The EBA advises on resolution procedures for EU banks

06 March 2015

The EBA issued today advice to the European Commission on the resolution framework for EU banks, covering the definition of critical functions and core business lines, as well as rules for the exclusion of liabilities from the application of the bail-in tool. The Authority reminded that the purpose of the bail-in tool is to ensure the legislative principle that shareholders and creditors of a failing institution have to bear its losses, and as such exemptions should be applied cautiously. The EBA advice on critical functions is based on its work on rules for recovery planning and on a comparative analysis of the recovery plans of 27 European cross-border banking groups which identified key strengths and weaknesses in banks' approaches and is also published today.
 
The EBA delivered today advice that will inform delegated acts on the Bank Recovery and Resolution Directive (BRRD). Upon request of the European Commission, the Authority provided a comprehensive set of criteria for testing critical functions of institutions under resolution, as well as core business lines of banks, the exclusion of liabilities from the application of the bail-in tool and on the deferral of ex-post contributions.
 
The substitutability of a function for the real economy, risk of contagion and loss of market confidence should be taken into consideration by national authorities, which should evaluate the potential impact that the resolution of an institution can have on financial markets and the real economy. Such analysis should be based on the analysis carried out by the concerned institution and complemented by a critical review by competent authorities and resolution authorities. This work is based on the EBA's work on rules for recovery planning and its ‘Comparative report on the approach to determining critical functions and core business lines in recovery plans', which is also published today. This comparison report reviewed the range of practices currently observed across the EU banking sector and identified key strengths and weaknesses in banks' approaches for determining critical functions and core business lines in recovery plans. In particular the comparison exercise illustrated the preferred assessment criteria used by banks in their determination of critical functions and core business lines and most common set of indicators used to support the assessment. This comparison analysis should be beneficial to credit institutions in identifying best practices and their positioning in relation to peers, ultimately contributing to ensure that the approach to assessing critical functions and core business lines is correctly addressed in recovery plans. 
 
In relation to bail-in exemptions, the EBA pointed out that the characteristics of an institution (e.g.: size, interconnectedness or complexity) should not automatically justify such exemptions. These should in fact be considered on a case-by-case basis, rather than by considering the specific nature of concerned institutions in isolation, as this could result in competitive unbalances and set wrong incentives for bank structures. The advice also recommends that exclusions should be used restrictively, as they are exceptions to the principle of equitable treatment of creditors of the same class and with a view to the no-creditor-worse-off principle the resources for absorbing losses despite exclusions are limited. The draft EBA RTS on the minimum requirement of eligible liabilities (MREL) requires authorities to take into account likely exclusions from bail-in when ensuring sufficient MREL. Where the resolution authorities have, when setting the MREL for an institution, assumed that certain liabilities would credibly and feasibly contribute to loss absorption, the advice recommends that this should be reflected in the conditions justifying an exclusion of these liabilities from bail-in. With regard to exclusions based on the impossibility to bail in a liability, the advice recommends to effectively constrain the use of this case. It should for example not be a ground for exclusion that a liability is issued under the law of a foreign country. Liabilities related to critical functions should be assessed on a case-by-case basis at the time of the resolution action. The advice also elaborates on liabilities required for risk management purposes. For the risk of contagion, the advice distinguishes two types of contagion (direct through counterparties of the firm or indirect by a general loss of confidence) and suggests criteria for each of them.
 
Regarding the deferral of ex-post contributions to the ‘resolution fund' provided by the BRRD and to which all EU institutions have to contribute, the EBA recommended that national authorities analyse the impact on solvency and liquidity of institutions before allowing for ex-post contributions, which should only be applied in exceptional cases.

Note to the editors

The work issued today by the EBA is a response to a call for advice from the European Commission on drafting delegated acts in the context of resolution. It consists of three specific papers: the Technical advice on the definition of ‘critical functions' and ‘core business lines' (Art. 2(2) of the Bank Recovery and Resolution Directive (BRRD), which was complemented by EBA's own Comparative report on the approach to determining critical functions and core business lines in recovery plans, the Technical advice on the exclusion of liabilities from the application of the bail-in tool (Art. 44(11) of the BRRD) and the Technical advice on the deferral of ex-post contributions (Art. 44(11)).
 

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