BRIEFING
THE TRANSPOSITION OF
THE BRR DIRECTIVE IN GREECE
OCTOBER 2015
● A DISCUSSION OF THE
BRR DIRECTIVE AND ITS
IMPLEMENTATION.
“THE INTRODUCTION OF
THE BRRD LAW IS ONLY
PART OF THE GREEK
GOVERNMENT’S GENERAL
UNDERTAKING TO
RESTRUCTURE ITS
FINANCIAL SECTOR.”
In the Euro Summit Statement agreed in Brussels on 12 July 2015, one of the most
urgent conditions precedent to the start of negotiations between the “Quartet”
(European Commission, EFSF, IMF and ECB) and the Greek government on a new
ESM programme for additional support measures to the country was the
implementation of the EU Directive 2014/59/EU on Bank Recovery and Resolution
(the “BRRD”) by 22 July 2015. The BRRD should have been transposed into Greek
legislation and should have entered into force by 1 January 2016, with the exception
of the bail-in provisions. The country’s creditors deemed the unification of the
regulations as vital to ensure the protection and supervision of the country’s banking
system, currently under capital controls and surviving on support from the European
Liquidity Assistance. As agreed, the BRRD was implemented into Greek law by Law
4335/2015 (the “BRRD Law”) on 23 July 2015, part of the second tranche of
conditions precedent which have paved the way for the negotiations which are
currently underway between Greece and its creditors.
The introduction of the BRRD Law is only part of the Greek Government’s general
undertaking to restructure its financial sector, in which over 90% of banking assets
are held by the four systemic banks (National Bank of Greece, Alpha Bank,
Eurobank Ergasias and Piraeus Bank). The Hellenic Financial Stability Fund (itself
funded by the IMF and the European Financial Stability Fund) holds the majority of
all four banks after the recapitalisation in 2012 following the PSI. The Euro Summit
Statement notes that the Greek government undertakes to:
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“Adopt the necessary steps to strengthen the financial sector, including decisive
action on non-performing loans and measures to strengthen financial governance of
the HFSF and the banks, in particular by eliminating any possibility for political
interference especially in appointment processes.”
“WE EXPECT THAT THERE
WILL BE CONSIDERABLE
ACTIVITY IN THE COMING
MONTHS IN RELATION TO
THE GREEK BANKING
SECTOR.”
“THE BRRD GIVES WIDERANGING POWERS TO
SUPERVISORS IN ORDER
TO ALLOW THEM TO
MOVE FAST AND
DECISIVELY…”
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We therefore expect that there will be considerable activity in the coming months in
relation to the Greek banking sector, from the sale or restructuring of the banks’
non-performing loan portfolios (which on some estimates reach at least 40% of their
total loans) to further recapitalisation (up to €25 million, according to the Minister of
Finance).
About the BRR Directive
The BRRD was passed in order to establish a unified system of dealing with
undercapitalised banks across the European Union. Within the Eurozone, a Single
Resolution Mechanism has been established which, together with the Single
Supervisory Mechanism and the Single Deposit Guarantee Mechanism, will ensure
more uniform regulation and the additional security to depositors in Greek banks.
The European Central Bank is the central supervisory and resolution authority which
directly supervises all significant banks in the Eurozone, which includes all four
systemic Greek banks1. The BRRD is intended to unify and strengthen systems for
ensuring the “resolution objectives”, which are to ensure the continuation of critical
functions and the protection of depositors covered under the deposit guarantee
scheme (“covered deposits”). These interests must be protected, whilst minimising the
effect of a bank failure or reconstruction on the financial system in general and
reducing reliance on public funds. Member States are required to ensure that the
principle that the shareholders are the first to “bail in” and bear the first losses,
followed by the usual order of claims priority as provided under insolvency law, with
the exception of covered deposits; these deposits are in practice used for resolution
purposes, but the deposits are refunded under the deposit guarantee scheme. At
least 8% of the institution’s total liabilities need to have been met by shareholders
and holders of similar capital instruments through write down, conversion or
otherwise before any public funds can be used for loss absorption or recapitalisation.
This is intended to address issues of moral hazard in relation to risk-taking by bank
management and to avoid the presumption that the taxpayer will shoulder any bailout resulting from poor investment decisions.
The BRRD also stipulates expressly that management of the financial institution
should be changed and any natural or legal persons responsible for the failure of
the institution should be made liable under civil or criminal law.
The BRRD gives wide-ranging powers to supervisors in order to allow them to move
fast (over a “resolution weekend”) and decisively in the context of a bank resolution
to avoid contagion, market uncertainty and ultimately, bank runs.
The BRRD’s implementation in Greece
The BRRD Law is in general a close transposition of the BRRD, and we will therefore
not analyse its detailed terms; we set out below some of its key issues relating mainly
to the application of the bail-in provisions in Greece.
ECB, “The list of significant supervised entities and the list of less significant institutions” September 2014
The Transposition of the BRR Directive in Greece
“THE SINGLE RESOLUTION
BOARD WITHIN THE
EUROPEAN BANKING
UNION WILL COOPERATE
CLOSELY WITH THE BANK
OF GREECE AS AT THE
ULTIMATE ECB IS THE
RESOLUTION AUTHORITY
RESPONSIBLE FOR THE
FOUR SIGNIFICANT GREEK
BANKS.”
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Competent Authorities
The competent authority is the Bank of Greece, which also acts as the central
prudential supervisory authority for both banks and insurance companies in Greece.
It is also the contact authority and national resolution authority. The Hellenic Capital
Markets Committee is the resolution authority for investment firms. The Single
Resolution Board within the European Banking Union will cooperate closely with the
Bank of Greece as at the ultimate ECB is the resolution authority responsible for the
four significant Greek banks.
The ECB’s short opinion on the draft of the BRRD Law2 noted that “Greece has
enacted comprehensive legislation that introduced mechanisms to resolve failing
institutions since 2011, prior to the adoption of the BRRD, on which the ECB has
been consulted,” so that significant amendments to the Bank of Greece’s supervisory
powers are not introduced through the BRRD Law.
Resolution Tools
The BRRD Law provides for four resolution tools that may be applied individually or
in combination: (a) sale of business; (b) establishment of a (temporary) bridge bank;
(c) asset separation; and (d) bail-in.
The first two tools have been in place since 2011; however, under the last two newly
enacted tools mentioned above, the institutions under resolution can continue as
going concern.
The Bail-in provisions
The BRRD Law implements almost exactly the provisions of the BRRD in relation to
the write-off or conversion to equity (“bail-in”) of claims for the purposes of
recapitalisation of financial institutions, or to provide bridge capital or sell part of the
institution’s business or assets.
Accordingly, bail-in will potentially apply to any liabilities of an institution under
resolution not covered by any form of collateral. It will not apply to covered deposits,
client assets, short-term inter-bank lending or claims of clearing houses and
payments and payment and settlement systems (having a remaining maturity of less
than seven days), or liabilities such as salaries, pensions, procurement debts or taxes.
In exceptional cases, the resolution authorities may opt for excluding other liabilities
on a case-by-case basis, if required so for the continuity of critical services or the
prevention of widespread contagion to the financial system or if bail-in cannot be
completed within a reasonable timeframe.
The Greek legislation however includes provisions on the priority ranking of deposits
when a credit institution is placed in special liquidation which contain key differences
to the BRRD. Under Article 108 of the BRRD, on an insolvency the deposits of natural
persons and those of micro, small and medium-sized enterprises in an amount over
€100,000 will be repaid before the claims of ordinary unsecured, non-preferred
creditors. The only two categories which rank higher than these are covered deposits
(those covered under deposit guarantee schemes) and the claims of the deposit
guarantee schemes arising from their subrogation rights for covered depositors.
2
OPINION OF THE EUROPEAN CENTRAL BANK of 20 July 2015 on recovery and resolution of credit institutions and investment firms.
http://www.ecb.europa.eu/ecb/legal/pdf/en_con_2015_25_f_sign.pdf
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The BRRD Law did not transpose Article 108 of the BRRD in terms, but referred the
ranking of claims on special liquidation of a credit institution to a new Article 145A,
which Article 120 of the BRRD Law inserted into Law 4261/2014 on “Intervention in
the activities of credit institutions and preventative bank supervision”. This provides
that the following claims rank prior to the claims of natural persons, micro, small
and medium-sized enterprises for amounts over €100,000:
1. Employment claims (as defined in the Insolvency Code)3;
2. State claims in the event that the public equity support tool has been used (Arts.
57-58 of the BRRD);
3. Covered deposits and subrogation claims of the HDGIF; and
4. Claims of the State for any cause, plus any applicable increases and interest.
Moody’s made this comment on the decision of the Greek State to give higher
priority to State claims than is provided in the BRRD:
“THE GREEK LAW CLOSELY
MIRRORS BRRD PRACTICES
IN OTHER EUROPEAN
UNION (EU) COUNTRIES,
BUT DEVIATES IN THE
INSOLVENCY RANKING IT
ESTABLISHES.”
“The Greek law closely mirrors BRRD practices in other European Union (EU)
countries, but deviates in the insolvency ranking it establishes. Whereas elsewhere in
the EU state claims rank equally with wholesale deposits in an insolvency or bail-in,
Greek law ranks Greek State deposits together with all State claims as senior to
uninsured deposits, including small and midsize enterprise and retail deposits
greater than €100,000. Therefore, state deposits are subject to bail-in only after any
losses are imposed on uninsured deposits. Once the bail-in tool becomes effective in
2016, the more senior ranking of state claims would negatively affect recovery rates
for Greek wholesale depositors4.”
We would also note that this ranking of claims applies to any credit institution special
liquidation which commence after the publication of the BRRD Law (23 July 2015),
not simply to those which take place pursuant to the bail-in provisions after
1 January 2016.
The Deposit Protection Scheme
The deposit protection scheme body in Greece is the HDIGF (known by its Greek
acronym as “TEKE”) which was established in 2009. It includes three schemes: for
the protection of depositors (“Deposit Cover Scheme”), for the protection of investors
(“Investment Cover Scheme”) and the financing of resolution measures (“Resolution
Scheme”). The assets of each Scheme are distinct.
“THE BRRD LAW ENTERED
INTO FORCE ON 23 JULY
2015, REPEALING ARTICLES
139-144 OF LAW
4261/2014.”
3
4
Law 3588/2007, as amended, Art. 154(c)
Moody’s Credit Outlook, 27 July 2015
Entry into force
The BRRD Law entered into force on 23 July 2015, repealing Articles 139-144 of
Law 4261/2014. Regulations which had been issued to implement those provisions
remain in force until replacement, unless their provisions conflict with the terms of the
BRRD Law. However, the provisions of Articles 43 to 55 on bail-in enter into force
from 1 January 2016. Bank liquidations which had started prior to the entry into
force of the BRRD Law will proceed under the previous legislation, unless express
provisions in the BRRD Law provide otherwise.
The Transposition of the BRR Directive in Greece
FOR MORE INFORMATION
Should you like to discuss any of the matters raised in this Briefing, please
speak with a member of our team below or your regular contact at Watson
Farley & Williams.
VIRGINIA MURRAY
Partner
Athens
+30 210 455 7303
[email protected]
NIKOLAOS KOSTIKAS
Partner
Athens
+30 210 455 7338
[email protected]
MARISETTA MARCOPOULOU
Partner
Athens
+30 210 455 7309
[email protected]
Publication code number: 56934731v1© Watson Farley & Williams 2015
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