Barclays Bank Plc v (1) Unicredit Bank AG (formerly known as Bayerische Hypo-Und Vereinsbank AG) (2) Unicredit Bank Austria AG

JurisdictionEngland & Wales
JudgeThe Hon. Mr Justice Popplewell
Judgment Date21 December 2012
Neutral Citation[2012] EWHC 3655 (Comm)
Docket NumberCase No: 2011-312
CourtQueen's Bench Division (Commercial Court)
Date21 December 2012
Barclays Bank PLC
(1) Unicredit Bank AG (formerly known as Bayerische Hypo-Und Vereinsbank AG)
(2) Unicredit Bank Austria AG

[2012] EWHC 3655 (Comm)


The Hon. Mr Justice Popplewell

Case No: 2011-312




Royal Courts of Justice

Rolls Buildings, Fetter Lane,


David Railton QC, Giles WheelerandJames Duffy (instructed by Addleshaw Goddard LLP) for the Claimant

David Wolfson QC and Edmund King (instructed by Quinn Emanuel Urquhart & Sullivan LLP) for the Defendants

Hearing dates: 27, 28, 29 November 2012 and 3 & 6 December 2012

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

The Hon. Mr Justice Popplewell The Hon. Mr Justice Popplewell



This is a dispute about whether the Claimant ("Barclays") exercised its discretion in a commercially reasonable manner in refusing to consent to the early termination of three synthetic securitisations of loan portfolios entered into in the wake of the financial crisis in autumn 2008.


The First Defendant ("HVB") is a German bank. The Second Defendant ("Bank Austria") is an Austrian bank. Since 2005 each has been a wholly owned direct subsidiary of UniCredit S.p.A., an Italian company based in Rome and Milan which is part of the UniCredit banking group. Save where it is necessary to distinguish between the individual companies, I shall refer to the Defendants, as the parties did, as "UniCredit".


The securitisations were embodied in three deeds of guarantee as follows:

(1) a guarantee dated 29 September 2008 between Barclays and HVB as amended and restated on 2 April 2009 ("the HVB-1 Guarantee");

(2) a guarantee dated 19 December 2008 between Barclays and Bank Austria as amended and restated on 2 April 2009 ("the BA Guarantee");

(3) a guarantee dated 22 December 2008 between Barclays and HVB as amended and restated on 2 April 2009 ("the HVB-2 Guarantee").


UniCredit sought consent for early termination of the Guarantees in June 2010 as a result of a change in their regulatory treatment, which adversely affected UniCredit's ability to obtain the capital relief which the Guarantees were designed to achieve. Barclays determined that it would not consent unless it were paid the balance of five years' fees, amounting to some €82 million (discounted to then present value). UniCredit was not prepared to pay this or any sum, and contends that Barclays' insistence on five years' fees was not a commercially reasonable ground for declining consent.

The regulatory context and the background to the Guarantees


UniCredit S.p.A. is regulated in Italy by the Bank of Italy. HVB is regulated in Germany by the Bundesanstalt für Finanzdienstleistungsaufsicht ("BaFin"). Bank of Austria is regulated in Austria by the Österreichische Finanzmarktaufsicht (Financial Market Authority "FMA").


HVB and BA were at all material times subject to the regulatory oversight of their local financial regulator because both entities acted as fully licensed banks in their respective countries. At the consolidated level for the UniCredit group, the Bank of Italy also had regulatory oversight in relation to the capital position of the group. At the time the Guarantees were entered into, Bank of Italy had a policy of following the local regulator.


A key function of banking regulators is to ensure that the banks under their supervision maintain adequate capital reserves. The Basel Committee on Banking Supervision, which is a committee of banking supervisory authorities established by the central bank governors of ten countries, has attempted to achieve a measure of international consistency in relation to minimum capital requirements for banks. The so-called "Basel Accords" were issued by the Basel Committee in 1988 ("Basel I") and 2004 ("Basel II"), and were implemented in Germany and Austria.


The nature of a bank's business is that its assets will consist mainly of debts of one sort or another which are owed to the bank by third parties. In order to assess the amount of capital reserves which must be held against each asset, these assets are assigned a percentage risk weight which reflects their credit risk. The composition of the Risk Weighted Assets ("RWA") in turn dictates the amount of capital (tier one and tier two) which a bank must hold in respect of them. Tier one capital, the more important of the two, consists largely of shareholders' equity and disclosed reserves. Tier two capital, comprises undisclosed reserves, revaluation reserves, general provisions, hybrid instruments and subordinated term debt.


Securitisation can be used to transfer or mitigate the credit risk on a pool of assets, and in turn reduce the regulatory capital requirements of the bank in relation to such pool. In a "synthetic securitisation", the credit risk of a pool of assets is transferred to a third party through the use of credit default swaps ("CDS") or guarantees, without actually removing the portfolio of assets from the balance sheet of the bank selling the credit risk. The CDS or guarantees are tranched: the credit risk of the pool is divided up into junior, mezzanine and senior tranches which are commonly rated by rating agencies. If effective risk transfer, as the regulators define it, has been achieved by transferring the risk on some or all of the tranche, the bank can hold less capital against the risk of it suffering losses on that pool of assets. How much risk has to be transferred to achieve effective risk transfer is precisely defined by the applicable regulatory rules for synthetic securitisation. The resulting regulatory capital relief is known as "RWA relief". In Germany, an effective risk transfer leading to RWA relief needed to be approved by the regulator, either before entering into the deal, or afterwards on the basis of an information pack sent to the regulator. HVB's practice for the previous 10 years had been to inform BaFin and seek regulatory approval for all regulatory capital securitisations before concluding the transactions.


There are different methods used by regulators to assess the amount of tier one capital reserve that must be held against the securitised tranches which are retained by the originator of such a securitisation. One common approach is for the risk weight to be determined by external credit ratings. Another approach, which at the relevant time was little used and could only be adopted by a small number of approved banks, is known as the Supervisory Formula Approach ("SFA"). Basel II allows for two main methodologies for calculating RWA: the "standardised" approach and the Internal-Rating Based ("IRB") approach. In 2008, HVB in Germany and Bank Austria in Austria were already using the IRB method, whereas UniCredit Banca SpA and the other Italian banks which were part of the UniCredit group were still using the standardised method. The regulatory relief afforded in relation to a securitisation applying the SFA was only available to so-called Advanced IRB banks (which both HVB and BA were), and then only on portfolios which met certain criteria.


To determine a risk weight on each tranche, the SFA applies a formula which takes account of five inputs, which are: (1) the number of loans in the underlying pool taking into account their individual sizes, (2) the regulatory capital which the bank would have had to maintain against the pool without synthetic securitisation, (3) the pool's exposure weighted average loss given default number (i.e. the expected loss against a particular asset which would be suffered if there was to be a default), (4) where the securitised tranche sits in the structure (junior, mezzanine, senior) and (5) the size of the tranche. The output of the formula is an RWA percentage for the tranche for which it has been computed. The formula enables the bank flexibly to divide the pool into different tranches, computing the regulatory capital requirement each tranche must bear. To manage the capital charge against the whole pool the bank can transfer the risk in certain tranches to a counterparty, and thereby gain regulatory capital relief on the pool, if effective risk transfer is achieved according to the regulatory rules.


These rules for synthetic balance sheet deals were particularly well developed by BaFin for German banks due to the frequent usage of synthetic securitisation in Germany. Bank Austria was the largest Austrian bank, and as far as Dr Spaeth knew, it was the only bank in Austria conducting synthetic securitisations of the type contained in the Guarantees. In this respect, the FMA, and the auditors who approved the regulatory treatment, were content to follow BaFin's lead on the regulatory interpretation of Basel II, whose implementation in Austria was in substantially the same terms as in Germany.


All this was well known to Dr Spaeth, and her colleagues in the team at HVB who were involved in concluding the Guarantees. Those at Barclays involved in negotiating the Guarantees would have been aware of these general principles of regulatory capital relief, but were not familiar with the detail of the SFA formula, nor the particular attitudes and approach of the Austrian and German regulators to effective risk transfer. Nor were they aware of the UniCredit group's overall regulatory capital position.


The immediate context for the HVB-1 Guarantee was that UniCredit as a consolidated group wished to improve its tier one capital ratio, and was under considerable pressure from the Bank of Italy to do so before the quarter date of 30 September 2008. The initiative to execute the HVB-1 Guarantee came from the Italian Head Office at UniCredit in...

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