Research Trends and Conclusions: Banking 2010

• December 2009

• Banking

Tom Barnes - Editor, Who's Who Legal

Tom Barnes takes a closer look at the issues affecting banking lawyers.

The banking industry has never been higher on the international agenda. Recent events in the industry have directly affected millions of people around the world. The travails of the banking clients of the lawyers listed in this publication can be said to have played a large part in the onset of the worst global recession since the Second World War.

Examples are legion and well documented. Phrases such as “sub-prime”, “toxic debt” and “bail-out” entered the everyday lexicon. Household names such as Lehman Brothers, Bear Stearns, AIG and Merrill Lynch failed, were acquired under duress or were subject to state takeover. State ownership of banks has reached levels that would have been unthinkable in certain countries just years before. In April 2009, as the dust began to settle, the International Monetary Fund estimated that banks and other financial institutions faced aggregate losses of US$4.05 trillion in the value of their holdings as a result of the crisis.

The lawyers in the following pages have seen their clients struggle, refocus their energies and in some cases cease to exist altogether. They face a radical change in the nature of their practices and the work they are called upon to do.

CHANGING TIMES

Establishing an exact timeline is difficult, but in retrospect the first signs of the crisis can be traced back to mid-2007. By the end of the year law firms were beginning to see levels of work drop off, before they “fell off a cliff”, in the words of one London lawyer, from the Lehman Brothers bankruptcy onwards. The effect was felt worldwide, and a downturn was reported by sources in practically all of the 60-plus countries our research covers.

However, by the time of writing in late 2009, banks had begun to address the root causes of their problems rather than merely dealing with the effects. The leading banking lawyers in each country are now facing an altered landscape and have had to adapt accordingly. In the words of one lawyer, “if you have any work at all, its nature has changed completely”.

In some cases this has not been a wholly unhappy time – “sometimes lawyers earn more money when the deal goes wrong” in the words of one source – but overall, times are hard. The traditional surge in disputes work has not taken place, and deals are scarce. Lawyers have broadened their client base beyond banks where possible to other financial institutions and foreign clients. Fee levels have inevitably dropped. Where once the deal flow was nearly overwhelming, now outside counsel are called upon to support their clients in different areas.

AREAS OF ACTIVITY

The areas that were mentioned to researchers most frequently were restructuring and refinancing for banking clients. The amount of work was described by one source as “not less but different, and usually starts with clients saying ‘we have a problem’”. Timelines are shorter and matters can be more sophisticated, which favours lawyers with greater experience, particularly of previous downturns, and a wider range of skills. In some cases, lawyers find themselves acting on the workouts and restructuring of assets they had helped purchase in the past.

Another busy area is work arising from state recapitalisation schemes, which have proved vital for banks worldwide. Our research identified a tendency for clients to use their pre-existing banking counsel in administering these schemes, providing a valuable source of work for our featured lawyers, who in some cases also act for the government, as in the UK where Slaughter and May is widely renowned for its work for HM Treasury. In some jurisdictions the prospect of more stringent capital adequacy rules could lead to banks looking for a second round of state aid, or going to the capital markets to get more equity, and either course will require the expertise of their lawyers. Clients are also looking to take advantage of government asset protection schemes, which leads to spin-off work for their outside counsel. As Rowan Russell of Mallesons Stephen Jaques in London notes, “government support is keeping the legal market busy and that support has also played a large role in keeping the banking industry going”. Of course, this type of work is finite and the ultimate aim for the banks is to exit state control. The hope for their lawyers is that this type of work will see them through until then, by which point transactional levels may once again have picked up.

That is not to say that transactional activity has completely disappeared. While there was undeniably a slowdown, the lawyers we canvassed are beginning to see things pick up again in traditional asset-based lending, and to a lesser extent in the leveraged finance sector. There still remain attractive companies that require financing, and some deals that had stalled are being reviewed. Equally, there is no shortage of opportunities for those in the market to acquire distressed companies, for instance Bank of America’s acquisition of Merrill Lynch. M&A and equity capital markets activity is beginning to increase, although overall the more esoteric types of financing that were so prevalent before the crisis have now vanished.

The global nature of the crisis was communicated clearly in our research. Interviewees from countries across the world related the impact on their practices, but there were also local variations in the type of work banking experts were being called upon to do. While selected sources suggested that recovery in some less developed countries is driven by an ongoing demand for infrastructure, others noted that their banking clients had been damaged by their exposure to the previously lucrative emerging markets. Some countries in Latin America and Europe had been hit less hard relatively by the global downturn as a result of recent domestic crises of their own, which had left them with improved domestic regulation or simply less far to fall than economies that had seen sustained periods of unbroken growth, such as the UK, US and even the UAE.

REGULATION

Banking regulation was repeatedly cited as a growth area for lawyers, with widely differing levels reported in the countries we canvassed.

While economies remain stunned or begin to take tentative steps towards a fragile recovery, there has not been much appetite for instituting radical regulatory change. However, this does not mean that it has not been discussed at great length. For the most part, there has not yet been the wave of regulation that could have been expected as the result of the crisis, but the general trend points towards increased regulation in this sector in the future. In addition, the failures of high-profile companies have led to greater scrutiny from the authorities in certain sectors, with banking lawyers called upon on occasion to advise clients in relation to fraud and other criminal proceedings.

In the words of René Bösch at Homburger in Switzerland, “Lehman Brothers affected the practice of most of us”. The focus on banks’ internal proceedings and regulatory compliance has increased, with their outside counsel called upon to keep their clients up to date and to ensure they meet these new requirements. Capital adequacy rules are being brought in, with other areas such short-selling and compensation also on the agenda. This last area is particularly emotive, and bankers’ bonuses are headline news in countries around the world, with proposals to limit them by law being considered in the US and UK, to name but two.

However, this is a delicate area. To be fully effective, regulation has to be international and cross-border in nature; capital can move very easily, so if a jurisdiction is perceived to be over-regulated it will soon find itself at a disadvantage. In the research for previous editions, it was often suggested to researchers that London owed its status as one of the leading banking centres in the world to its comparatively relaxed regulatory environment, when compared to the US. If true, this “advantage” may now be viewed as double edged, but by the same token a regulatory over-correction would also be damaging if it scares the financial services industry offshore and undermines local recovery. This issue has inevitably become political, with current and aspiring governments aiming to establish their credentials in an area that has recently assumed great importance to voters. There has been a lot of tough talk, but in general regulators have been wary of going too far in the other direction while the economy remains in straightened circumstances. Overall, an increase in regulatory work has thus far partially offset the drop-off in work experienced by banking lawyers in other sectors, and expertise in this area is likely to become even more useful to clients in the coming months.

LOOKING TO THE FUTURE

Few commentators accurately presaged these recent upheavals in the banking market, and our sources were guarded when asked for their predictions for the future. Many believe that still more banks are going to fail, and are concentrating their practices on helping ailing clients or on the acquisition of distressed assets. Elsewhere, as a result of the absence of liquidity in the banking system, other clients are turning to the equity capital markets for funding. Those firms that offer combined banking and capital markets practices are well placed to weather the storm until the eventual return of general lending and acquisition finance work, although opinion is divided as to when that is likely to be.

What does seem certain is that in the longer term, when the banking system returns to a more healthy state, the landscape will have radically changed. It seems fair to assume that lawyers will see a sustained growth in bank regulatory work. All respondents reported a more cautious marketplace. While the loan market has firmed up and market fundamentals overall have improved to a point where deals are now feasible, the “silly” deals of previous years are a thing of the past and are likely to remain so. Many prophesise a return to a more simple banking market, without the extreme pro-borrower aspects that were prevalent before the crash. The “overly complicated” instruments that were demonised during the crisis are unlikely to return in the near future, if at all, but most experts see simpler structured products returning relatively soon.

Further down the line, many interviewees had sincere doubts about whether the levels of lending and overall liquidity will ever return to pre-crash levels. There were predictions of a “post-growth era” and a period of long-term stabilisation in the banking market, rather than a return to the sustained expansion of recent years. This will have inevitable ramifications for the law firms that have built substantial practices on the basis of this high level of activity and promise of continued growth. Indeed, one partner commented that the single biggest change currently being experienced by banking lawyers is that the “pipeline of work is now uncertain”, that is to say, it is impossible to predict either the nature or amount of work lined up even a month in advance, in contrast with the reliable flow of previous years. Long-term planning for law firms is almost impossible. If these predictions come to pass, we could see a corresponding reorganisation of the legal market in this sector and even the reduction in the size of banking practices of some of the world’s leading firms.

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