EBA consults on treatment of liabilities in bail-in
01 October 2014
The European Banking Authority (EBA) launched today a consultation on draft Guidelines clarifying the interrelationship between the sequence in which liabilities should be written down or converted when the bail-in power introduced by the Bank Recovery and Resolution Directive (BRRD) is used, and the hierarchy of capital instruments in the Capital Requirements Regulation (CRR). This is the first of several EBA regulatory mandates under the BRRD which aim to ensure that bail-in power is an effective way of absorbing losses and recapitalising banks in resolution and that resolution authorities and other stakeholders have a clear understanding of the terms under which it should be applied. The consultation runs until 3 January 2015.
The BRRD specifies the sequence in which the power to write down or convert liabilities in resolution should be applied. This sequence provides that capital instruments, as defined in the CRR, should bear losses first, before other liabilities. The BRRD also includes a similar provision about the power to write down or convert capital instruments at the point of non-viability.
The draft Guidelines provide general guiding rules, based on the resolution principles established by Article 34 of the BRRD, which should be applied in cases where there is potential ambiguity about which category of the writedown sequence a particular instrument belongs to. The two guiding rules are that when applying the bail in tool or the conversion power, except where exclusions according to Article 38 BRRD are made, the resolution authority should treat capital instruments which rank equally in insolvency in the same way, whatever their other qualities; and that the resolution authority should apply the same treatment to instruments which are partially included in the calculation of own funds as to instruments which are fully included.
These are applied to the particular cases of grandfathered Additional Tier 1 instruments and Tier 2 instruments which are only partially included in the calculation of own funds because they are subject to the amortisation regime of the CRR.
The EBA will, later this year, issue for consultation further draft Guidelines on the operation of the bail-in power, namely on the treatment of shareholders and rates of conversion from debt to equity. The EBA will also consult on technical standards further specifying the criteria for setting the minimum requirements for own funds and eligible liabilities (MREL).
Comments to these consultations 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 3 January 2015.
All contributions received will be published following the close of the consultation, unless requested otherwise. A public hearing will then take place at the EBA premises on 28 November 2014 from14:00 to 16:00 UK time.
Note to the editors
The proposed Guidelines are based on Article 4(5) of the BRRD, which requires the EBA to issue guidelines in accordance with Article 16 of Regulation (EU) No 1093/2010 to specify the interrelationship between the sequence in which liabilities should be written down or converted when the bail-in power introduced by the Bank Recovery and Resolution Directive (BRRD) is used, and the hierarchy of capital instruments in the Capital Requirements Regulation (CRR).