EBA consults on contractual recognition of bail-in

05 November 2014

The European Banking Authority (EBA) launched today a consultation on its draft Regulatory Technical Standards (RTS) under Article 55(3) of the Bank Recovery and Resolution Directive (BRRD). These RTS support the effective application of the write-down and conversion powers in relation to liabilities governed by the law of a third country. The consultation is part of the EBA's work to promote the effective application of recovery and resolution powers to banks and banking groups with a cross-border presence and to foster convergence of practices between relevant authorities and institutions across the EU. The consultation runs until 5 February 2015.
 
The BRRD requires Member States to ensure that their resolution authorities have available powers to write-down and convert relevant liabilities of an institution at the point of non-viability and in the course of an application of the resolution tools.
 
In order to support the effective application of these powers in relation to liabilities governed by the law of a third country, the BRRD requires that agreements concerning relevant liabilities include a contractual term by which the creditor (or party to the agreement creating the liability) recognises that it may be subject to the write-down and conversion powers and agrees to be bound by any reduction of the principal or outstanding amount due, conversion or cancellation that is affected by the exercise of those powers by a Member State resolution authority.
 
The draft RTS developed by the EBA further determine the cases in which the requirement to include the contractual term does not apply. In particular the requirement to include a contractual term is displaced where a statutory regime in the third country concerned or an international agreement exists which provides for an administrative or judicial procedure to secure recognition of the application of the write-down and conversion powers by a Member State resolution authority. The draft RTS makes clear that a Member State resolution authority may only determine that a third country law or international agreement is sufficient to displace the obligation to include the contractual term where a minimum set of elements specified in the RTS is identified.
 
The draft RTS also specifies the contents of the contractual term required to be included in relevant liabilities where no alternative, i.e. statutory, mechanism exists to secure recognition.  This approach is designed to strike a balance between the need for harmonisation and the need for flexibility to take account of any issues arising in relation to a specific third country law, type of liability or arbitrage risk.
 
This Consultation Paper includes the EBA's proposal for the draft RTS and explains the approach the EBA has taken in relation to the proposal for the RTS.
 

Consultation process

Comments to this consultation can be sent to the EBA by clicking on the "send your comments" button on the consultation page. Please note that the deadline for the submission of comments is 5 February 2015.
 
A public hearing will then take place at the EBA premises on 9 January 2015 from 14:00 to 17:00 UK time. All contributions received will be published following the close of the consultation, unless requested otherwise.

Legal basis and next step

The proposed RTS are based on Article 55(3) of the BRRD, which requires the EBA to develop draft regulatory technical standards in order to further determine the list of liabilities to which the exclusion in Article 55(1) of the BRRD applied, and the contents of the terms required in that paragraph, taking into account banks' different business models.