Question ID
2018_3699
Legal act
Directive 2014/59/EU (BRRD)
Topic
Resolution tools and powers
Article
44, 101
Paragraph
2
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Not applicable
Article/Paragraph
n.a.
Type of submitter
Competent authority
Subject matter
Intervention of the resolution fund to cover for losses due to creditors / liabilities excluded from bail-in
Question

Can Article 101(2) of Directive 2014/59/EU (BRRD) be interpreted in the way that even if all bail-inable creditors have been subjected to bail-in and losses are still not covered, a bridge bank would not be allowed to take on the remaining losses and thus resolution would not be possible?

Background on the question

Article 101(2) of Directive 2014/59/EU (BRRD) states that “The resolution financing arrangement shall not be used directly to absorb the losses of an institution or an entity referred to in point (b), (c) or (d) of Article 1(1) or to recapitalise such an institution or an entity. In the event that the use of the resolution financing arrangement for the purposes in paragraph 1 of this Article indirectly results in part of the losses of an institution or an entity referred to in point (b), (c) or (d) of Article 1(1) being passed on to the resolution financing arrangement, the principles governing the use of the resolution financing arrangement set out in Article 44 shall apply.”

The practical implications of this paragraph are unclear. The resolution fund (RF) may only intervene to cover for losses due to creditors/liabilities excluded from bail-in, which would mean that even if all bail-inable creditors have been subjected to bail-in and losses are still not covered, a bridge bank would not be allowed to take on the remaining losses and thus resolution would not be possible. Would this also exclude guarantees by the RF (with the aim of creating liquidity, but that might result in the RF taking on indirect losses)?

Submission date
Final publishing date
Final answer

As a general principle, according to Article 101(2) of Directive 2014/59/EU (BRRD), the resolution financing arrangements could indirectly absorb part of the losses of the institution under resolution, subject to application of the principles set out in Article 44 BRRD. Even if not all losses are absorbed by the creditors of the institution under resolution but the absorbed losses amount to at least 8% of the total liabilities of the institution under resolution, the Resolution Fund may be used for the purposes listed in Article 101(1) BRRD, for example, to fund the difference between assets and liabilities transferred to a bridge bank.

With respect to the scenario proposed in the question it should also be specified that a bridge bank cannot receive liabilities that exceed the value of assets transferred from the institution under resolution. Therefore, assets and liabilities can only be transferred provided that the bridge bank can receive additional funds from other sources, including the resolution financing arrangements, as laid down in Article 40(3), so as to fill the gap between the value of its assets and the value of its liabilities.

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 reviewed in the light of the changes introduced to Directive 2014/59/EU (BRRD) and continues to be relevant.

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.