Article 34(1)(g) of Directive 2014/59/EU (BRRD) on general principles of resolution requires that no creditor incur greater losses than would have been incurred under the normal insolvency proceedings. Similarly, Article 34(1)(i) requires that resolution actions be taken in accordance with the safeguards included in this Directive (and one of the safeguards is the "No Creditor Worse Off (NCWO) principle").

The write down of capital instruments is not included in the definition of "resolution action". In addition, in accordance with Article 59, the write down of capital instruments may be exercised also independently of resolution action (i.e. not in combination with resolution action). Thus, from the wording of Article 34 BRRD, a doubt may arise on whether the NCWO principle should apply also to the write down of capital instruments. This is particularly relevant when the write down is carried out independently, because if it is carried out in combination with resolution action, the NCWO would anyway apply under Article 34 BRRD.
Even if the BRRD does not explicitly provide that the NCWO principle applies also to the write down of capital instruments when it is exercised independently, the application of this principle to the write down of capital instruments is implicitly required for the following reasons:

1) The NCWO principle stems from the Charter of Fundamental Rights which is a legal act of general application whenever Member State adopts national legislation implementing EU law. Therefore, the protection afforded by the Charter to Fundamental Rights applies across the board, whenever there is a public interference with property rights. The relevant provisions and guidelines explicitly provide that the protection of fundamental rights applies to resolution actions as well as to application of the State Aid rules.

Given that the write down of capital instruments constitute the same interference with fundamental rights as resolution or the application of State Aid rules, it would be difficult to argue that in the case of the write down of capital instruments, this protection does not apply.

2) Article 59(10) BRRD requires that resolution authorities, before writing down capital instruments, carry out a valuation in accordance with Article 36, in order to form a basis for the calculation of the write down. Under Article 36(8) and (10) the valuation must include the estimate of the treatment that each shareholder and creditor would have been expected to receive if the institution were wound up under normal insolvency proceedings. It is clear from these provisions that the NCWO principle is an element that authorities must take into account when calculating the write down.

3) An exception to the NCWO principle is the write down of Cocos instruments. A distinction should be made between capital instruments that convert at the point of non-viability (which pursuant to the BRRD coincides with the existence of the pre-requirements for resolution except the public interest) and CoCos instruments that convert when the capital falls below a certain quantitative threshold. Conversion of the CoCos does not require the application of the NCWO principle, because these instruments contain a contractual clause according to which the creditors have accepted that their debt will convert into equity when certain conditions occur. In this case, the conversion is an effect of the clause and not of the statutory action of public authorities. Thus, if convertible Cocos exist at the time of the resolution decision and they are converted, because the event triggering their conversion has occurred, the NCWO principle does not apply to the Coco holders.

On this basis, we consider that the NCWO principle applies in the above terms also to the write down or conversion of capital instruments.

Disclaimer:

This question goes beyond matters of consistent and effective application of the regulatory framework. A Directorate General of the Commission (Directorate General Financial Stability, Financial Services and Capital Markets Union) has prepared the answer, albeit that only the Court of Justice of the European Union can provide definitive interpretations of EU legislation. This is an unofficial opinion of that Directorate General, which the European Banking Authority publishes on its behalf. The answers are not binding on the European Commission as an institution. You should be aware that the European Commission could adopt a position different from the one expressed in such Q&As, for instance in infringement proceedings or after a detailed examination of a specific case or on the basis of any new legal or factual elements that may have been brought to its attention.