Guidelines on the treatment of shareholders in bail-in

Status: Final and translated into the EU official languages

These Guidelines clarify the circumstances which should guide the choice between cancellation and severe dilution of existing shares (or other instruments of ownership) when applying the bail-in tool or the write down or conversion of capital instruments power provided for in the BRRD.

EBA provides guidance on bail-in under the BRRD

EBA provides guidance on bail-in under the BRRD

05 April 2017

The European Banking Authority (EBA) issued today three sets of final Guidelines on bail-in under the Bank Recovery and Resolution Directive (BRRD). These Guidelines complement existing regulation and guidance to facilitate the use of the bail-in power as a way of absorbing losses and recapitalising banks in resolution. In particular the Guidelines clarify how valuation information should help determine the terms of bail-in.
 
The first set of Guidelines focuses on conversion rates in bail-in. It highlights guiding principles resolution authorities are to apply when setting debt-to-equity conversion rates both in a bail-in context, or when the power to write down and convert capital instruments is not applied in conjunction with any resolution tool. These Guidelines point out the role of the valuation of assets and liabilities of failing institutions, mandated by the BRRD, in defining the expected value of the combined equity and debt claim after resolution, and their expected value in the hypothetical case the institution had entered normal insolvency proceedings.  In addition, the Guidelines clarify when to set differential conversion rates for different classes of creditors.
 
The second set of Guidelines deals with the treatment of shareholders. It aims at clarifying the circumstances under which it is appropriate to cancel, transfer, or severely dilute shares or other instruments of ownership. In particular, resolution authorities should only favour dilution over cancellation where the net asset value of the institution is positive under the ex-ante valuation. Where more than one choice (cancellation, dilution or transfer) is available to Resolution authorities, the choice should be guided by the need to meet the resolution objectives. In this regard, national or EU company law may affect the appropriate choice, for example shares with special voting rights might be more appropriate to cancel than to transferor a transfer of shares of a listed company would avoid an interruption of listing.
 
The third set of Guidelines on the interrelationship between the BRRD and the Capital Requirements Directive (CRD) and Capital Requirements Regulation (CRR) clarifies the treatment of instruments which meet the criteria for recognition as AT1 as per Article 52 of the CRR but are progressively grandfathered as per Article 484 of that Regulation due to the fact that they do not contain a Point Of Non-Viability (PONV) clause. These Guidelines prescribe that these instruments should be treated identically to AT1 instruments. In addition, they clarify the treatment of T2 instruments, which are progressively amortised in the final five years of residual maturity as per Article 64 of the CRR. Finally, these guidelines prescribe that the Resolution Authority should treat those instruments in the same way as T2 instruments included in the same class.

Legal basis 

These Guidelines have been developed according to Article 47, 48 and 50 of the BRRD and are addressed to Resolution Authorities. They will apply 6 months after their publication in all EU official languages. Competent Authorities shall confirm to the EBA their compliance status, which will be disclosed on the EBA website.
 
 

Press contacts:

Franca Rosa Congiu

E-mail: press@eba.europa.eu - Tel: +44 (0) 207 382 1772

EBA consults on guidelines on the use of the bail-in power

EBA consults on guidelines on the use of the bail-in power

11 November 2014

The European Banking Authority (EBA) lunched today two public consultations on (i) Guidelines on the treatment of shareholders when applying the bail-in tool or the write down or conversion of capital instruments and (ii) Guidelines on when and how different conversion rates from debt to equity should be set for different types of liability. These two sets of Guidelines are part of a series of EBA regulatory mandates under the Bank Recovery and Resolution Directive (BRRD), which aim to ensure that the 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 on which it should be applied. Both consultations run until 6 February 2015.
 
In particular, these Guidelines, together with those on the treatment of liabilities in bail-in and the draft Technical Standards on valuation in resolution, aim to clarify how valuation information should help determine the terms of bail-in. 
 
The first set of Guidelines clarifies the circumstances which should guide the choice between cancellation and severe dilution of existing shares (or other instruments of ownership) when applying the bail-in tool or the write down or conversion of capital instruments power provided for in the BRRD.
 
Dilution may only be used when, according to the valuation, the institution under resolution has a positive net asset value, and the conversion shall be conducted at a rate that severely dilutes existing holdings of shares and other instruments of ownership. If the net asset value of the institution being resolved is negative or zero, shares should instead be cancelled or transferred. Resolution authorities should not seek to impose losses on other creditors of the institution until shareholders have absorbed losses to the maximum possible extent. 
 
The second set of Guidelines clarifies when and how different conversion rates from debt to equity should be set for different types of liability. Resolution authorities should set conversion rates, first, to seek to ensure that no shareholder or creditor receives worse treatment than they would have done in insolvency. This should be assessed on the basis of the ex ante valuation to inform resolution decisions, and the ex ante valuation estimate of outcomes in insolvency. Subject to that, conversion rates should be set to ensure that the resolution principles of the BRRD, in particular respect for the creditor hierarchy, are complied with. 

Consultation process

Comments to these consultations can be sent to the EBA by clicking on the "send your comments" button on the respective consultation pages. Please note that the deadline for the submission of comments is 6 February 2015.
 
A public hearing will then take place at the EBA premises on 12 January 2015 from 10:00 to 13:00 UK time. All contributions received will be published following the close of the consultation, unless requested otherwise.

Legal basis 

These Guidelines have been developed according to Article 47 and 50 of the BRRD which mandate the EBA to (i) produce Guidelines specifying the circumstances under which it would be appropriate to cancel, transfer or severely dilute existing shares and (ii) on the setting of conversion rates
 

Press contacts:

Franca Rosa Congiu

E-mail: press@eba.europa.eu - Tel: +44 (0) 207 382 1772