BANK RECOVERY AND RESOLUTION DIRECTIVE
(BRRD)
Public Consultation
DECEMBER 2014
Public Consultation Paper:
Bank Recovery and Resolution Directive
Department of Finance
December 2014
Department of Finance
Government Buildings, Upper Merrion Street, Dublin 2
Ireland
E-mail: [email protected]
Website: www.finance.gov.ie
Contents
Page
1.
Introduction .............................................................................................................5
1.1.
Consultation Process ................................................................................................. 5
2.
Why BRRD is necessary .............................................................................................6
3.
The Banking Union context .......................................................................................7
4.
Protection for deposits under BRRD ..........................................................................9
5.
Overview of the BRRD and its transposition ............................................................ 10
6.
Preparatory and preventative measures ................................................................. 11
7.
8.
6.1.
Articles 5-9: Recovery planning: ............................................................................. 11
6.2.
Articles 10-18: Resolution planning & Resolvability: .............................................. 12
6.3.
Articles 27 - 30: Early intervention .......................................................................... 13
Resolution .............................................................................................................. 14
7.1.
Article 31: Resolution objectives ............................................................................. 14
7.2.
Article 32: Conditions for resolution ....................................................................... 14
Consultation Questions........................................................................................... 16
8.1.
Question 1: Should the resolution authority have the power to make a “failing or
likely to fail” determination?................................................................................... 16
8.2.
Article 36: Valuation ................................................................................................ 16
8.3.
Articles 73 - 75: Valuation of difference in treatment ............................................ 17
8.4.
Articles 38-39: Sale of business tool........................................................................ 17
8.5.
Articles 40-41: Bridge institution tool ..................................................................... 18
8.6.
Article 42: Asset separation tool ............................................................................. 18
8.7.
Article 44: The bail-in tool ....................................................................................... 18
8.8.
Article 45: Minimum requirement for own funds and eligible liabilities (MREL): .. 20
8.9.
Question 2: Timing for the transposition of Section 5 of Chapter IV of Title IV (bailin tool and minimum requirements for eligible liabilities) ..................................... 21
8.10.
Articles 56 - 58: Government financial stabilisation tools .................................. 22
8.11.
Question 3: Government financial stabilisation tools ......................................... 22
8.12.
Articles 59 - 62: Write down of capital instruments ........................................... 22
8.13.
Question 4: Should the competent authority or the resolution authority be
responsible for the decision to write down or convert capital instruments?..... 23
8.14.
Resolution powers............................................................................................... 24
8.15.
Article 63: General powers .................................................................................. 24
8.16.
Article 64: Ancillary powers................................................................................. 24
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 3
8.17.
Article 65: Power to require the provision of services and facilities .................. 24
8.18.
Article 66: Power to enforce crisis management measures or crisis prevention
measures by other Member States ..................................................................... 25
8.19.
Article 67: Power in respect of assets, rights, liabilities, shares and other
ownership located in third countries .................................................................. 25
8.20.
Article 68: Exclusion of certain contractual terms in early intervention and
resolution ............................................................................................................ 25
8.21.
Article 69: Power to suspend certain obligations ............................................... 25
8.22.
Article 70: Power to restrict the enforcement of security interests ................... 25
8.23.
Article 71: Power to temporarily suspend termination rights ............................ 26
8.24.
Articles 73 – 80: Safeguards ................................................................................ 26
8.25.
Question 5: Safeguards and how appropriate protection should be provided. . 26
8.26.
Articles 85-86: Right of appeal and rights to challenge decisions....................... 27
8.27.
Question 6: Ex-ante judicial approval ................................................................. 27
8.28.
Articles 87 - 92: Cross-border group resolution .................................................. 28
8.29.
Articles 93-98: Relations with third countries..................................................... 28
8.30.
Financing arrangements ...................................................................................... 28
8.31.
Article 102: Target level ...................................................................................... 29
8.32.
Article 103: Ex-ante contributions....................................................................... 29
8.33.
Question 7: Calculation and payment of contributions process ......................... 29
8.34.
Article 104: Extraordinary ex-post contributions ................................................ 31
8.35.
Article 108: Ranking of deposits in insolvency hierarchy .................................... 31
8.36.
Article 109: Use of deposit guarantee schemes in the context of resolution..... 32
8.37.
Question 8: Cap on deposit guarantee scheme (DGS) contribution in resolution
action? ................................................................................................................. 32
8.38.
Question 9: Do you have any other comments on the transposition of this
Directive? ............................................................................................................ 33
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 4
1. Introduction
The objective of this Consultation is fourfold:
(i)
to provide an overview of the Bank Recovery and Resolution Directive (BRRD)
and to put it into the appropriate banking union context. In this regard, there
is a description of the most important Articles;
(ii)
to highlight the protection for deposits in BRRD;
(iii)
to outline the major areas in which the Directive provides a discretion for
Member States. These are set out in boxes underneath the relevant Articles;
(iv)
to seek the view of all relevant stakeholders on the Directive as a whole and
in particular in relation to its transposition in Ireland.
It should be noted that this document does not seek to address every element of the
BRRD. In addition, where it expresses the Minister’s views, these are of a preliminary
nature and are subject to further consideration of the legal requirements of the BRRD.
The Directive, which applies to all banks and a subset of investment firms that meet
certain initial capital requirements, entered into force on 2 July 2014 and is required to
be transposed into Irish law by 31 December 2014 in order to be applied from 1 January
2015.
1.1.
Consultation Process
Responses are requested by Tuesday 16th December. The Minister cannot guarantee
that responses received after this date will be considered.
Responses should be sent by email to [email protected].
Responses to this consultation are subject to the provisions of the Freedom of
Information Acts. Parties should also note that responses to the consultation may be
published on the website of the Department of Finance.
Responses received will be taken into consideration when finalising the Department’s
policy choices for each of the options specified in this paper.
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 5
2. Why BRRD is necessary
The purpose of the BRRD is to establish a common framework for the recovery and
resolution of credit institutions and certain investment firms throughout the
EU (including cross-border banks). The Directive will apply to all 28 Member States.
The Directive does not apply to credit unions.
The overarching objective of the BRRD is to shift the cost of bank failure from taxpayers
to shareholders and creditors of the institutions themselves. The European financial
crisis has made clear that a strong, harmonised legal framework is necessary to achieve
this objective. This is particularly the case in a highly integrated cross-border financial
services market such as the EU: the failure of a national bank can create ripple effects
elsewhere, or the failure of a cross-border bank can affect the financial stability of
financial markets in the different Member States in which it operates. In the absence of
a mechanism to resolve such banks or banking groups satisfactorily, there is a significant
risk of the internal market being undermined as a result of a lack of consistency and coordination in the responses of different Member States. Consequently, the development
of a harmonised set of tools and powers for the management of bank failures is
considered essential.
A number of Member States, including Ireland, already have domestic resolution
regimes in place. However, national regimes vary in their scope and content – there are
no common minimum standards which apply across the Union. In many instances
Member States simply apply their standard insolvency regime to the banking sector. The
recent crisis has highlighted that ordinary insolvency mechanisms are often inadequate
to take account of the particular characteristics of banks and investment firms: the
intrinsic importance of the banking sector, including credit supply and payments
systems, to the real economy; the necessity in many cases for rapid intervention; the
need to ensure the continuity of institutions’ critical functions; the need to avoid
contagion effects and financial instability; the public policy objective of providing certain
protections for depositors.
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 6
3. The Banking Union context
The intention of BRRD is to provide a minimum level of harmonisation in the future
application of resolution tools in all Member States and ensure a broad uniformity of
approach to such matters. However, the nature of such a regime is that there will
continue to be some flexibility for Member States, and consequently the possibility of
diverging approaches in supervision and resolution. Differences in perceived regulatory
approaches may lead to divergences in funding costs for banks because of where they
are located, irrespective of the underlying creditworthiness of the institution. Any such
divergences in funding costs are likely to be passed on to bank customers, in the form
of higher borrowing costs. In response to this, and in order to try and break the link
between the sovereign and the banking sector, Euro Area Member States committed to
establishing a “Banking Union”.
Banking Union consists of several elements:
(i)
a Single Rulebook which consists of a harmonised set of rules on supervision
(Capital Requirements Directive and Regulation1), resolution (BRRD) and
deposit insurance (recast Deposit Guarantee Scheme Directive2);
(ii)
centralised supervision under which the ECB will act as the central supervisor
in the banking union (Single Supervisory Mechanism Regulation3); and
(iii)
a single resolution mechanism that will ensure an effective EU response
where a bank finds itself in serious difficulties (Single Resolution Mechanism
Regulation4).
It should be noted that the SRM Regulation, which was published in July 2014, will take
effect from January 2016. It will complement the BRRD for Banking Union Member
States, by establishing a pan-European resolution authority, the Single Resolution Board
(SRB), with the power to restructure and wind-down failing banks. The SRB will have
access to a single resolution fund (SRF), with a target level of 1% of covered deposits
within banking union Member States (approximately €55bn). The fund will be paid for
by contributions from the EU banking sector and will have operational effect from 1
January 2016.
As a result, the BRRD will be superseded in some respects by the SRM Regulation after
1 January 2016. However, the BRRD will remain in effect – it will provide the legal basis
1
Directive 2013/36/EU
Directive 2014/49/EU
3
Council Regulation (EU) No 1024/2013
4
Regulation (EU) No 806/2014
2
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 7
for a national resolution authority to implement a resolution decision of the SRB, and
will continue to govern the resolution of less significant banks and investment firms.
The major practical changes which the SRM Regulation will ultimately bring from 1
January 2016 are:
(i)
Resolution fund levies will continue to be collected by the relevant Member
State, but will be transferred to the Single Resolution Fund rather than to the
national resolution fund;
(ii)
The time within which the resolution fund target must be built up will fall
from 10 years to eight years. In addition, the basis for the calculation of the
resolution levies will change from 1% of national covered deposits to 1% of
Euro Area covered deposits. The combined effect of these factors is that,
because of the relative mix of deposit and non-deposit liabilities in the Irish
banking sector generally, Irish institutions will be likely to pay higher
contributions under the SRM post-2016 than they will pay under BRRD in
2015;
(iii)
The SRB will be responsible for making resolution decisions for (i)
“significant” banks and (ii) less significant banks where it is necessary to draw
upon the single resolution fund. The definition of “significant” in the SRM
Regulation to a large extent mirrors the scope of ECB direct supervision under
the SSM Regulation.
(iv)
Under the SRM, authorities will potentially be able to draw on a much larger
resolution fund than under BRRD. However, as under BRRD, certain
restrictions and pre-conditions will be placed on the use of the Single
Resolution Fund.
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 8
4. Protection for deposits under BRRD
It is important to note that the Directive provides certain protections which enhance the
position of depositors.
First, the existing Deposit Guarantee Scheme protection for eligible deposits up to
€100,000 will not be affected.
Second, the Directive provides that covered deposits (i.e., eligible deposits up to
€100,000) are excluded from the scope of the bail-in tool. While certain other creditors
can be bailed-in, covered deposits cannot.
Third, the Directive introduces in all Member States “depositor preference”, which
further strengthens the position of (i) covered deposits and (ii) eligible deposits from
natural persons and SMEs which exceed the €100,000 coverage threshold. Such deposits
will no longer rank pari passu with senior bonds and other unsecured creditors. Instead,
they will have statutory preference in insolvency and resolution. The practical effect of
this is that, where a bank fails, shareholders and other unsecured creditors (including
senior bondholders) will have to be fully written down before losses are imposed on
preferred depositors. It is envisaged that in most cases, this preference will be sufficient
to ensure that preferred deposits do not ultimately suffer any losses in the event of
insolvency, bail-in, or another resolution action being taken.
Fourth, in addition to the above, the bail-in rules allow in exceptional circumstances for
the exclusion or partial exclusion of certain liabilities (with a key focus being eligible
deposits) from the application of the write down or conversion powers. In particular, it
might be possible for authorities exclude such liabilities where:
“the exclusion is strictly necessary and proportionate to avoid giving rise to
widespread contagion, in particular as regards eligible deposits held by natural
persons and micro, small and medium sized enterprises, which would severely
disrupt the functioning of financial market, including the financial market
infrastructures, in a manner that could cause a serious disturbance to the
economy of a Member State or of the Unions.” (Article 44 (3) (c))
The cumulative effect of these protections is to significantly strengthen the position of
both covered depositors, and natural persons and SMEs with deposits which exceed
€100,000.
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 9
5. Overview of the BRRD and its transposition
The main objective of the BRRD is to ensure that, when a bank or investment firm fails,
authorities have the tools and powers to manage that effectively, critical functions are
maintained, financial instability is avoided, depositors are protected, and shareholders
and creditors bear the losses to the extent necessary, while taxpayers are protected to
the greatest extent possible.
In order to lay the ground for the implementation of the transposition the Minister for
Finance has already made two important decisions in relation to the transposition:
(i)
To confer the powers and functions of the Irish national resolution authority
upon the Central Bank of Ireland (Article 3 of BRRD). The Minister recognises,
however, the need to ensure that adequate structural arrangements are put
in place to ensure operational independence and to avoid conflicts of interest
between supervisory functions and resolution functions within the Central
Bank, while at the same time providing for the necessary exchange of
information and cooperation between the two functions;
(ii)
Banks will no longer be subject to the Central Bank and Credit Institutions
(Resolution) Act 2011, from the start of 2015, with possible limited
exceptions for certain provisions of the Act. The 2011 Act will continue to
apply to credit unions, which are not covered by the BRRD.
The three pillars of the BRRD are:
(i)
Preparatory and preventative measures (recovery and resolution planning,
etc.) (Articles 5- 26)
(ii)
Early intervention measures (actions designed to remedy deteriorations in
institution’s financial position) (Articles 27-30)
(iii)
Resolution Measures (resolution tools and powers) (Articles 31-58)
These three main pillars are complemented by a series of ancillary provisions and
powers.
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 10
6. Preparatory and preventative measures
The purposes of the first pillar are, firstly, to seek to ensure that an institution will not
need to be resolved in the first place and, secondly, in the event that it does, that
authorities are adequately prepared to manage its failure.
6.1.
Articles 5-9: Recovery planning:
While Article 61 of the European Union (Capital Requirements) Regulations 2014
provide for recovery planning obligations, Articles 5-9 of the BRRD set out in greater
detail the recovery planning process which will apply to institutions and groups. Some
important points to note about such recovery plans are:
(i)
they shall not assume any access to or receipt of extraordinary public
financial support;
(ii)
they shall include where applicable an analysis of how and when an
institution may apply, in the conditions addressed by the plan, for the use of
central bank facilities and identify those assets which would be expected to
qualify as collateral;
(iii)
they should also include what possible measures an institution would carry
out where the conditions for early intervention in Article 27 are met.
A key element of the recovery planning process is the assessment of recovery plans by
the competent authority in order to ensure that they are reasonably likely to maintain
or restore the viability and financial position of the institution or group, and that they
are capable of being implemented quickly and effectively in situations of financial stress
while at the same time avoiding to the maximum extent possible any significant adverse
effect on the financial system.
As part of an assessment of recovery plans, the competent authority will consult the
resolution authority to seek its view on how the plan may impact on the resolvability of
the institution. Where the competent authority assesses that there are material
deficiencies in the recovery plan or material impediments to its implementation it shall
inform the institution and give it an opportunity to address them. Ultimately, if the
institution does not identify and implement suitable changes to its plan, the competent
authority has the power to direct the institution to take certain measures.
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 11
6.2.
Articles 10-18: Resolution planning & Resolvability:
Again, while Article 62 of European Union (Capital Requirements) Regulations 2014
require institutions to draw up resolution plans, the BRRD sets out greater detail about
what such plans should contain, how they should be assessed and the resolution
authority’s powers to address impediments to resolvability. Unlike for recovery plans, it
is the resolution authority that draws up the resolution plan rather than the institution
itself. In essence, the resolution plan sets out the resolution actions which the resolution
authority may take in the event that the institution meets the conditions for resolution.
A key part of this process is the assessment of resolvability of an institution or group. In
particular, the resolution authority will assess the extent to which the institution or
group is resolvable without the assumption of public support or central bank liquidity
assistance.
The Directive states at Article 15(1) that “an institution shall be deemed to be resolvable
if it is feasible and credible for the resolution authority to either liquidate it under normal
insolvency proceedings or to resolve it by applying the different resolution tools and
powers to the institution while avoiding to the maximum extent possible any significant
adverse effect on the financial system, including in circumstances of broader financial
instability or system-wide events, of the Member State in which the institution is
established, or other Member States or the Union with a view to ensuring the continuity
of critical functions carried out by the institution.”
Article 17 and 18 deal with the power to address or remove impediments to
resolvability. They provide that where the resolution authority determines that there
are substantive impediments to the resolvability of an institution, it shall notify the
institution in order to give it the opportunity to propose measures to address or remove
these impediments. If the authority is of the view that the measures proposed by the
institution would not effectively address the impediments to resolvability, the authority
may either directly or indirectly through the competent authority require the institution
to take alternative measures that may achieve this goal.
Resolution authorities will have the power to take a range of measures as outlined in
Article 17 (5). These include:

to require the institution to limit its maximum individual and aggregate
exposures;

to require the institution to divest specific assets;

to require the institution to limit or cease specific existing or proposed activities;
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 12

restrict or prevent the development of new or existing business lines or sale of
new or existing products;

to require an institution or a parent undertaking to set up a parent financial
holding company in a Member State or a Union parent financial holding
company.
6.3.
Articles 27 - 30: Early intervention
The second pillar provides a number of powers to the competent authority which can
be exercised where an institution infringes or is likely in the near future to infringe
prudential requirements, including capital, liquidity and leverage rules.
These powers include the right to:

direct that the institution implement elements of a recovery plan;

require changes to the institution’s business strategy;

require changes to the legal or operational structure of the institution;

require the removal of some or all of the management body or senior
management;

appoint a temporary administrator to the institution.
In addition, it should be noted that Article 59 allows authorities to write down or convert
capital instruments (i.e., non-equity Tier 1 or Tier 2 instruments) independently of
resolution action, in a situation where there is a capital shortfall, but the appropriate
authority is of the view that this write down or conversion of capital instruments is
sufficient to restore the institution’s financial position to a viable level without the need
for resolution action which would impose losses on other creditors.
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 13
7. Resolution
The third pillar of BRRD addresses, among other issues, the objectives of resolution
(Article 31), the conditions for resolution (Article 32), the general principles governing
resolution (Article 34), the appointment of a special manager (Article 35), valuation for
the purposes of resolution (Article 36). In addition, it sets out the resolution tools
available to a resolution authority.
The most important Articles are described in more detail below:
7.1.
Article 31: Resolution objectives
When using these resolution tools and exercising resolution powers, a resolution
authority is required to have regard to the following “resolution objectives”:
(i)
to ensure the continuity of critical factors;
(ii)
to avoid a significant adverse effect on the financial system, in particular by
preventing contagion, including to market infrastructures, and by maintaining
market discipline;
(iii)
to protect public funds by minimising reliance on extra-ordinary public financial
support;
(iv)
to protect covered deposits;
(v)
to protect client funds and client assets.
The Authority, in pursuing the above objectives, is required to seek to minimise the cost
of resolution and avoid destruction of value unless necessary to achieve the resolution
objectives.
7.2.
Article 32: Conditions for resolution
This Article provides that the resolution authority is required take a resolution action in
relation to an institution, only if the authority considers that all of the following
conditions are met:
(i)
a determination that the institution is failing or likely to fail 5 has been made
by the competent authority, after consulting the resolution authority, or
5
In broad terms an institution is deemed to be failing or likely to fail in one or more of the following
circumstances (see Article 32(4) of Directive for more detail)
(i)
It is infringing the requirements for continuation of authorisation in a way that would
justify the withdrawal of its authorisation by the competent authority
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 14
subject to the conditions in paragraph (2) by the resolution authority after
consulting the competent authority;
(ii)
having regard to timing and other relevant circumstances, there is no
reasonable prospect that any alternative private sector measures, including
early intervention measures or the write down or conversion of relevant
capital instruments taken in respect of the institution would prevent its
failure within a reasonable timeframe; and
(iii)
a resolution action is necessary in the public interest.
Paragraph (2) provides that Member States may provide that, in addition to the
competent authority, the determination that the institution is failing or likely to fail
under point (a) of paragraph 1 can be made by the resolution authority, after consulting
the competent authority, where resolution authorities under national law have the
necessary tools for making such a determination, including in particular, adequate
access to relevant information. The competent authority shall provide the resolution
authority with any relevant information that the latter requests in order to perform its
assessment without delay.
(ii)
(iii)
(iv)
The assets of the institution will in the near future be less than its liabilities
The institution will in the near future be unable to pay its debts or other liabilities as they
fall due
Extraordinary public financial support is required (except in certain specified situations)
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 15
8. Consultation Questions
8.1.
Question 1: Should the resolution authority have the power to make a
“failing or likely to fail” determination?
Question 1: Should the resolution authority have the power to make a “failing or likely to
fail” determination?
The BRRD provides that the decision on whether an institution is failing or likely to fail
– in other words, the financial assessment which triggers possible resolution action –
is made by the competent authority (supervisory side of the Central Bank). In addition,
Member States have a discretion to provide that the decision can also be made by the
resolution authority (resolution side of the Central Bank).
The main reason this discretion was introduced was because some Member States
felt that in its absence a competent authority might exercise inappropriate regulatory
forbearance.
The Minister’s initial view is that this decision should be made by the competent
authority only (after consultation with the resolution authority). The rationale for this
is that the supervisor is better positioned to assess the financial position of the
institution, and providing two public authorities with identical powers blurs
responsibilities and creates a risk of a dis-coordinated approach by the respective
authorities.
Do you have any comments on this matter?
8.2.
Article 36: Valuation
Before taking resolution action, authorities are obliged to carry out a valuation of the
assets and liabilities of the institution under resolution in order to ensure that a “fair,
prudent and realistic valuation” is obtained. This valuation must in general be carried
out by an independent person; however, some flexibility is provided to allow a
provisional valuation to be carried out by the resolution authority itself in urgent
circumstances.
The purpose of the valuation, among other things, is to:
(i)
inform the determination of whether the conditions for resolution or the
conditions for the write down or conversion of capital instruments are met;
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 16
(ii)
if the conditions for resolution are met, to inform the decision on the
appropriate resolution decision to be taken in respect of the institution;
(iii)
when the bail-in tool is applied, to determine the extent of the write down
or conversion of eligible liabilities;
(iv)
when the sale of business tool or bridge bank tools are applied, to inform the
price at which the assets or liabilities are sold or transferred.
8.3.
Articles 73 - 75: Valuation of difference in treatment
Related to Article 36 is Article 74. Its purpose is give effect to the safeguard for creditors
contained in Article 34(1)(g):
“no creditor shall incur greater losses than would have been incurred if the
institution or entity … had been wound up under normal insolvency proceedings
and in accordance with the safeguards in Articles 73 to 75”
This valuation, which occurs after the resolution action has taken place, aims to
determine whether shareholders and creditors whose claims have been written down
or converted would have received better treatment if the institution had been
liquidated. If so, these shareholders and creditors may be entitled to compensation from
the resolution fund.
8.4.
Articles 38-39: Sale of business tool
The first of the four resolution tools is the sale of business tool. This tool enables a
resolution authority to sell either an institution under resolution in full or in part to one
or more purchasers, without the consent of shareholders of the institution under
resolution.
In applying this tool there is a requirement to conduct the transaction in an open
transparent and non-discriminatory way while aiming to maximise the sale price. The
resolution authority has flexibility to avoid the strict application of these marketing
requirements where it believes that complying with them would undermine the
resolution objectives.
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 17
8.5.
Articles 40-41: Bridge institution tool
The purpose of the second resolution tool, the bridge institution tool, is to enable the
transfer of some or all of the assets and liabilities of an institution under resolution to a
bridge institution, a State-owned bank which holds the assets and liabilities on a
temporary basis with a view to reselling them. The tool aims to enable critical functions
continue to be provided to the clients of the failing institution.
8.6.
Article 42: Asset separation tool
The purpose of the asset separation tool is to transfer some or all of the assets and
liabilities of the institution under resolution to an asset management vehicle. The asset
management vehicle will wind down or sell the assets over a medium or long-term
horizon, in order to maximise their value. This tool might be employed, for instance, if
the market for particular assets is of such a nature that the liquidation of those assets
under normal insolvency proceedings could have an adverse effect on financial markets.
8.7.
Article 44: The bail-in tool
The fourth resolution tool, the bail-in tool, is among the most important changes which
the Directive introduces. It enables a resolution authority to write down the value of
certain liabilities or convert them into equity, to the extent necessary to absorb losses
and recapitalise the institution.
The scope of the bail-in tool is wide: in general, it applies to all liabilities, in order of
preference, unless they are specifically excluded from its scope. Article 44(2) defines
certain classes of liabilities which are to be always excluded from the scope of bail-in:
these liabilities include covered deposits, secured liabilities (unless the value of the
liability exceeds the value of the security), liabilities that the bank has by virtue of
holding client assets, etc.
In addition, in exceptional circumstances, where the bail-in tool is applied, the resolution
authority may exercise a discretion to exclude or partially exclude further liabilities from
the bail-in tool. This can only be done where:
(a) it is not possible to bail-in that liability within a reasonable time
notwithstanding the good faith efforts of the resolution authority;
(b) the exclusion is strictly necessary and is proportionate to achieve the
continuity of critical functions and core business lines in a manner that maintains
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 18
the ability of the institution under resolution to continue key operations, services
and transactions;
(c) the exclusion is strictly necessary and proportionate to avoid giving rise to
widespread contagion, in particular as regards eligible deposits held by natural
persons and micro, small and medium sized enterprises, which would severely
disrupt the functioning of financial markets, including of financial market
infrastructures, in a manner that could cause a serious disturbance to the
economy of a Member State or of the Union; or
(d) the application of the bail-in tool to those liabilities would cause a destruction
in value such that the losses borne by other creditors would be higher than if
those liabilities were excluded from bail-in.
Where an Authority decides that such a discretionary exclusion is necessary, the level of
write down or conversion to other liabilities may be increased to take account of such
discretionary exclusions. This is subject to the constraint that no creditor shall incur
losses greater than would have been incurred if the institution had been wound up
under normal insolvency proceedings.
In certain cases, where liabilities have been excluded from bail-in and the losses that
these liabilities would otherwise have suffered have not been fully passed on to the
holders of other liabilities, the resolution fund may contribute to the institution under
resolution in order to help absorb these losses. However, the use of the resolution fund
in this way is subject to certain conditions being met:
(i)
a contribution to losses of not less than 8% of total liabilities including
own funds measured at the time of the commencement of the resolution
action has been made by shareholders and creditors through the write
down or conversion process;
(ii)
the contribution of the resolution financing does not exceed 5% of the
total liabilities including own funds of the institution measured at the
time of the commencement of the resolution action;
(iii)
the use of the resolution fund has been approved by the European
Commission.
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 19
8.8.
Article 45: Minimum requirement for own funds and eligible liabilities
(MREL):
In order to prevent institutions from structuring their liabilities in such a manner as to
impede the effectiveness of the bail-in tool, the Directive requires that institutions must
at all times meet a minimum requirement for own funds and eligible liabilities (MREL).
This new prudential ratio expresses qualifying equity and liabilities as a percentage of
the total liabilities and own funds of the institution.
Eligible liabilities shall only be included in MREL if they meet the following conditions:
(i)
the instrument is issued and fully paid up;
(ii)
the liability is not owed to, secured by or guaranteed by the institution itself;
(iii)
the purchase of the instrument was not funded directly or indirectly by the
institution;
(iv)
the liability has a remaining maturity of at least one year;
(v)
the liability does not arise from a derivative;
(vi)
the liability does not arise from a deposit which benefits from preference in
the national insolvency hierarchy in accordance with Article 108.
The MREL for each institution shall be determined by the resolution authority after
consulting the competent authority on the basis of at least the following criteria:
(i)
the need to ensure that the institution can be resolved by the application of
the resolution tools including, where appropriate, the bail-in tool, in a way
that meets the resolution objectives;
(ii)
the need to ensure, in appropriate cases, that the institution has sufficient
eligible liabilities to ensure that, if the bail-in tool were to be applied, losses
could be absorbed and the Common Equity Tier 1 (CET1) ratio of the
institution could be restored to a level necessary to enable it continue to
comply with the conditions for authorisation and to continue to carry out the
activities for which it is authorised
and to sustain sufficient market
confidence in the institution;
(iii)
the need to ensure that, if the resolution plan anticipates that certain classes
of eligible liabilities might be excluded from bail-in under Article 44(3) or that
certain classes of eligible liabilities might be transferred to a recipient in full
under a partial transfer, that the institution has sufficient other liabilities to
ensure that losses could be absorbed and the CET1 ratio of the institution
could be restored to a level necessary to enable it to continue to comply with
the conditions for authorisation and to continue to carry out the activities
for which it is authorised.
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 20
8.9.
Question 2: Timing for the transposition of Section 5 of Chapter IV of
Title IV (bail-in tool and minimum requirements for eligible liabilities)
Question 2: Timing for the transposition of Section 5 of Chapter IV of Title IV (bailin tool and minimum requirements for eligible liabilities)
Article 130 of the BRRD requires that the Directive be transposed by 31 December
2014, in order for it to come into effect on 1 January 2015. However, it also provides
that Member States need not apply Section 5 of Chapter IV of Title IV (bail-in tool and
MREL) until 1 January 2016.
The reason that the BRRD permits flexibility in the duration of the transition period is
to enable Member States to ensure that adequate notification is provided to the
holders of eligible liability before the bail-in provisions take effect, and to allow
institutions adequate time to build up sufficient liabilities in order to meet the new
MREL requirements.
In practical terms, if Ireland decides to defer the introduction of bail-in until 2016, the
following would be the major effects:
(i) should an Irish bank need to be resolved in 2015, eligible liabilities which
include senior debt and deposits over €100,000, could not be bailed in
(although they might nonetheless suffer losses as a result of the application of
one of the other resolution tools);
(ii) the resolution authority would have more time to determine the appropriate
MREL for banks and banks would have more time to build up a sufficient stock
of qualifying liabilities.
Member States are reasonably evenly split between those which intend to transpose
the bail-in provisions from January 2015, and those which intend to defer
transposition until 2016.
The Minister’s preliminary view is that the application of the bail-in tool and MREL
provisions should be deferred until January 2016 in order to allow for banks and other
market participants to have more time to fully adapt to this aspect of the new
resolution regime before it takes effect.
Do you have any comments on this matter?
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 21
8.10. Articles 56 - 58: Government financial stabilisation tools
In addition to the resolution tools referred to above, the Directive also provides for what
are known as “Government financial stabilisation tools”. These comprise a public equity
support tool and a temporary public ownership tool.
These tools can only be used in the “very extraordinary situation of a systemic crisis” and
certain conditions need to be met first including a requirement that 8% of total liabilities
including own funds have been bailed in first.
The use of Government financial stabilisation tools facility would not be permissible
under the SRM regime.
8.11. Question 3: Government financial stabilisation tools
Question 3: Government financial stabilisation tools
The public equity support tool and a temporary public ownership tool available under
Articles 56-58 are an option for Member States under BRRD.
As this option is not available under the SRM Regulation, it is unlikely that it will be
transposed into Irish law.
Do you have any comments on this matter?
8.12. Articles 59 - 62: Write down of capital instruments
In addition to the bail-in powers, authorities have the power to write down or convert
capital instruments (i.e., non-equity Tier 1 or Tier 2 instruments). It provides the basis
for writing down or converting such capital instruments either (i) independently of
resolution action or (ii) in combination with a resolution action, where the conditions
for resolution are met.
The write down of capital instruments can be used independently of resolution tools if
its use is sufficient to restore the financial health of the institution, without the need for
further resolution action. Alternatively, the write down powers can be applied in
conjunction with resolution powers; for example, the write down powers would be first
applied to impose losses on holders of capital instruments, and the bail-in tool would
then be used to impose losses on eligible liabilities.
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 22
8.13. Question 4: Should the competent authority or the resolution
authority be responsible for the decision to write down or convert
capital instruments?
Question 4: Should the competent authority or the resolution authority be
responsible for the decision to write down or convert capital instruments?
Article 61(2) of the BRRD provides as follows:
"Each Member State shall designate in national law the appropriate authority which
shall be responsible for making determinations pursuant to Article 59. The appropriate
authority may be the competent authority or the resolution authority, in accordance
with Article 32."
Consequently, a decision needs to be made to designate either the competent
authority (supervisor) or the resolution authority as the responsible body for making
the determination that capital instruments should be written down or converted.
There a number of arguments in favour of providing the competent authority with
such powers:

similar powers are already provided to it under the Capital Requirements
Regulation;

these powers can be used in a pre-resolution scenario and therefore can be
used as a means of restoring a bank's capital position and thus avoiding
resolution;

the supervisor has the best knowledge and insight into the capital position of
a bank.
On the other hand, however, it could be argued that since write down/conversion
powers are directly analogous to bail-in powers and involve forcing losses on holders
of certain instruments, the resolution authority is the more appropriate decision
maker.
The Minister’s initial view is that these powers should be exercised by the competent
authority.
Do you have any comments on this matter?
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 23
8.14. Resolution powers
The powers that enable a resolution authority to apply the resolution tools are set out
in Articles 63 to 72.
8.15. Article 63: General powers
This sets out a series of specific powers which an authority can exercise singly or in
combination. They provide amongst other things the power:

to transfer shares or other instruments of ownership by an institution under
resolution;

to reduce including to zero, the principal amount of or outstanding amount
due in respect of eligible liabilities of an institution under resolution;

to convert eligible liabilities into ordinary shares;

to cancel debt instruments issues by an institution under resolution except
for secured liabilities which are excluded from write down or conversion as
per Article 44(2).
8.16. Article 64: Ancillary powers
This provides the Resolution Authority with, inter alia, the power to:

subject to Article 78 provide for a transfer to take effect free from any liability
or encumbrance affecting the financial instruments, rights, assets or liabilities
transferred;

remove the right to acquire further shares;

cancel or modify the terms of a contract to which the institution under resolution
is a party or substitute a recipient as a party.
8.17. Article 65: Power to require the provision of services and facilities
This gives the resolution authority the power to require an institution under resolution
to provide any services or facilities that are necessary to enable a recipient to operate
effectively the business transferred to it.
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 24
8.18. Article 66: Power to enforce crisis management measures or crisis
prevention measures by other Member States
This provision enables the recognition of a transfer of shares, assets, rights or liabilities
in a Member State other than the Member State of the resolution authority that makes
the decision.
8.19. Article 67: Power in respect of assets, rights, liabilities, shares and
other ownership located in third countries
This Article provides the resolution authority with powers to handle the transfer, write
down or conversion of assets, rights or liabilities located in a country outside of the EU.
8.20. Article 68: Exclusion of certain contractual terms in early intervention
and resolution
This Article provides that a party to a contract with a bank that is subject to a crisis
prevention or crisis management measure cannot deem it to be an enforcement event
within the meaning of Directive 2002/47/EC or as insolvency proceedings within the
meaning of Directive 98/26/EC, provided that the substantive obligations under the
contract continue to be met.
8.21. Article 69: Power to suspend certain obligations
This Article provides a resolution authority with the power to suspend for a very limited
period of time any payment or delivery obligations in relation to a contract to which the
institution under resolution is a party.
8.22. Article 70: Power to restrict the enforcement of security interests
This allows the resolution authority to prevent a secured creditor from enforcing its
interests in relation to any assets of the institution under resolution for a very short
period of time.
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 25
8.23. Article 71: Power to temporarily suspend termination rights
This provides a resolution authority with the power to suspend the termination rights of
any party to a contract with an institution under resolution for a very limited time,
provided that payment and delivery obligations and the provision of collateral continue
to be met.
8.24. Articles 73 – 80: Safeguards
These Articles are primarily designed to ensure that when only some of the assets, rights
and liabilities of a failing institution are being transferred to another entity, that there
are safeguards built in to prevent the splitting of linked liabilities, rights and contracts.
These safeguards cover contracts with the same counterparty covered by security
arrangements, title transfer financial collateral arrangements, set-off arrangements,
close out netting arrangements, and structured finance arrangements.
The Directive provides Member States with a degree of discretion in determining what
it considers to be appropriate protections.
8.25. Question 5: Safeguards and how appropriate protection should be
provided.
Question 5: Safeguards and how appropriate protection should be provided.
The Minister is conscious of the need to ensure that the following arrangements and
the counterparties to them are appropriately protected:
i.
security arrangements, under which a person has by way of security an actual
or contingent interest in the assets or rights that are subject to transfer,
irrespective of whether that interest is secured by specific assets or rights or
by way of a floating charge or similar arrangement;
ii.
title transfer collateral arrangements under which collateral to secure or cover
the performance of specified obligations is provided by a transfer of full
ownership of assets from the collateral provider to the collateral taker, on
terms providing for the collateral taker, to transfer assets if these specified
obligations are performed;
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 26
iii.
set-off arrangements under which two or more claims or obligations owed
between the institution under resolution and a counterparty can be set off
against each other;
iv.
netting arrangements;
v.
covered bonds;
vi.
structured finance arrangements, including securitisation and instruments
used for hedging purposes which form an integral part of the cover pool and
which according to national law are secured in a way similar to the covered
bonds which involve the granting and holding of security by a party to the
arrangement or a trustee, agent or nominee.
The Minister has asked that this issue be closely examined in order to ensure we get
it right. In this regard, there are ongoing discussions with the Central Bank and the
Attorney General’s Office on this matter.
Do you have any comments on this matter?
8.26. Articles 85-86: Right of appeal and rights to challenge decisions
Article 85 provides the option for Member States to require resolution authorities to
obtain judicial pre-approval before taking a crisis prevention measure or a crisis
management measure.
8.27. Question 6: Ex-ante judicial approval
Question 6: Ex-ante judicial approval
Article 85 provides that Member States may require that a decision to take a crisis
prevention measure or a crisis management measure is subject to ex-ante judicial
approval.
Crisis prevention measures are pre-resolution measures involving the exercise of
powers to direct removal of deficiencies or impediments to recoverability under
Article 6(6), the exercise of powers to address or remove impediments to resolvability
under Article 17 or 18, the application of an early intervention measure under Article
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 27
27, the appointment of a temporary administrator under Article 29 or the exercise of
the write down powers under Article 59.
Crisis management measures are a resolution action or the appointment of a special
manager under Article 35 or a person under Article 51 (2) or under Article 72(1).
The Department is continuing to consider the extent to which the transposing
regulations will provide for judicial pre-approval for decisions under BRRD. However,
the initial view is that crisis management measures under BRRD will require judicial
pre-approval (as is currently the case under the Central Bank and Credit Institutions
(Resolution) Act 2011). On the other hand, the current view is that crisis prevention
measures are less likely to require judicial pre-approval. Legal analysis of this issue is
continuing.
Do you have any comments on this matter?
8.28. Articles 87 - 92: Cross-border group resolution
These Articles provide the basis for resolving cross-border groups. With the introduction
of the SRM from 1 January 2016, most of these powers will be applied by the Single
Resolution Board in a cross-border resolution scenario.
8.29. Articles 93-98: Relations with third countries
These Articles provides, inter alia, for agreements with third countries to facilitate cooperation with third country resolution authorities. They also provide for the
recognition and enforcement of third country resolution proceedings, and the right to
refuse recognition or enforcement of such proceedings.
8.30. Financing arrangements
These provisions deal with, among other things, the establishment of a domestic
resolution fund (Article 100), the use of such a fund (Article 101), the target level for
such a fund (Article 102), ex-ante contributions (Article 103), extraordinary ex-post
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 28
contributions (Article 104), ranking of deposits in insolvency hierarchy (Article 108), use
of deposit guarantee scheme in the context of resolution (Article 109).
The key Articles are as follows:
8.31. Article 102: Target level
This Article requires Member States to ensure that by 31 December 2024 that the
available means of their financing arrangements should reach at least 1% of the amount
of covered deposits of all the institutions authorised in their territory. It also allows for
Member States to set target levels in excess of this amount. Because we will be subject
to the SRM from 1 January 2016, we are not proposing to set a higher rate.
8.32. Article 103: Ex-ante contributions
This Article sets out the basis for the calculation of contributions for each institution. It
provides that each institution shall pay contributions pro-rata to the amount of its
liabilities (excluding own funds) less covered deposits, with respect to the aggregate
liabilities (excluding own funds) less covered deposits of all the institutions authorised
in the territory of the Member State.
These contributions shall also be adjusted in proportion to the risk profile of the
institution, in accordance with a methodology to be specified by the European
Commission.
8.33. Question 7: Calculation and payment of contributions process
Question 7: Calculation and payment of contributions process
The detail of the application of this provision is set out in a recently adopted
Commission delegated act (14545/14). There are two components to the
contribution which an institution must pay annually under BRRD (i) the flat rate
which will reflect an institution’s size as the contribution should be based on a fixed
amount determined on the basis of that institution’s liabilities (i.e., total liabilities
excluding own funds and covered deposits) and (ii) the risk adjustment which
reflects the risk level of an institution.
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 29
The delegated act specifies how the flat rate shall be determined. In particular it
requires that intra group liabilities arising from a transaction entered into by an
institution with an institution which is part of the same group shall be excluded from
the institution’s total liabilities, provided certain conditions are met. The primary
objective is to avoid double counting.
In addition the delegated act based on criteria set out in 103(7) of BRRD provides for
how the risk adjustment will be calculated and applied to the flat rate. In assessing
the risk profile of an institution, a resolution authority will do so on the basis of the
following four pillars :
(i)
Risk exposure (weighting of 50%)
(ii)
Stability and variety of sources of funding (weighting of 20%)
(iii)
Importance of an institution to the stability of the financial system or
economy (weighting of 10%)
(iv)
Additional risk indicators to be determined by the resolution authority
(weighting of 20%)
The delegated act provides for a transitional provision for 2015 in relation to how
contributions are calculated and paid. The following are the key points to note
(i)
The basis for the calculation is the target level of 1% of covered deposits
in the State. The DGS shall provide the resolution authority by 1
September 2015 with information about the amount of covered deposits
as of 31 July 2015
(ii)
Institutions are required to provide the resolution authority with the
latest approved annual accounts available before 31 December of the
year preceding the calculation period. In 2015, this information shall be
provided by at the latest 1 September 2015.
(iii)
The resolution authority shall notify each institution of its decision
determining the annual contribution to be paid by them at the latest by
30 November 2015
(iv)
The amount to be paid by an institution shall be paid by 31 December
2015
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 30
It should be noted that the target level for contributions for banks under SRM will be
1% of the covered deposits in the Euro zone6, rather than 1% of the covered deposits
in Ireland. All indications to date suggest that this will result in a significant increase
in contributions for Irish banks from 2016 onwards, because of the composition of
Irish banks’ liability base relative to their European counterparts.
Finally, the purpose of the above description is primarily for information purposes as
there is little scope at this stage for further changes, aside from the possibility of a
transitional arrangement from a BRRD contribution basis to an SRM contribution basis
which is currently the subject of negotiation.
Nevertheless as this is an important issue you may have comments?
8.34. Article 104: Extraordinary ex-post contributions
This Article provides for the raising of extraordinary ex post contributions when there
are insufficient funds available to cover the losses and expenses incurred by the Fund.
Extraordinary ex post levies are capped at a level equal to three times annual ex ante
contributions.
8.35. Article 108: Ranking of deposits in insolvency hierarchy
This Article provides that:
(i)
eligible deposits of over €100,000 of natural persons and micro, small and
medium sized enterprises shall have a higher ranking than the claims of
ordinary unsecured, non-preferred creditors;
(ii)
the DGS has a higher ranking than the deposits immediately above, in other
words it will only contribute to the resolution process once all other liabilities
have been bailed in and there are still losses to be absorbed.
6
This target level could also include non-euro Member States who decide to participate in the
SSM/SRM.
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 31
8.36. Article 109: Use of deposit guarantee schemes in the context of
resolution
This Article provides for the DGS to contribute in place of covered deposits where the
bail-in tool is applied. The DGS is required to contribute to the extent that covered
depositors would have suffered losses, had they been included within the scope of
bail-in and had been written down to the same extent as creditors with the same level
of priority.
In practice, given the super-preference for covered deposits (and as a result, the DGS)
introduced in Article 108, it is unlikely that such DGS contributions will be required
often.
8.37. Question 8: Cap on deposit guarantee scheme (DGS) contribution in
resolution action?
Question 8: Cap on deposit guarantee scheme (DGS) contribution in resolution
action
The Directive also provides at Article 109(5) for a cap to be placed on the level of
contribution that the DGS can contribute to a resolution of 50% of the target level of
the DGS. However, there is a discretion for Member States to set the cap at a level
higher than 50%.
This cap is designed to protect the DGS from being entirely exhausted by a single
resolution action, and thus reducing confidence in its ability to reimburse depositors
in future resolutions or insolvencies.
In order to put the above into context, the following needs to be understood:
The DGS can be used in two broad sets of circumstances:
(a) as a paybox function: for instance where a bank is put into insolvency and
there are insufficient funds to pay depositors. A recent example of this is IBRC,
where eligible depositors were compensated using the paybox function of the
DGS;
(b) in a resolution: where the bail-in tool is used, covered deposits are exempted
from being written down or converted. This allows policyholders to continue
to have access to their deposits in a "business as normal" fashion. However,
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 32
there is a requirement for the DGS to make a contribution on their behalf in
order to cover the losses they would have borne if they had been bailed in.
Certain Member States have argued they would never put their banks into liquidation
and thus the paybox function is unlikely to be used. Instead, these Member States
would resolve banks in order to ensure continuity of critical functions such as access
to deposits. Consequently, some countries sought the option of setting a percentage
higher than 50% in relation to the use of the DGS in a resolution.
While there may be merits to such an approach, the Minister’s initial view is that it is
important to maintain a minimum level of funds in the DGS for public confidence
reasons.
Do you have any comments on this matter?
8.38. Question 9: Do you have any other comments on the transposition of
this Directive?
Question 9: Do you have any other comments on the transposition of this
Directive?
___________________________________
Department of Finance | BRRD: Public Consultation Paper | December 2014
Page | 33