Investment Management Association

BRRD provides resolution authorities with possibilities to intervene before an institution becomes subject to ordinary insolvency proceedings under national insolvency law. The conditions under which early intervention or recovery and resolution actions provided by BRRD may be triggered could overlap with conditions for insolvency proceedings in many member states. It is essential, that market participants can clearly distinguish between the different cliff edges and the different measures.
According to BRRD Article 32 one or more of the following four conditions have to be met, before a resolution authority takes any resolution activity:
a) the institution infringes or is likely to infringe in the near future its requirements for authorisation in a way that would justify the withdrawal of the authorisation
b) the assets of the institution are less than its liabilities or there are objective elements to support a determination that this will be the case in the near future;
c) the institution is or is likely to be unable to pay its debts or other liabilities as they fall due;
d) extraordinary public financial support is required
At least the conditions b) and c) do interfere with conditions of insolvency in most member states. Condition a) can be met even where the capital situation of the entity is sound. When a financial institution loses its authorisation and so is deprived of its commercial basis, technical insolvency will be the consequence in most cases and insolvency proceedings are inevitable.
Recovery and resolution activities by a resolution authority are designed to facilitate a process that protects society from expensive bailouts which might be necessary in insolvency and leaves no creditor worse off than an ordinary insolvency proceeding.
The purpose of insolvency laws is to prevent a race among creditors and to guarantee a fair allocation of remaining assets while avoiding cases of social hardship. Insolvency rules can only be functional as a set of mandatory rules while under BRRD some discretion is provided for competent authorities.
We would, therefore, urge EBA to take into account the need for market participants to be able to anticipate under what conditions which insolvency, recovery or resolution action will be taken. Situations in which insolvency proceedings are initiated at the same time as recovery and resolution measures are applied by the resolution authority have to be avoided by all means. The IMA would, therefore, advocate strongly for guidelines that allow competent and resolution authorities to adapt their practices to national insolvency laws.
It is, of course, useful to create supervisory convergence, but especially with regard to the conditions under which measures under BRRD apply the guidelines have to read in combination with national insolvency laws. Guidelines are, therefore, only useful for describing the desired effect the rules in the different member states may have. Prescribing the rules themselves could thwart the efforts to establish a level playing field. The IMA, therefore, considers the level of detail provided by the guidelines as appropriate. A more granular approach might be counterproductive.
The IMA has some doubts about the necessity of providing examples for situations in which an institution could be considered as failing or likely to fail. Every competent authority and resolution authority has to take national insolvency law into consideration when defining their benchmarks for recovery and resolution conditions. The examples provided in the draft guidelines are not suitable to help defining the triggers in a balanced way.
Reiterating that the determination that the institution is failing or likely to fail should remain an expert judgement and should not be automatically derived from the list of objective elements, the IMA agrees with the approach taken in the draft guidelines.
The IMA would oppose to set a predefined threshold for a significant decrease in asset value. Very different institutions are subject to BRRD and a significant decrease in value of own assets is likely to have idiosyncratically different consequences for different banks.
The IMA has no additional comments.
The IMA has no additional comments.
The IMA has no additional comments.
The proposed specification of the circumstances, related to the institution’s operational capacity to provide regulated activities are not suitable for investment firms subject to BRRD. Investment firms subject to BRRD may have permission to hold clients’ money, but deposit-taking would not be their main business. National competent authorities and resolution authorities should have the possibility to lay out those specifications in an appropriate way for all kinds of firms subject to BRRD.
Johannes Woelfing
I