man-made – could get it quickly into recession. […] We are now basically flying without a parachute or without a safety-net – it is worry-some.”


Ramon Aracena, Chief Economist of the Latin America Department, IIF



 

Ramon divides Latin America, from an economic angle, into three areas:

  • Pacific alliance countries (Columbia, Chile, Mexico, and Peru) have well balanced and consistent macroeconomic policies in place and pursue precise inflation targets. Because of their strong fiscal positions, they will be able to withstand economic policy normalization in the US.
  • On the other end of the spectrum, Venezuela’s and Argentina’s economic institutions lack independence, the countries expropriate property rights regularly, and their governments pursue “populistic anti-market policies”. As they show declining trend growth, these countries will be vulnerable to tapering in the US.
  • Brazil stands in-between the above groups of countries: It might suffer economically because the country is not very open to international trade, its monetary policy lacks consistency, and the Government strongly intervenes in the economy.


Quotes

The main problem in Brazil now is a confidence problem.”

[Brazil needs] a balanced and coordinated monetary, fiscal, and quasi-fiscal policy, all of them moving in the same direction.”

The problem Brazil is having is that the policy adjustments will be much more difficult to implement […] because of social unrest and social pressures.”

Latin America ranks very badly in terms of competitiveness across the different regions.”


David Hedley, Deputy Director of the Africa and Middle East Department, IIF




 
David reports on the economic situation in Africa and identifies four major risks for the continent:

  • Inflation remains in excess of 8 %.
  • Current account deficits are important, often in excess of 10 % of GDP.
  • Vulnerability to commodity prices, for example in Kenya, Ghana, and Tanzania
  • Large fiscal deficits are difficult to control, especially because infrastructure needs in African countries are tremendous.

Positive for African countries are, on the other side, the currently declining debt servicing costs, due to recent successful bond placements.

In a spotlight on South Africa, David explain the country’s prevailing monetary policy dilemma: As a matter of fact, South Africa has reasons for both lowering and raising interest rates. Weak economic activity and the need to create jobs suggest lower interest rates while inflation at roughly 5.6 % and depreciating exchange rates back high interest rates.


Lubomir Mitov, Chief Economist of the European Department, IIF

 




Lubomir’s presentation focuses on central Europe:

In the realm of recessions in Western European countries, central European countries currently experience a sharp drop in foreign direct investment inflows. Furthermore, as European banks deleverage, bank lending in these countries has dropped sharply. Additional internal factors such as weak consumer and business confidence as well as weak domestic demand contribute to fairly sluggish economies in this region.

As reported by Lubomir Mitov, central banks can do little to tackle these problems. They require structural reforms, which are problematic for governments to implement, because of tight fiscal budgets.


Quotes

There is one single issue which is of importance in the region [Central Europe] – the really disappointing growth performance.”

Fixed investment has been declining almost everywhere [in Central Europe].”

Because the slowdown [of the economy] seems to be mostly structural, policy challenges have become more difficult.”

To summarize, we have very constraint policy options.”

Under these circumstances [unemployment at records lows, inflation at record highs (about 7 %), and pressure on wages] fiscal and monetary policy [in Russia] can do little to boost growth but can do a lot to further push inflation up.”

The odds for a major financial dislocation [in Ukraine] have really increased sharply and are rising. And we are really talking about something big here.”

This [high current account deficits in Turkey in the range of 6-7 % of GDP] is not an alarming situation as long as capital inflows are coming but could become really difficult to handle when capital flows go out.”

What makes Hungary really vulnerable is the very large exposure to foreign exchange risk.”


Patrick Artus, Chief Economist, Natixis





 
Patrick primarily explains the differences between monetary policies in the US and in Europe.

First, the European Central Bank has traditionally adopted a monetary policy not comprising the purchase or holding of government bonds. Second, different monetary policies in the US and Europe can be explained by the hierarchy between long-term rates and nominal growth: Long-term rates below nominal growth rates have a positive effect on the economy because de-leveraging will become easier and asset prices will go up. The US FED benefits from such a situation whereas Europe, at present, experiences the opposite.

Natixis’ chief economist concludes that it would not be wise for the ECB to follow expansionary monetary policies of the type adopted in the US or Japan. The reasons are the following:

  • Extremely low level of potential growth in Europe (Nominal potential growth of 2 % per year as opposed to 4.5 % per year in the US) which makes it difficult to bring long-term growth rates below potential growth.
  • High debt to GDP ratios in Europe
  • In the US, credit demand has been growing again since 2011. At the same time, credit demand in Europe has collapsed.

According to Patrick Artus, possible solutions for solving the European crisis consist of

  • making European capital markets less segmented country by country;
  • making the quality of banks' balance sheets more transparent;
  • improving technical progress in Europe;
  • making labor markets less rigid and more flexible.


Quotes

The austerity policies [in Europe] probably – or visibly – have not lead to very successful results.”

There is very little excess liquidity in the Euro area. There is a lot of excess liquidity in the US and Japan.”

The ECB is very much aware of the moral hazard effects that could arise if it were to start buying very aggressively on the government bond markets.”

[Long-term rates below nominal growth] is what is behind the [economic] recovery in the US.”

In theory, there are no clear-cut effects of a very large monetary expansion on the economy.”

My personal view on Japan is that what's been done [the monetary policy] is very detrimental to the Japanese economy and this is very much going in the wrong direction.”

I am absolutely convinced that we will end up with a Yen crisis. At some stage, the balance sheet of the Bank of Japan will become so large that people will start to get out of the Yen. This is an extremely dangerous risk the central bank is taking.”

Europe is so different from the US that it is very unlikely that, what worked in the US, would be efficient in Europe.”

The big problem [for obtaining a fiscal stimulus in Europe] here is the segmentation of capital markets.” “If you want a fiscal stimulus, it's mostly on a country by country basis.”

There is a very significant negative effect of [a high] Debt/GDP ratio on potential growth. […] I am very much worried about what's going on with debt/GDP ratios in Europe.”

You cannot force someone to borrow more if he doesn't want to.”

We have to work on the structures of Europe. Monetary policy will not help very much doing that.”

The effects of very expansionary monetary policies are extremely ambiguous and extremely difficult to credit.”


Paul Donovan, Senior Global Economist, UBS Investment Bank

 




Paul talks about China and highlights lower growth prospects for the country. In his view, this is mainly due to declining demographics and limited natural resources. This lower growth rate as such is, however, not a major problem for China, because its Inflation has remained lower than expected and helps keeping social stability.

Nevertheless, in the long run, China should keep an eye on its debt level whose growth might become unsustainable.


Quotes

I don't come with good news […]; I come with less bad news.”

In the longer term, China's growth is clearly lower [around 5.5 % or, in a risk case scenario, about 2 %].”

A natural disaster is good for growth. […] It is not good for standards of living.”

You [the Chinese government] don't want a credit bubble in the first year in office [now], you want it in the ninth year in office.” Therefore, the Chinese government will not allow a credit bubble to burst now.”

I am not worried by the stock of debt in China. Debt of 200 % of GDP is not a problem. This is domestically owned debt.”

Inter-generational wealth transfers can be reversed very easily. There are many ways we can transfer wealth between the generations – something I remind my father of on a weekly basis.”

We cannot have the level of credit growth [in China] that we have seen in the past.”

Sunday, September 8, 2013

The draft EU Directive on the recovery and resolution of credit institutions and investment firms – The end of “too big to fail?”


Imagine the following situation: You are poor. Luckily, a few years ago, you married the daughter of a wealthy hedge fund manager. Your father-in-law has passed away just a few months after your marriage, so there is – -besides your wife – just your mother-in-law left, sitting on a huge fortune. She has already celebrated her 90th birthday and is, in addition, sick. A trustee has been put in place. Her passing away is just a question of time…

In the above story, your mother-in-law is a systemically important financial institution, her trustee is the regulator, and you are the general public.

What should you do? The European Commission, in its draft proposal dated June 6, 2012, proposes a six step approach:

  • Clarify your goals! (Purpose)
  • Evaluate whether there is any need to act now! (Scope of application)
  • Make sure that your mother-in-law makes the right decisions! (Measures by financial institutions)
  • Verify that the trustee is on your side and makes the right decisions! (Measures by member states’ authorities)
  • Make alliances with other members of your family! (Relation with third countries)
  • Check your own bank account and make sure that you have enough money to pay for your operations! (European system of financing arrangements)






A. Purpose – Which?

Which?
  • Strengthen banks’ vital role for the economy and people’s trust on which banks’ business depends.
  • Reduce systemic risk in the banking industry and enhance financial stability by providing resolution tools other than traditional insolvency proceedings.
  • Manage bank failures in an orderly way to limit the risk of contagion.
  • Safeguard financial stability and limit taxpayer exposure to loss from solvency support.
  • Harmonize procedures for resolving credit institutions at EU level.


B. Scope of application – Who?, What?, When?

Who? The directive applies to any financial institution. The definition is large – it namely includes credit institutions and investment firms, whether in subsidiary, independent, or holding form.

What? As its title indicates, the directive applies to recovery and resolution scenarios. Resolution refers to a restructuring of the institution. A recovery is somewhat broader. It refers to a situation in which a financial institution succeeds to redress its financial situation after a significant deterioration.

When? The directive will apply from January 1, 2015 on.



C. Measures financial institutions take


I. Recovery planning– Who?, What, When?

Who? What? The institution must draw up a plan to ensure recovery. In case of a group of companies, the directive requires recovery plans at subsidiary and group level. But what precisely is a recovery plan? It is a document that analyzes the firm’s strategy, how its financial situation and strategy could be affected by stress situations, and how the firm could fix this situation, without public financial support. A detailed list of contents is included in Annex / Section A of the directive. Recovery planning cannot rely on extraordinary financial support.

When? The plan must be in place when the directive becomes applicable, i.e. on January 1, 2015. If its organization or business or financial situation changes materially, it must update the plan. An annual update must be made in any case.



II. Intra-group financial support – What?, When?

What? Intra-group financial support refers to financial support agreements that will become mandatory within a group of financial institutions. The support shall be remunerated and the calculation of consideration fixed in advance.

When? Article 19.1 of the directive provides for detailed support conditions. Namely, support shall only be given for the group as a whole, it must be reasonably likely to be successful, and it should not endanger the financial stability of the entity granting the support.



D. Measures member state authorities take

I. Resolution planning – What, When?

What? Resolution plans are drawn up by public authorities and deal with the question of how to unwind failing financial institutions, without public financial support and without significant adverse consequences for the financial system. Article 9.4 of the directive specifies the content (separation of critical functions and core business lines, timeframe of resolution, valuation of critical functions and core business lines, financing, critical interdependencies, communication plan, etc.). A resolution plan is mandatory at parent and subsidiary level; if different authorities are competent at parent and subsidiary level, they shall coordinate their decision within the resolution college. Resolution planning cannot rely on extraordinary financial support.

When? After first establishment upon entry into force of the directive, resolution plans must adjust to material changes in the legal and organizational structure of the institution and are updated, at least, annually.


II. Early intervention – What?

What? Prior to resolution measures, member state authorities have access to early intervention measures such as requiring the application of recovery tools and preparing specific management decisions (replace the management team, restructure negotiations, contact potential purchasers of the financial institution, appoint a temporary special manager, etc.).


III. Write down of capital instruments – When?, What?

When? A write down of capital instruments is a pre-requisite for the application of any resolution tool. It can intervene if a financial institution meets the conditions for its resolution.

What? A write-down means to reduce the principal value of a capital instrument to zero, usually without any compensation for its holder.


IV. Exercise resolution tools

1. Objectives – Which?, Who?

Which? Objectives all turn around financial stability: ensuring the continuity of critical functions, preventing contagion, and maintaining market discipline.

Who? Resolution planning intends to protect the general public – taxpayers, depositors, investors, and clients.



2. Principles – Which?

Which?
  • Ranking: Shareholders shall bear losses before creditors.
  • Treatment of creditors: Within the same class, creditors shall be treated equal. They cannot incur greater losses than under normal insolvency proceedings.
  • Participation of senior management: Senior management of a failing institution shall be replaced and bear losses, through civil and criminal responsibility.


3. Conditions – Which?

Which?
  • The institution is failing or likely to fail (i.e. breach of capital requirements, assets less than liabilities, inability of the institution to pay its obligations as they fall due, or institution’s request of extraordinary financial support)
  • There is no reasonable prospect for any alternative private sector or supervisory action that would prevent the failure in a reasonable time frame.
  • The resolution is necessary in the public interest.


4. Valuation – What?, Who?, How?

What? Assets and liabilities of the financial institution

Who? Valuation is usually carried out by an independent expert. In case of urgency, resolution authorities themselves may evaluate.

How? Valuation is normally based on fair market value. If, however, the market is not working properly, valuation shall reflect the long-term economic value of assets and liabilities. Extraordinary public support is not taken into consideration. Finally, the valuation shall indicate the ranking of creditors.



V. Resolution tools – Which?

Which? Resolution tools can be either normal insolvency proceedings or any of the following specific resolution tools:

  • Sale of business
  • Bridge institution
  • Asset separation
  • Bail-in

Resolution tools may be applied separately or in conjunction with each-other.


1. Sale of business – What?, How?

What?
  • Shares or other instruments of ownership
  • Specified assets, rights, or liabilities
  • Combination of assets, rights, and liabilities

How? The transfer must be made on commercial terms. Except for the purchaser, no shareholder or third party consent is required. Guiding principles for the selling process are transparency, non-discrimination, prevention of conflicts of interest, avoidance of unfair advantages on a potential purchaser, rapidity, and sale price maximization.


2. Bridge institution – What?, When?, How?

What? Specific or all assets, rights, or liabilities or an institution under resolution can be transferred to and re-transferred from a bridge institution as well as transferred from a bridge institution to a third party. A bridge institution is a special purpose vehicle (partially) owned by one or more public authorities. Its purpose is to hold the financial securities until selling them to a private investor becomes appropriate.

When? A transfer is possible if the financial institution is under resolution.

How? A transfer requires no shareholder or third-party consent or specific procedure. A re-transfer is only possible if provided for prior to the initial transfer.


3. Asset separation – What?, How?

What? Assets, rights, or liabilities of an institution under resolution can be transferred to a publicly owned asset management vehicle to maximize the value of such assets or wind down the business. Asset separation is only possible if normal insolvency proceedings could have an adverse effect on the financial market.

How? A transfer requires no shareholder or third-party consent or specific procedure. A re-transfer must be provided for prior to the initial transfer.


4. Bail-in – Why?, When?, What?, How?

Why? A bail-in of a financial institution’s liabilities can pursue a dual purpose – to recapitalize the institution to reach sufficient equity levels or to reduce the debt level of the institution.

When? It must be realistic for a bail-in to restore the financial soundness and long-term viability of the institution.

What? All liabilities can be bailed in except guaranteed deposits, secured liabilities, assets held for third parties, liabilities with an original maturity of less than one month, privileged liabilities towards employees, liabilities towards commercial or trade creditors that are essential for the creditor’s operations, and liabilities towards tax and social security authorities.

How? A bail-in must be accompanied by a business reorganization plan.



VI. Resolution powers – Which?

Which?
  • Require information from any person to decide upon and prepare a resolution action
  • Take control of an institution under resolution
  • Transfer shares, debt instruments, and specified rights, assets or liabilities of an institution under resolution
  • Write down or convert instruments (other than equity instruments) into equity instruments of the institution under resolution
  • Reduce the principal amount of liabilities of an institution under resolution
  • Cancel shares and debt instruments of the institution under resolution
  • Require the institution under resolution to issue new equity instruments
  • Amend or alter the maturity of debt instruments of the institution under resolution
  • Remove or replace senior management of the institution under resolution
  • Ancillary powers such as modifying contractual terms of the institution under resolution, restrict enforcement of security right against the institution under resolution, and temporarily suspend termination rights towards an institution under resolution


VII. Group resolution – What?

What? In case a financial institution has subsidiaries in several member countries, the resolution of the group as a whole or any of its subsidiaries shall be coordinated within a resolution college. Main features of the cooperation are exchange of information, resolution strategies, and communication plans. The group level resolution authority coordinates the activities.



VIII. Relations with third countries – What?

What? To coordinate resolution issues with countries outside the EU, the directive intends for the European authorities to

  • negotiate international agreements;
  • sign cooperation agreements with non-EU resolution authorities;
  • recognize or refuse third country resolution proceedings.


IX. European system of financing arrangements – What?, Why?

What? The European system of financing arrangement sets up national financing arrangements, provides for borrowing among them, and combines them in case of a group resolution. Its target financing level, ten years after entry into force of the directive, is 1 % of total deposits with credit institutions.

Why? The system is put in place to guarantee or purchase assets or liabilities of an institution under resolution, to grant loans to it, or to contribute to a bridge institution.


As a reminder, the above has not been formally agreed upon by the European legislator. Even though the big picture is not likely to change, details are still under discussion.


Resource: