1 | ARTHUR COX
Group Briefing
August 2015
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FINANCIAL REGULATORY
Bank Recovery and
Resolution Directive - FAQs
The Bank Recovery and Resolution
Directive (Directive 2014/59/EU) (BRRD)
was introduced in light of concerns that
insufficient tools and resources existed
at EU-level to deal effectively with failing
banks and investment firms, albeit many
Member States, including Ireland, did
have domestic resolution regimes in
place. Given that the failure of a crossborder institution could severely affect
the stability of the European financial
markets, the BRRD was developed as a
framework for resolving banks and large
investment firms operating at both a
national and cross-border level in the EU.
The BRRD has now been implemented
into Irish law, and will supersede
existing domestic resolution legislation
where applicable.
This Briefing summarises the key aspects
of the BRRD.
WHEN DID IT COME INTO FORCE?
The BRRD was due to be transposed by
each Member State by 31 December
2014. It was transposed into Irish law
by SI 289/2015 on 9 July 2015 (the
Irish Regulations).
This document contains a general summary of
developments and is not a complete or definitive
statement of the law. Specific legal advice should be
obtained where appropriate.
Not all Member States have yet
transposed the BRRD, and in May 2015
the European Commission requested 11
Member States (not including Ireland,
which had already demonstrated
progress towards transposition by
issuing a Consultation Paper in December
2014) transpose the BRRD or risk referral
to the European Court of Justice.
WHAT ENTITIES DOES IT APPLY TO?
The BRRD applies to:
»» banks;
»» investment firms subject to the
initial capital requirement in CRD
IV; and
»» certain other financial institutions
and financial holding companies.
WHAT IS IT DESIGNED TO DO?
The BRRD:
»» provides a framework for resolving
failing banks and large investment firms;
»» aims to reduce the use of taxpayer
funds to rescue failing institutions,
and eliminate (insofar as possible) the
need for government-led bail-outs;
»» enables authorities to intervene early
to prevent the failure of an institution;
»» enables authorities to take swift
resolution action where a failure
cannot be avoided; and
»» facilitates cooperation between
competent authorities across the EU.
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FINANCIAL REGULATORY
BANK RECOVERY AND RESOLUTION
DIRECTIVE - FAQS
AUTHORITIES
WHO IS THE COMPETENT AUTHORITY
UNDER THE BRRD AND WHAT IS ITS ROLE?
The Central Bank of Ireland (CBI) was
designated as the competent authority in
Ireland under the Irish Regulations, save
as regards the specific tasks conferred on
the European Central Bank (ECB) as part
of the Single Supervisory Mechanism,
in which case the ECB will function as
competent authority.
intervention measures must also be
included, together with options for
recovery actions.
Recovery plans are subject to assessment
by the competent authority, which
can require revisions to the plan if
deficiencies are identified. It is also open
to the competent authority to direct an
institution to take steps to reduce its risk
profile, review its strategy and structure,
change its governance structure, change
its funding strategy and facilitate its
timely recapitalisation.
»» Group recovery plans
WHO IS THE RESOLUTION AUTHORITY AND
WHAT IS ITS ROLE?
The Irish Regulations appoint the CBI as
the resolution authority in Ireland for
BRRD purposes. The Irish Regulations
also require that the CBI publish internal
rules (including rules on professional
secrecy) on information exchanges
between it as resolution authority and
its other functional areas. These internal
rules were published by the CBI on 17
August 2015 and are available here. The
Irish Regulations also require structural
separation and separate reporting lines
for those CBI staff involved in the BRRD
resolution authority function.
RECOVERY & RESOLUTION PLANNING
WHAT ARE RECOVERY PLANS AND WHEN
ARE THEY REQUIRED?
»» Individual recovery plans
Each institution to which the BRRD
applies must, where it is not part of a
group that is subject to consolidated
supervision under CRD IV, prepare a
recovery plan setting out the measures
that it would take if its financial position
deteriorated significantly. That recovery
plan must be updated each year, after any
material structural change and on request
from the relevant competent authority.
Such recovery plans must contemplate
a range of stress-scenarios, and set
out conditions and procedures to
ensure that recovery options can be
implemented quickly. Potential early
Where a group is subject to consolidated
supervision, the parent must submit a
group recovery plan to the competent
authority (and this can be circulated to
other relevant competent authorities in
other Member States). Group recovery
plans must set out measures designed
to stabilise the group, address or
remove causes of the group’s financial
deterioration and restore the group’s
financial position. The group recovery
plan must also, where applicable,
include arrangements for the provision
of intra-group financial support.
Group recovery plans are subject to
assessment by the competent authority,
and by other relevant competent
authorities in other Member States
(where, for example, the group has a
significant branch).
WHAT ARE RESOLUTION PLANS AND WHEN
ARE THEY REQUIRED?
The CBI, as resolution authority in
Ireland, must prepare a resolution
plan for each institution, following
consultation with the competent
authority and with the resolution
authorities in other Member States in
which the institution (or members of its
group) has significant branches.
Each resolution plan will set out the
actions that the CBI plans to take in the
event that the institution in question
meets the conditions for resolution (see
below for details of these conditions).
Resolution plans must be updated by
the CBI at least annually, and should
contemplate scenarios where the
institution fails due to a period of general
financial instability, and also where the
institution fails for institution-specific
reasons. Resolution plans must (among
other matters) also demonstrate how
the institution’s critical functions
could be separated to ensure continuity
on any failure of the institution, list
any perceived impediments to the
institution’s resolvability, set out a
process for determining how core
functions could be transferred to a third
party, set out how resolution options
could be financed, analyse the resolution
plan’s impact on employees, and set the
level of minimum requirement for own
funds and eligible liabilities if the bail-in
tool is used (further detail on the bail-in
tool is set out later in this Briefing).
HOW IS RESOLVABILITY ASSESSED?
In conjunction with the development
of resolution plans, the CBI must also
assess whether an institution is resolvable
(following consultation with other
relevant resolution authorities and with
the competent authority for the relevant
institution). That assessment must be
made having regard to, at a minimum, the
matters set out in Part 3 of the Schedule
to the Irish Regulations. If the CBI’s
assessment is that an institution is not
resolvable, it must notify the European
Banking Authority (EBA).
EARLY INTERVENTION (WHERE
THERE IS A (POSSIBLE) BREACH
OF PRUDENTIAL REQUIREMENTS)
WHAT ARE EARLY INTERVENTION MEASURES?
Early intervention measures are steps
that the competent authority may take if
an institution has breached, or is likely to
breach, certain prudential requirements.
Possible breaches could include a
reduction in own funds, deteriorating
liquidity, increased leverage, increased
non-performing loans or an increased
concentration of exposures. Early
intervention measures may include:
3 | ARTHUR COX
FINANCIAL REGULATORY
BANK RECOVERY AND RESOLUTION
DIRECTIVE - FAQS
»» implementation of one or more
measures from the institution’s
recovery plan;
»» directing the institution or its
management body to develop an
action programme;
»» directing the institution to
convene a shareholders’ meeting
(the competent authority can
directly convene the meeting if the
institution fails to do so);
»» directing the institution or its
management body to draw up a plan
for renegotiating/restructuring its debt;
»» directing the institution to change its
business strategy, legal structure or
operational structure.
Where the above (and similar)
measures are not regarded by the
competent authority as sufficient to
remedy the financial deterioration
of the institution, the BRRD contains
detailed provisions enabling the
competent authority to remove
senior management and to appoint
a temporary administrator (on foot
of an ex parte Court application for a
temporary administration order).
IS INTRA-GROUP FINANCIAL
SUPPORT PERMITTED?
Where a group member meets the
conditions for early intervention, the BRRD
also permits group entities to provide intragroup financial support in the form of loans,
guarantees, the provision of assets for use as
collateral or a combination of the foregoing.
The intention behind this is to facilitate
the stabilisation of the group (without
adversely affecting the liquidity or solvency
of the group entity providing the support).
RESOLUTION (WHERE THE
INSTITUTION IS FAILING OR
LIKELY TO FAIL)
WHAT CONDITIONS DETERMINE IF
RESOLUTION IS NECESSARY?
The following conditions must be met
for resolution of an institution to be
regarded as necessary:
»» the competent authority, having
consulted with the CBI as resolution
authority, must have determined that
the institution is likely to fail. This
may be because the institution has
breached, or is expected to breach, its
authorisation requirements on a scale
likely to result in its authorisation
being withdrawn, it is or is likely
to become balance sheet insolvent,
it is or is likely to become cash
flow insolvent (a requirement for
emergency liquidity assistance from
the CBI should not, of itself, trigger
this condition), or extraordinary
public financial support is required;
»» there must be no reasonable prospect
of an alternative private sector
measure (i.e. a sale to, or merger with,
a private sector purchaser) which
could remedy the situation;
»» resolution must be necessary in
the public interest (and it must be
the case that a normal winding up
could not ensure the continuity of
important functions, the protection
of public funds, depositors, client
assets or client funds, or avoid a
significant adverse effect on the
financial system); and
»» the Minister for Finance must
be informed.
WHAT PRINCIPLES GOVERN RESOLUTION?
If the CBI as resolution authority intends
to use one of the resolution tools at its
disposal, any measures that it takes
must have regard to certain overriding
principles as follows:
»» first losses are to be borne by
shareholders, followed by creditors.
Creditor losses are to be borne in line
with the order of priority that would
apply in a normal insolvency, and
creditors of the same class are to be
treated equitably (unless otherwise
provided by the Irish Regulations).
Creditors are not to incur losses
greater than what they would have
incurred in a normal insolvency;
»» the management body and senior
management must be replaced
unless retention of one or more
of those persons is necessary to
achieve resolution;
»» persons are to be made liable for any
responsibility for the institution’s
failure; and
»» covered deposits must be protected.
Before the CBI takes action, it must
arrange an independent valuation of
the institution’s asset and liabilities. A
provisional valuation is allowed in urgent
cases where there may not be time to
arrange a full independent valuation.
WHAT RESOLUTION TOOLS ARE AVAILABLE?
Four resolution tools are available (the
sale of business tool, the bridge institution
tool, the asset separation tool, and the
bail-in tool), and they can be exercised
individually or on a combined basis.
WHAT ORDERS CAN BE MADE/MUST BE MADE?
»» “Capital instruments order”
The CBI can apply to Court for a “capital
instruments order” to write-down or
convert relevant capital instruments
into shares or other instruments of
ownership in respect of an institution
that requires resolution.
»» “Resolution order”
To avail of one of the four resolution
tools detailed below, the CBI must make
a “proposed resolution order” and then
make an ex parte application to Court for
a “resolution order”. The institution itself,
a shareholder, or the holder of a capital
instrument or liability affected by a
resolution order may apply to Court,
within 48 hours of publication of the
order, for the order to be set aside.
The resolution order may provide for
(among other matters) the transfer
of shares, assets and liabilities, the
reduction of principal under a capital
instrument or in respect of eligible
liabilities (or their conversion into
shares), the cancellation of debt
instruments (other than secured
liabilities), the close out or termination
of financial contracts, and the removal
and replacement of management by a
special manager.
4 | ARTHUR COX
FINANCIAL REGULATORY
BANK RECOVERY AND RESOLUTION
DIRECTIVE - FAQS
During the period of the resolution order, the
rights of shareholders may be suspended.
HOW DO THE FOUR RESOLUTION
TOOLS WORK?
»» Sale of business tool
A resolution order can transfer shares
issued by the institution, and/or assets,
rights and liabilities of that institution,
to a purchaser (which cannot be a
bridge institution). Neither shareholder
nor third party consent is needed, and
procedural requirements under company
law or securities law do not need to be
met (save as expressly set out in the Irish
Regulations). The transfer must be on
commercial terms. Where only some
of the assets and liabilities are sold, the
residual entity will be wound up.
»» Bridge institution tool
A resolution order can transfer shares issued
by the institution, and/or assets, rights and
liabilities of that institution, to a bridge
institution. Again, neither shareholder
nor third party consent is needed, and
procedural requirements under company
law or securities law do not need to be met.
Where only some of the assets and liabilities
are transferred, the residual entity will be
wound up. A bridge institution would be
established by the CBI under the Companies
Act 2014, and would be wholly or partially
owned by public authorities (which could
include the CBI).
»» Asset separation tool
A resolution order may transfer all or any
rights, assets or liabilities of an institution
under resolution, or a bridge institution,
to one or more asset management
vehicles. Again, neither shareholder
nor third party consent is needed, and
procedural requirements under company
law or securities law do not need to be
met. The relevant asset management
vehicle may be the subject of directions
from the CBI, and must manage the assets
with a view to maximising their value by
selling them or winding them down.
convert to equity or write down the
principal amount of claims or debt
instruments that are transferred under
the bridge institution tool, the sale of
business tool or the asset separation tool.
Certain liabilities cannot be the subject
of the bail-in tool. These are covered
deposits (only as regards the amount
actually covered – any excess may be
bailed-in), covered bonds, liabilities
used for hedging purposes which are
secured in a manner similar to covered
bonds, liabilities arising by virtue of
the institution holding client monies
or client assets, liabilities deriving from
the institution acting as a fiduciary,
liabilities to other institutions with a
maturity of less than 7 days, certain
liabilities to employees, liabilities
to deposit guarantee schemes,
preferred debts owing to the Revenue
Commissioners or the Minister
for Social Protection, liabilities to
commercial or trade creditors in respect
of goods and services that are critical
to the institution’s daily functioning,
liabilities arising from client monies
or client financial instruments where
the institution is an investment firm,
and liabilities to systems designated
under the Settlement Finality Directive.
Secured assets related to a covered
bond pool cannot be the subject of a
bail-in, and must be kept segregated
with sufficient funding. In limited
circumstances, where any secured
liability in respect of a covered bond
pool exceeds the value of the collateral
secured, the excess part of the secured
liability may be the subject of a bail-in.
From 1 January 2016 onwards, when an
institution enters into an agreement in
respect of liabilities or relevant capital
instruments governed by the laws of a
non-EU country, that institution must
procure the inclusion in that agreement
of a contractual term noting that the
liability or instrument may be subject
to write-down and conversion powers
under the BRRD.
»» Bail-in tool (not available until 1
January 2016)
HOW WILL RESOLUTION BE FUNDED?
The CBI may use the bail-in tool to
recapitalise an institution which meets
the conditions for resolution, or to
The Bank and Investment Firm
Resolution Fund (the Irish Fund) was
established under the Irish Regulations,
and will be administered by the CBI.
The CBI may use the Irish Fund in
connection with the application of
resolution tools, and it will be financed
by annual contributions from all
institutions authorised in the State
(and branches of EU institutions
operating in the State). The CBI has
the ability to prescribe the level of
annual contribution. If the Irish Fund
is insufficient, the CBI is empowered to
raise extraordinary contributions from
those institutions (subject to a cap of 3
times the annual contribution target set
for those institutions) and also to raise
funds from other institutions and third
parties (i.e. by way of debt).
This funding arrangement will change
slightly when the Single Resolution
Mechanism becomes effective on 1
January 2016 – the contributions raised
by the CBI will instead be transferred to
the Single Resolution Fund, rather than
the Irish Fund.
ARE THERE RESTRICTIONS ON, OR
PROTECTIONS FOR, CREDITORS
AND COUNTERPARTIES?
Temporary restrictions may be imposed
on creditors and counterparties, as part
of the resolution framework, as regards
exercising termination rights and
enforcing security.
However, certain protections are also
available under BRRD, including
the following:
»» the carrying out of a valuation to
determine whether a shareholder
or creditor incurred, as part of a
resolution tool, losses greater than
they would have incurred had the
institution entered normal insolvency
proceedings, with compensation
payable if that is the case;
»» in respect of modified contracts or
partial property transfers:
»» a restriction on a partial transfer of
rights and liabilities under set-off,
netting or title transfer financial
collateral arrangements (either all
or none may be transferred);
»» where liabilities are secured
under a security arrangement,
FINANCIAL REGULATORY
5 | ARTHUR COX
BANK RECOVERY AND RESOLUTION
DIRECTIVE - FAQS
everything must be transferred
together, i.e. the assets, the liability
and the benefit of the security;
»» a partial property transfer cannot
facilitate the transfer of some but
not all of the assets, rights and
liabilities which form part of a
structured finance deal;
»» there are also protections for trading,
clearing and settlement systems in
the case of partial transfers.
LEVEL 2 MEASURES
HOW ARE LEVEL 2 MEASURES PROGRESSING?
The BRRD requires the preparation,
by the EBA, of a number of binding
guidelines, together with regulatory
technical standards (RTS) and
implementing technical standards (ITS)
which will form the basis of delegated
regulations to be adopted by the
European Commission.
Guidelines finalised by the EBA relate
to the range of scenarios to be used in
recovery plans; the minimum list of
qualitative and quantitative recovery plan
indicators; the specification of measures
to reduce or remove impediments
to resolvability; triggers for early
intervention measures; tests, reviews and
exercises that may lead to extraordinary
public support measures; and how
to interpret circumstances where an
institution is failing or likely to fail.
CONCLUSION
Banks that are subject to the BRRD
regime are no longer subject to the
existing Irish resolution regime under
the Central Bank and Credit Institutions
(Resolution) Act 2011 (the Resolution
Act) (save for Part 7 of the Resolution
Act, which deals with the liquidation of
“designated credit institutions” (i.e. banks,
building societies and credit unions)).
Credit unions will continue to be subject
to the Resolution Act as they are not
subject to the BRRD regime.
The transposition of the BRRD by
way of the Irish Regulations requires
institutions, competent authorities and
the CBI to actively continue to invest time
and resources in developing, assessing
and finalising recovery and resolution
plans, and assessing resolvability. Further
practical guidance will become available
as Level 2 measures are developed and
finalised, and we will be issuing further
briefings as these Level 2 measures
develop to highlight key aspects of those
measures for institutions subject to the
Irish BRRD regime.
RTS and ITS finalised to date (and
awaiting publication as Commission
Delegated Regulations) cover matters
including the content and assessment
of recovery plans and resolution
plans; resolvability assessments; how
information is to be provided for
resolution plans; independent valuations;
and the minimum requirement for own
funds and eligible liabilities.
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