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INTERNATIONAL
Rosali Pretorius, financial markets and regulation partner at Denton Wilde Sapte says: "The interventions in October 2008 were designed to prevent the collapse of banks. Today's intervention extends a number of the existing measures - extending drawdown of credit guarantee scheme; Bank of England discount window facility and introduces a major new measure, the Asset Protection Scheme. This is designed to stem the adverse impact on bank balance sheets of the continuing downward spiral of loan asset values. The lack of liquidity in the financial markets has caused solid performing assets to be marked down in bank balance sheets to values as low as 60%, a downward process which has become self-reinforcing. This is putting considerable pressure on the capital of banks, and the Government Asset Protection Scheme should go along way towards easing these pressures. There is bound to be pressure on government to intervene in banks, especially now that preference shareholding has been converted into ordinary shareholding. (That in itself makes sense, as cost of preference shares are said by some to be the reason for the lack of lending). Government schemes make intervention possible - see e.g. terms of Asset Protection Scheme. Assets (e.g. loans) benefiting from guarantee, although on balance sheet, must be ring fenced so that enforcement and disposal action in respect of these loans will be subject to government controls. The Scheme may also provide for the Treasury to take over ownership and/or management of the assets in certain defined circumstances. Details still to be published. A key plank of government proposals, especially the new government guarantee of asset backed securities under the Asset Protection Scheme, is the government's own credit rating. This must be maintained at all costs so the credit guarantee scheme works. The Credit guarantee scheme effectively replaces the CDS market which remains effectively closed. Some say government should move toxic assets to bad bank rather than guarantee them with taxpayers' money. But the Asset Protection Scheme may yet include moving assets to a "bad bank", as the Treasury contemplates ownership. And the Banking Bill, now in the Committee stage in the Lords, makes permanent a special resolution regime to split banks up to shore up financial stability. The FSA announcement on capital regulation is consistent with those announced by the Basel Committee on Friday especially as to measures to counteract procyclical nature of current capital regulation. One measure is to require banks to strengthen core tier 1 capital to 4%. The government intervention here, in the US, in Europe and elsewhere will take some time yet to make a meaningful impact, and there is unlikely to be a repeat of the huge flows of cheap credit arising from the "originate-to-distribute" model of the last 10 to 15 years. So, many corporates will still experience difficulties financing and refinancing over the next 12 to 18 months, and we will continue to see restructurings (particularly featuring debt for equity swaps) and insolvencies until we reach a lower leveraged economic environment. But some very positive steps are being taken, and there are positive developments occurring in the financial markets, such as Commerzbank's successful issue of new debt backed by Germany's banking sector stabilisation fund. Hopefully these measures together will hopefully ease the crippling effects of the current lack of liquidity. The number of market commentators are concerned at increased protectionism, rolling back benefits of globalisation. Likely pressure from taxpayers to see UK government money spent on UK loans, not foreign loans. Interestingly the UK government seems to be keen to lead the charge with ideas to deal with the credit crunch - discussions to establish similar asset protection schemes internationally." The financial markets and regulation group at Denton Wilde Sapte LLP is well-placed to comment on these developments. The group focuses on the commodities future market and energy trading, but also has retail and consumer credit advisory capabilities, and was joined by Jody Whitehorn from the OFT as well as three lawyers from the FSA's enforcement division. It advised over 30 clients on MiFID projects, and acted for Nasdaq-OMX on the establishment of a pan-European equities exchange. Clients speaking to the Chambers UK Guide to the Legal Profession say well-reputed Robert Finney is "hugely knowledgeable" and "obviously an expert on energy market participants." As head of the firm's financial markets and regulation group, he advises clients on a broad range of financial regulatory and compliance issues.
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