Question ID
2017_3630
Legal act
Directive 2014/59/EU (BRRD)
Topic
Resolution tools and powers
Article
48
Paragraph
3, 5
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Not applicable
Article/Paragraph
n.a.
Type of submitter
Competent authority
Subject matter
Write down or convert bail-inable liabilities following Article 48(3)
Question

How would the resolution authority write down or convert bail-inable liabilities referred to in point (e) of Article 48(1) of Directive 2014/59/EU (BRRD) without previously reducing or converting the other instruments, regardless of the terms mentioned in points (a) and (b) of Article 48(3)?

How should "substantially" in Article 48(5) be interpreted exactly?

Background on the question

Article 48(3) of Directive 2014/59/EU (BRRD) (Sequence of write down and conversion) provides that:

“Before applying the write down or conversion referred to in point (e) of paragraph 1, resolution authorities shall convert or reduce the principal amount on instruments referred to in points (b), (c) and (d) of paragraph 1 when those instruments contain the following terms and have not already been converted:
(a) terms that provide for the principal amount of the instrument to be reduced on the occurrence of any event that refers to the financial situation, solvency or levels of own funds of the institution or entity referred to in point (b), (c) or (d) of Article 1(1);
(b) terms that provide for the conversion of the instruments to shares or other instruments of ownership on the occurrence of any such event.”

Considering that the resolution authority can only reduce or convert the bail-inable liabilities referred to in point (e) of Article 48(1) if and only if the total reductions of the instruments referred to in points (a), (b), (c) and (d) is less than the sum of the amounts referred to in points (b) and (d) of Article 47(3) in what situations does Article 48(3) apply? How would the resolution authority write down or convert bail-inable liabilities referred to in point (e) of Article 48(1) without previously reducing or converting the other instruments, regardless of the terms mentioned in points (a) and (b) of Article 48(3)? In addition, it would be worth clarifying how to interpret "substantially" in Article 48(5).

Submission date
Final publishing date
Final answer

In most of the cases the instruments referred to under Article 48(3) of Directive 2014/59/EU (BRRD) will have been converted into equity even before the application of bail-in, in line with the provisions in Articles 47(2) and 48(4). Article 48(3) represents a “catch-all” provision for any instrument, which may not have been converted or reduced before the application of the bail-in tool to the eligiblebail-inable liabilities referred to in point (e) of paragraph 1.

As regards the interpretation of "substantially" in Article 48(5) "substantially" should be understood as "fully".

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.

Status
Final Q&A
Answer prepared by
Answer prepared by the European Commission because it is a matter of interpretation of Union law.
Note to Q&A

Update 26.03.2021: This Q&A has been updated in the light of the changes introduced to Directive 2014/59/EU (BRRD).

Disclaimer

The Q&A refers to the provisions in force on the day of their publication. The EBA does not systematically review published Q&As following the amendment of legislative acts. Users of the Q&A tool should therefore check the date of publication of the Q&A and whether the provisions referred to in the answer remain the same.