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1 1 (February 2016)

handle is hein.amenin/aeiaaoi0001 and id is 1 raw text is: T he Bank of Portugal made a serious mistake in the structure of the C2 billion recapitalization of Novo Banco. It chosefivespecific senior unsecured bonds out of 40 bonds of equal rank to absorb the losses required to recapitalize Novo Banco. The justification was protection of small investors because the five bonds are held enti rely by large investors. Bondholders of equal rank receive unequal treatment. The result is legal challenges, claims of discrimination and of arbitrary action by bank regulators, and uncertainty for investors in Eurozone bank bonds. An alternative structure based upon the treatment of depositors in a bank restructuring will generate the necessary C2 billion of Novo Banco capital while providing full protection of small investors and equal treatment f or bondholders of equal rank. A clear set of predictable rules will be established. Under the Bank of Portugal plan, all holders of thefiveselected bondswill see100 percent of their holdings transferred to the bad bank and incur large losses. Under the equal treatment structure, even after full protection of small investors, less than 50 percent of large investor bondswill be transferred to the bad bank wherelosseswill be imposed. Bank of Portugal Recapitalization Plan The Bank of Portugal hastwo goals: 1. Recapitalize Novo Banco without taxpayer funds; and 2. Protect small investorsto ensurethe stability of the Portuguese financial system. To achieve these goals, the Bank of Portugal transferred fivesenior unsecured Novo Banco bonds governed by Portuguese law totaling C2 billion into the bad bank BESwhere investors will incur large losses. The minimum denomination of the bonds is Cioo,ooo. Thirty-f ive other Novo Banco senior unsecured bonds governed by foreign law and Portuguese law totaling C3.4 billion remain liabilities of Novo Banco where no losses will be imposed. Almost all of the bonds transferred to the bad bank BESare held by institutional investors. Many, if not most, of the bonds that stay in Novo Banco are held by retail investors. However, the Bank of Portugal plan only partially achieves its goal of protecting small bondholders. It failsto protect small investors that hold the minimum Cioo,ooo denomination of the transferred bonds. At the 1 AMERICAN ENTERPRISE INSTITUTE

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