Toelichting bij COM(2023)227 - Wijziging van Richtlijn 2014/59/EU wat betreft vroegtijdige-interventiemaatregelen, de voorwaarden voor afwikkeling en de financiering van afwikkelingsmaatregelen - Hoofdinhoud
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| dossier | COM(2023)227 - Wijziging van Richtlijn 2014/59/EU wat betreft vroegtijdige-interventiemaatregelen, de voorwaarden voor afwikkeling en de ... |
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| bron | COM(2023)227  |
| datum | 18-04-2023 |
•Reasons for and objectives of the proposal
The proposed amendments to Directive 2014/59/EU 1 (the Bank Recovery and Resolution Directive or BRRD) are part of the crisis management and deposit insurance (CMDI) legislative package that also includes amendments to Regulation (EU) No 806/2014 2 (the Single Resolution Mechanism Regulation or SRMR) and to Directive 2014/49/EU 3 (the Deposit Guarantee Schemes Directive or DGSD).
The EU crisis management framework is well-established, however, previous episodes of bank failures have shown that there is need for improvements. The aim of the CMDI reform is to build on the objectives of the crisis management framework and to ensure a more consistent approach to resolution, so that any bank in crisis can exit the market in an orderly manner, while preserving financial stability, taxpayer money and ensuring depositor confidence. In particular, the existing resolution framework for smaller and medium-sized banks needs to be strengthened with respect to its design, implementation and, most importantly, incentives for its application, so that it can be more credibly applied to those banks.
Inhoudsopgave
- Context of the proposal
- The crisis management and deposit insurance (CMDI) reform and the broader implications for the Banking Union
- The objectives of the crisis management and deposit insurance (CMDI) framework
- Reasons for the proposal
- Summary of the crisis management and deposit insurance (CMDI) reform elements
- 2.LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
- 3.RESULTS OF EX POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
- 4.BUDGETARY IMPLICATIONS
- 5.OTHER ELEMENTS
- 6.DETAILED EXPLANATION OF THE SPECIFIC PROVISIONS OF THE PROPOSAL
- Early warning of failing or likely to fail
- Public interest assessment
- Amendments to the resolution objectives
- Procedural changes to the comparison between resolution and national insolvency proceedings
- Use of DGS in resolution
- Depositor preference
- Stylised view of creditor hierarchy in insolvency under the current framework (three-tier depositor preference) and under the proposed reform (single-tier general depositor preference)
- Conditions for providing extraordinary public financial support
- Precautionary recapitalisation
- Article 32b and market exit
- Amendments related to the minimum requirement for own funds and eligible liabilities (MREL)
- Estimating the combined buffer requirement in case of prohibition of certain distributions
- De minimis exemption from certain MREL requirements
- Contingent liabilities
- Contributions and irrevocable payment commitments
- Mandates for the EBA
- Other provisions
- Clarifications to Article 44(7)
- Resolution colleges
- Information exchange
In the aftermath of the global financial and sovereign debt crises, the EU took decisive actions, in line with international calls for reform, to create a safer financial sector for the EU single market. This included providing the tools and powers to handle the failure of any bank in an orderly manner, while preserving financial stability, public finances and depositor protection. The Banking Union was created in 2014 and is currently made up of two pillars: a Single Supervisory Mechanism (SSM) and a Single Resolution Mechanism (SRM). However, the Banking Union is still incomplete and is missing its third pillar: a European deposit insurance scheme (EDIS) 4 . The Commission’s proposal adopted on 24 November 2015 to establish EDIS 5 is still pending.
The Banking Union is supported by a Single Rulebook which, in what concerns the CMDI, is made up of three EU legal acts adopted in 2014: the BRRD, the SRMR and the DGSD. The BRRD defines the powers, rules and procedures for the recovery and resolution of banks, including cross-border cooperation arrangements to tackle cross-border banking failures. The SRMR creates the Single Resolution Board (SRB) and the Single Resolution Fund (SRF) and defines powers, rules and procedures for the resolution of the entities established in the Banking Union, in the context of the single resolution mechanism. The DGSD ensures the protection of depositors and sets-out the rules for the use of DGS funds. The BRRD and the DGSD apply in all Member States while the SRMR applies in Member States participating in the Banking Union.
The 2019 banking package, also known as the ‘risk reduction package’, revised the BRRD, the SRMR, the Capital Requirements Regulation (CRR) 6 and the Capital Requirements Directive (CRD) 7 . These revisions included measures delivering on the EU’s commitments made in international fora 8 to take further steps towards completing the Banking Union by providing credible risk reduction measures to mitigate threats to financial stability.
In November 2020, the Eurogroup agreed on the creation and early introduction of a common backstop to the SRF by the European Stability Mechanism (ESM) 9 .
The crisis management and deposit insurance (CMDI) reform and the broader implications for the Banking Union
Together with the CMDI reform, a complete Banking Union, including its third pillar, EDIS, would offer a higher level of financial protection and confidence to EU’s households and businesses, increase trust and strengthen financial stability as necessary conditions for growth, prosperity and resilience in the Economic and Monetary Union and in the EU more generally. The Capital Markets Union complements the Banking Union as both initiatives are essential to finance the twin transitions (digital and green), step up the international role of the euro and strengthen the EU’s open strategic autonomy and its competitiveness in a changing world, particularly considering the current challenging economic and geopolitical environment 10 , 11 .
In June 2022, the Eurogroup did not agree to a more comprehensive work plan to complete the Banking Union by including EDIS. Instead, the Eurogroup invited the Commission to table more targeted legislative proposals for reforming the EU framework for bank crisis management and national deposit insurance 12 .
In parallel, the European Parliament, in its 2021 annual report on the Banking Union 13 , also stressed the importance of completing it with the establishment of EDIS and supported the Commission in putting forward a legislative proposal on the CMDI review. While EDIS was not explicitly endorsed by the Eurogroup, it would make the CMDI reform more robust and it would deliver synergies and efficiency gains for the industry. Such a legislative package would be part of the agenda for completing the Banking Union, as emphasised in President von der Leyen’s Political Guidelines, which also recalled the importance of EDIS, and as regularly supported by leaders 14 .
The CMDI framework was designed to mitigate the risks and manage the failure of institutions of any size, while achieving four overarching objectives:
(i)protect financial stability while avoiding contagion, thereby ensuring market discipline and continuity of critical functions for society,
(ii)safeguard the functioning of the single market and provide a level playing field across the EU;
(iii)minimise recourse to taxpayer money and weaken the bank-sovereign loop and
(iv)protect depositors and ensure consumer confidence.
The CMDI framework provides for a set of instruments that can be applied in the various stages of the life cycle of banks in distress: recovery action supported by recovery plans drafted by banks; early intervention measures; measures to prevent the failure of a bank; resolution plans prepared by resolution authorities; and a resolution toolbox when the bank is declared failing or likely to fail and it is deemed that the resolution of the bank (rather than its liquidation) is in the public interest. Additionally, national insolvency procedures, which are outside of the CMDI framework 15 continue to apply for those failing banks that can be dealt with under these national procedures, where they are more suitable (rather than resolution) and do not harm public interest or endanger financial stability.
The CMDI framework is aimed at providing a combination of funding sources to manage failures in an economically efficient manner, protecting financial stability and depositors and maintaining market discipline, while reducing recourse to the public budget and ultimately the cost to taxpayers. The cost of resolving the bank is first covered through the bank’s own resources, i.e. allocated to the shareholders and creditors of the bank itself (constituting the bank’s internal loss absorbing capacity), which also reduces moral hazard and improves market discipline. If needed, it can be complemented by funds from deposit guarantee schemes (DGS) and resolution financing arrangements (national resolution funds (RF) or the SRF in the Banking Union). These funds are financed by contributions by all banks irrespective of their size and business model. In the Banking Union, these rules were further integrated by entrusting the SRB with managing and overseeing the SRF, which is funded by contributions from the industry in the participating Member States of the Banking Union. Depending on the tool applied to a bank in distress (e.g. preventive, precautionary, resolution or alternative measures under national insolvency proceedings) and the specific details of the case, State aid 16 control may be necessary for interventions by an RF/SRF, a DGS or public funding from the State budget.
Notwithstanding the progress achieved since 2014, resolution has been rarely applied, especially in the Banking Union. Areas for further strengthening and adjustment were identified as regards the CMDI framework in terms of design, implementation and most importantly, incentives for its application.
To date, many failing banks of a smaller or medium size have been dealt with under national regimes often involving the use of taxpayer money (bailouts) instead of the industry-funded safety nets, such as the SRF in the Banking Union that so far has been unused in resolution. This goes against the intention of the framework as it was set-up after the global financial crisis, which involved a major paradigm shift from bailout to bail-in. In this context, the opportunity cost of the resolution financing arrangements financed by all banks is considerable.
The resolution framework did not fully deliver on key overarching objectives, notably facilitating the functioning of the EU single market in banking by ensuring a level playing field, handling cross-border and domestic crises and minimising recourse to taxpayer money.
The reasons are mainly due to misaligned incentives in choosing the right tool to manage failing banks, leading to the non-application of the harmonised resolution framework, in favour of other avenues. This is due overall to the broad discretion in the public interest assessment, difficulties in accessing funding in resolution without imposing losses on depositors, and easier access to funding outside of resolution. Following this path raises risks of fragmentation and suboptimal outcomes in managing banks’ failures, in particular those of smaller and medium-sized banks.
The review of the CMDI framework and the interaction with national insolvency proceedings should provide solutions to address these issues. It should also enable the framework to fully achieve its objectives and be fit for purpose for all banks in the EU irrespective of their size, business model and liability structure, even smaller and medium-sized banks, if required by prevailing circumstances. The revision should aim at ensuring a consistent application of the rules across Member States, delivering a better level playing field, while protecting financial stability and depositors, preventing contagion and reducing recourse to taxpayer money. In particular, the framework should be improved to facilitate the resolution of smaller and medium-sized banks as initially expected, by mitigating the impacts on financial stability and the real economy without recourse to public funding, and by fostering the confidence of their depositors, consisting primarily of households and small and medium-sized enterprises (SMEs). In terms of the magnitude of the changes envisaged, the CMDI review does not seek to overhaul the current framework but rather to bring much needed improvements in several key areas to make the framework work as intended for all banks.
The amendments included in the CMDI package cover a range of policy aspects and constitute a coherent response to the identified problems:
·expanding the scope of resolution by reviewing the public interest assessment, when this achieves the objectives of the framework, e.g. protecting financial stability, taxpayer money and depositor confidence better than national insolvency proceedings;
·strengthening the funding in resolution by complementing the internal loss- absorbing capacity of institutions, which remains the first line of defence, with the use of DGS funds in resolution to help access resolution funds without imposing losses on depositors where appropriate, subject to conditions and safeguards;
·amending the ranking of claims in insolvency and ensuring a general depositor preference with a single-tier depositor preference, with the aim of enabling the use of DGS funds in measures other than payout of covered deposits;
·harmonising the least cost test for all types of DGS interventions outside payout of covered deposits in insolvency to improve the level playing field and ensure consistency of outcomes;
·clarifying the early intervention framework by removing overlaps between early intervention and supervisory measures, providing legal certainty on the applicable conditions and facilitating cooperation between competent and resolution authorities;
·ensuring a timely triggering of resolution; and
·improving depositor protection (e.g. targeted improvements of DGSD provisions on scope of protection and cross-border cooperation, harmonisation of national options, and improvement of transparency on financial robustness of DGSs).
•Consistency with existing policy provisions in the policy area
The proposal puts forward amendments to the existing legislation to render it fully consistent with existing policy provisions in the area of bank crisis management and deposit insurance. The review of the BRRD/SRMR and of the DGSD aims at improving the functioning of the framework in a way that provides the tools to resolution authorities to be able to handle the failure of any bank, irrespective of size and business model, in order to preserve financial stability, protect depositors, and avoid recourse to taxpayer money.
•Consistency with other EU policies
The proposal builds on the reforms carried out in the aftermath of the financial crisis that led to the creation of the Banking Union and the single rulebook for all EU banks.
The proposal helps strengthen the EU financial legislation adopted in the last decade to reduce risks in the financial sector and ensure an orderly management of bank failures. The aim is to make the banking system more robust and ultimately promote the sustainable financing of economic activity in the EU. It is fully consistent with the EU's fundamental goals of promoting financial stability, reducing taxpayers’ support in bank resolution and protecting depositor confidence. These objectives are conducive to a high level of competitiveness and consumer protection.
•Legal basis
The proposal amends an existing directive, the BRRD, in particular as regards the improved application of the tools that are already available in the bank recovery and resolution framework, clarifying the conditions for resolution, facilitating access to safety nets in the event of bank failure, and improving the clarity and consistency of funding rules. By establishing harmonised requirements for applying the CMDI framework to banks in the internal market, the proposal considerably reduces the risk of divergent national rules in Member States, which could distort competition in the internal market.
Consequently, the legal basis for the proposal is the same as the legal basis of the original legislative act, namely Article 114 TFEU. That provision allows for measures to be adopted for the approximation of national provisions which have as their objective the establishment and functioning of the internal market.
•Subsidiarity (for non-exclusive competence)
The legal basis falls within the internal market area, which is considered a shared competence, as defined by Article 4 TFEU. Most of the actions considered represent updates and amendments to existing EU law, and as such, they concern areas where the EU has already exercised its competence and does not intend to cease exercising such competence.
Given that the objectives pursued by the proposed measures aim at supplementing already existing EU legislation, they can be best achieved at EU level rather than by different national initiatives. In particular, the rationale for a specific and harmonised EU resolution regime for all banks in the EU was laid out at the inception of the framework in 2014. Its main features reflect international guidance and the ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’ adopted by the Financial Stability Board in the aftermath of the 2008 global financial crisis.
The principle of subsidiarity is embedded in the existing resolution framework. Its objectives, namely the harmonisation of the rules and processes for resolution, cannot be sufficiently achieved by Member States. Rather, by reason of the effects of a failure of any institution in the whole EU, they can be better achieved at EU level through EU action.
The intention of the existing resolution framework has always been to provide a common toolbox to deal effectively with any bank failure, irrespective of its size, business model or location, in an orderly way, where this is necessary to preserve financial stability of the EU, the Member State or the region in which it operates, and to protect depositors without relying on public funds.
The proposal amends certain provisions of the BRRD to improve the existing framework, particularly when it comes to applying it to smaller and medium-sized banks, as otherwise it may not reach its objectives.
Risks to financial stability, depositor confidence or the use of public finances in one Member State may have far-reaching impacts on a cross-border basis and may ultimately contribute to a fragmentation of the single market. The lack of action at EU level for less significant banks and their perceived exclusion from a mutualised safety net would also potentially affect their ability to access markets and attract depositors when compared with significant banks. Furthermore, national solutions to tackle bank failures would worsen the bank-sovereign link and undermine the idea behind the Banking Union of introducing a paradigm shift from bail-out to bail-in.
Acting at EU level to reform the resolution framework will not prescribe the strategy that should be taken when banks fail. The choice between an EU harmonised resolution strategy/tool and the national liquidation strategy will remain at the discretion of the resolution authority on the basis of the public interest assessment. This is tailored to each specific failure case and not automatically driven by considerations such as the bank size, the geographical outreach of its activities and the structure of the banking sector. In practice, this makes the public interest assessment the subsidiarity test in the EU.
Thus, while a case-by-case basis needs to be used for assessing whether a bank undergoes resolution or not, it is crucial that the possibility for all banks to undergo resolution is preserved and that resolution authorities have the right incentives to opt for resolution, due to the potentially systemic nature of all institutions, as already provided for in the BRRD.
Member States may still consider liquidation for the smaller or medium-sized banks under the reformed framework. In this respect, national insolvency regimes (which are not harmonised) remain in place when an insolvency procedure is deemed a better alternative to resolution. The continuum of tools is preserved in this way, including those outside resolution, such as: preventive and precautionary measures; resolution tools; alternative measures within national insolvency proceedings and payout of covered deposits in the event of piecemeal liquidation.
Amending the BRRD is therefore considered the best option. It strikes the right balance between harmonising rules and maintaining national flexibility, where relevant. The amendments would further promote a uniform application of the resolution framework and the convergence of practices of supervisory and resolution authorities, as well as ensure a level playing field throughout the internal market for banking services. This is particularly important in the banking sector where many institutions operate across the EU internal market. National rules would not achieve these objectives.
•Proportionality
Under the principle of proportionality, the content and form of EU action should not exceed what is necessary to achieve its objectives, consistent with the overall objectives of the Treaties.
Proportionality has been an integral part of the impact assessment accompanying the proposal. The proposed amendments have been individually assessed against the proportionality objective. In addition, the lack of proportionality of the existing rules has been assessed in several areas and specific options have been analysed aimed at reducing administrative burden and compliance costs for smaller institutions, in particular by removing the obligation to determine the minimum requirement for own funds and eligible liabilities (MREL) for certain types of entities.
The conditions to access the resolution financing arrangements under the current framework do not sufficiently account for distinctions on grounds of proportionality based on the resolution strategy, size and/or business model. The ability of banks to fulfil the access conditions to the resolution financing arrangement depends on the stock of bail-inable instruments available in their balance sheets at the time of the intervention. However, evidence suggests that some (smaller and medium-sized) banks in certain markets face structural difficulties in building up the MREL. For those banks, considering their specific liability structure (particularly those relying significantly on deposit funding), certain deposits would need to be bailed-in in order to access the resolution financing arrangement, which may raise concerns of financial stability and operational feasibility considering the economic and social impact in several Member States. The proposed amendments (e.g. clear rules on tailoring the MREL for transfer resolution strategies, introducing a single-tier depositor preference and allowing DGS funds to bridge the gap to access the resolution financing arrangement) would improve access to funding in resolution. They would also introduce more proportionality for banks that would be resolved under transfer strategies, by allowing the protection of deposits from bail-in where appropriate, and addressing effectively the problem of funding of resolution without weakening the minimum bail-in conditions for accessing the resolution financing arrangement.
•Choice of the instrument
It is proposed that the measures be implemented by amending the BRRD through a directive. The proposed measures refer to or further develop already existing provisions incorporated in this legal instrument.
Some of the proposed amendments, for instance those affecting market exit following a negative public interest assessment, would leave Member States with a sufficient degree of flexibility, at the stage of their transposition into national law, to maintain different national rules on winding up.
•Ex post evaluations/fitness checks of existing legislation
The CMDI framework was designed to avert and manage the failure of institutions of any size or business model. It was developed with the objectives of maintaining financial stability, protecting depositors, minimising the use of public support, limiting moral hazard, and improving the internal market for financial services. The evaluation concluded that, overall, the CMDI framework should be improved in certain respects, such as better protection of taxpayer money.
In particular, the evaluation shows that legal certainty and predictability in managing bank failures remains insufficient. The decision of public authorities on whether to resort to resolution or insolvency may differ considerably across Member States. In addition, safety nets financed by the industry are not always effective and divergent access conditions to funding in resolution and outside resolution persist. These affect incentives and create opportunities for arbitrage when decisions are made on what crisis management tool to use. Finally, depositor protection remains uneven and inconsistent across Member States in a number of areas.
•Stakeholder consultations
The Commission conducted extensive exchanges through different consultation tools to reach out to all stakeholders involved, in order to better understand how the framework performed as well as the possible scope for improvements.
In 2020, the Commission launched a consultation on a combined inception impact assessment and a roadmap aimed at providing a detailed analysis of actions to be taken at EU level and the potential impact of different policy options on the economy, society and the environment.
In 2021, the Commission launched two consultations: a targeted and a public consultation to seek stakeholder feedback on how the CMDI framework was applied and views on possible modifications. The targeted consultation, comprising 39 general and specific technical questions, was available in English only and open from 26 January to 20 April 2021. The public consultation consisted of 10 general questions, available in all EU languages and ran over the feedback period from 25 February to 20 May 2021.
In addition, the Commission hosted a high-level conference on 18 March 2021 gathering representatives from all relevant stakeholders. The conference confirmed the importance of an effective framework but also highlighted the current weaknesses.
Commission staff have also repeatedly consulted Member States on the EU implementation of the CMDI framework and on possible revisions of the BRRD/SRMR and DGSD in the context of the Commission Expert Group on Banking, Payments and Insurance. In parallel to the discussions in the Expert Group, the issues addressed in this proposal were also covered in meetings of the Council’s preparatory bodies, namely the Council Working Party on Financial Services and the Banking Union and the High-Level Working Group on EDIS.
Furthermore, during the preparatory phase of the legislation, Commission staff also held numerous meetings (physical and virtual) with representatives of the banking industry and with other stakeholders.
The results of all the above-mentioned initiatives have fed into the preparation of this proposal and the accompanying impact assessment. They have provided clear evidence of the need to update and complete the current rules to best achieve the objectives of the framework. Annex 2 of the impact assessment provides the summaries of these consultations and the public conference.
•Collection and use of expertise
The Commission issued a call for advice to the European Banking Authority (EBA) on funding in insolvency and resolution. The Commission sought targeted technical advice to: (i) assess the reported difficulty for some smaller and medium-sized banks to issue sufficient loss-absorbing financial instruments; (ii) examine the current requirements to access available sources of funding in the current framework; and (iii) assess the quantitative impacts of various possible policy options in the area of funding in resolution and insolvency and their effectiveness in achieving the policy objectives. The EBA responded in October 2021 17 .
The Commission also benefited from the opinion provided by the Fit for Future Platform in December 2021. The opinion highlighted the need to make the CMDI framework fit for purpose for all banks, in a proportionate manner, taking into consideration the potential impact on depositors’ confidence and on financial stability.
•Impact assessment 18
The proposal has been subject to an extensive impact assessment taking into account the feedback received from stakeholders and the need to address various interconnected issues spanning three different legal texts.
The impact assessment considered a range of policy options to address the problems identified in the design and implementation of the crisis management and deposit insurance framework. Given the strong links between the crisis management toolbox and its funding, the impact assessment considered packages of policy options that bundle together relevant design features of the CMDI framework to ensure a comprehensive and consistent approach. Some changes proposed – related to early intervention measures, the triggers to determine whether a bank is failing or likely to fail, and the harmonisation of certain features of the DGSD – are common across the option packages considered.
The different packages of options are mainly focused on analysing the spectrum of possibilities to broaden credibly and effectively the scope of resolution as a function of the level of ambition in making the funding more accessible. In particular, the policy options consider facilitating the use of DGS funds in resolution, including serving as a bridge, under the least-cost test safeguard, to improve the proportionality in accessing the resolution financing arrangements for banks, particularly smaller and medium-sized banks, being subject to transfer strategies with market exit. In addition, the policy options explore the possibility of using DGS funds more effectively and efficiently under a harmonised least cost test for measures other than the payout of covered deposits, seeking to improve the compatibility of incentives for resolution authorities when selecting the most appropriate tool to manage a crisis. Unlocking DGS funds for measures other than the payout of covered deposits depends on where the DGS ranks in the hierarchy of claims. Therefore, the policy options also explore different scenarios of harmonisation of depositor preference.
In light of these elements, the impact assessment explores three possible packages of policy options that deliver outcomes with varying ranges of ambition. Each package strives to create an incentive-based framework, by encouraging the application of resolution tools in a more consistent manner, increasing legal certainty and predictability, levelling the playing field, and facilitating access to common safety nets, all while maintaining some alternatives outside resolution under national insolvency procedures. However, by design, the packages of options achieve these objectives to a varying extent and their political feasibility differs.
The preferred option envisages ambitious improvements in the funding equation, opening the possibility for the resolution scope to be substantially broadened to include more smaller and medium-sized banks and a better alignment of incentives for deciding on the best crisis tool for these institutions. It was considered more effective, efficient and coherent in achieving the objectives of the framework relative to other options, including the baseline where no action is taken. In particular, the removal of the super-preference for the DGS was identified as the most effective means of ensuring that DGS funds can be used in resolution. The existence of a super-preference for DGS claims is the main reason why the DGS funds can almost never be used outside a payout of covered deposits in insolvency because of the impact it has on the outcome of the least cost test (LCT) that privileges a payout. However, it was found that the super-preference ends up protecting the financial means of the DGS and the banking sector from possible replenishment by hindering any DGS intervention in resolution, without bringing a better protection for covered deposits. Therefore, the removal of the DGS super-preference is necessary to address the existing outcome of the LCT assessment that is skewed towards payout and to provide adequate funding in resolution to make the resolution of smaller and medium-sized banks through a transfer of business and market exit of the failed bank feasible.
The impact assessment also included another option consisting of an ambitious reform of the CMDI framework including EDIS, in the form of an intermediate, hybrid model, different from the 2015 Commission proposal. This option acknowledges the importance of establishing a common deposit insurance system for the robustness of the framework and the completion of the Banking Union; however, it has been assessed as politically unfeasible at this stage.
The proposal would entail costs for authorities and certain banks, depending on the extent to which resolution would be expanded on the basis of case-by-case public interest assessments and the specific circumstances of each case. Using the DGS funds and the RF/SRF would be more cost-efficient in terms of financial means required to be used, however it may also trigger replenishment needs through contributions from the industry. Overall, costs for resolution authorities and banks would, however, be compensated by the benefits of enhanced preparedness for a larger spectrum of banks, clarified incentives when deciding which crisis tools to use, reduced recourse to taxpayer funds, and increased financial stability and depositor confidence, all thanks to clearer rules and access to industry-funded safety nets. For consumers and the public, the costs should be limited and clearly outweighed by the benefits, particularly through increased depositor protection, financial stability and reduced use of taxpayer money.
The Regulatory Scrutiny Board endorsed the impact assessment following a first negative opinion. To address the comments raised by the Board, the impact assessment has been extended to include additional explanations on: (i) the nature of the problems the review aims to address and the general merits of resolution compared with insolvency proceedings to protect financial stability, depositor confidence and minimise the recourse to taxpayers money; (ii) clarifications on how the reform complies with the principle of subsidiarity; and (iii) additional details on other aspects such as consistency with the review of State aid rules, the interaction with the 2015 Commission proposal on EDIS, how the EBA’s advice has been taken into account or the conditions in which DGS could intervene in resolution.
•Regulatory fitness and simplification
The review is mainly focused on the overall set-up and functioning of the crisis management and deposit insurance framework, with particular attention being paid to smaller and medium sized banks and a more equal treatment of depositors. The proposed reform is expected to bring benefits with respect to the effectiveness of the framework and legal clarity.
The reform is technology-neutral and does not impact digital readiness.
•Fundamental rights
The EU is committed to high standards of protection for fundamental rights and is a signatory to a broad set of conventions on human rights. In this context, the proposal complies with these rights, as listed in the main UN conventions on human rights, the Charter of Fundamental Rights of the European Union, which is an integral part of the EU Treaties and the European Convention on Human Rights.
The proposal does not have implications for the EU budget.
•Implementation plans and monitoring, evaluation and reporting arrangements
The proposal requires Member States to transpose the amendments to the BRRD in their national laws within 18 months from the entry into force of the amending Directive.
The proposal includes requirements for the EBA to issue standards in relation to certain provisions of the framework and to report to the Commission on its effective implementation, e.g. in relation to resolvability assessments conducted by resolution authorities or the preparation for resolution execution.
The legislation will be subject to an evaluation 5 years after its implementation deadline in order to assess how effective and efficient it has been in terms of achieving its objectives and to decide whether new measures or amendments are needed.
Early intervention measures and preparation for resolution
The conditions for applying early intervention measures, including the removal of management and appointment of temporary managers, are amended to remove ambiguity and provide competent authorities with the necessary legal certainty. Articles 27(1), 28 and 29(1) are amended to provide that early intervention measures may be used when the conditions for supervisory measures under CRD or Directive (EU) 2019/2034 19 (Investment Firms Directive or IFD) have been met, but those measures have not been taken by the institution or are deemed insufficient to address the identified issues. The existing triggers not covered by CRD or IFD are preserved. At the same time, the internal sequencing between early intervention measures, removal of managers and appointment of temporary managers is removed – under the proposal, they are all subject to the same triggers, but competent authorities are required to follow the proportionality principle when choosing the most appropriate measure for each circumstance. The EBA mandate for guidelines promoting the consistent application of the triggers is maintained.
The early intervention measures listed in Article 27 BRRD that overlapped with the available supervisory powers under Article 104 CRD or Article 49 IFD (concerning the examination of the financial situation by the management body, the removal of managers that no longer meet the suitability criteria, changes to the business strategy and to the operational structure of the institution) are removed from the BRRD and retained only in CRD/IFD. This should address the practical and administrative challenges observed by competent authorities in applying those overlapping measures.
To expand the limited provisions in BRRD requiring cooperation between competent and resolution authorities when the financial situation of a bank starts deteriorating, a new Article 30a details the interactions and responsibilities of competent and resolution authorities in the run-up to resolution. The competent authority is required to notify the resolution authority when it adopts certain supervisory measures under CRD or IFD (particularly those that previously overlapped with early intervention measures), when it considers that the conditions for early intervention are met and when it actually applies early intervention measures. Competent authorities in cooperation with resolution authorities should monitor the financial situation of the institution and its compliance with any imposed measure. At the same time, the competent authority must provide the resolution authority with all the information necessary for preparing for resolution, or require the institution itself to provide it. It is also clarified that the resolution authority has the power to market or make arrangements for the marketing of the institution and to request the creation of a virtual data room without being dependent on the prior application of early intervention measures. Competent and resolution authorities are required to cooperate closely when considering taking any early intervention or resolution preparation actions to ensure consistency and effectiveness.
Article 30a includes an obligation for the competent authority to notify sufficiently early the resolution authority as soon as it considers that there is a material risk that an institution or entity meets the conditions for being assessed as failing or likely to fail, as laid down in Article 32 i. This notification should include the reasons for the competent authority's assessment as well as an overview of the alternative solutions that may prevent the failure of the institution or entity concerned within a reasonable timeframe.
In recognition of the critical role that the timing of resolution action plays with respect to preserving as much as possible the levels of capital, MREL and liquidity of the institution or entity, and more generally, in ensuring that the necessary conditions are in place for the resolution authority to successfully execute the resolution strategy prepared for each institution or entity, the resolution authority is empowered to assess, in close cooperation with the competent authority, what it considers to be a reasonable timeframe for the purposes of looking for solutions of private or administrative nature, able to prevent the failure. During this early warning period, the competent authority should continue exercising its competences, while liaising with the resolution authority in line with Article 30a. The competent authority and the resolution authority should monitor, in close cooperation, the evolution of the situation of the institution or entity and the implementation of alternative measures. In this context, the resolution authority and the competent authority should meet regularly, with a frequency set by the resolution authority.
If no appropriate alternative measure which would avert the failure is found or implemented within this timeframe, the competent authority should assess whether the institution or entity is failing or likely to fail. Where the competent authority concludes that the institution or entity is failing or likely to fail, it should formally communicate this to the resolution authority, following the procedure laid down in Article 32(1) and (2). The resolution authority may also make this assessment itself, where the Member State has exercised the national option provided in Article 32(2). The resolution authority should then determine whether the conditions for resolution are met. Where the public interest assessment results in the need to resolve the institution or entity, the resolution authority should subsequently adopt a decision taking resolution action. This is in line with the recent case law of the Court of Justice of the EU related to a case taking place in the Banking Union, according to which the ECB’s assessment is a preparatory measure designed to allow the SRB to take a decision regarding the resolution of a bank. The Court further stated that the SRB has the exclusive power to assess the conditions required for the application of resolution action, subject to the endorsement of the resolution scheme by the Commission and, where applicable, non-objection by the Council 20 .
The CMDI framework was designed to avert and manage the failure of institutions of any size while protecting depositors and taxpayers. When a bank is considered failing or likely to fail and there is a public interest in resolving it, the resolution authorities will intervene by using the tools and powers granted by the BRRD in absence of a private solution. In the absence of a public interest for resolution, the bank failure should be handled through national orderly winding up proceedings carried out by national authorities, potentially with financing from the DGS or other funding sources, as appropriate.
In essence, the public interest assessment (PIA) compares resolution against insolvency, in particular assessing how each scenario achieves the resolution objectives. The resolution objectives against which the assessment is made includes: (i) the impact on financial stability (a wide-spread crisis may result in a different outcome of the PIA than an idiosyncratic failure); (ii) the assessment of the impact on the bank’s critical functions; and (iii) the need to limit the use of extraordinary public financial support. Under the current framework, resolution can only be chosen where insolvency would not allow achieving the resolution objectives to the same extent.
The BRRD and SRMR leave margin of discretion to resolution authorities when carrying out the PIA, which leads to divergent applications and interpretations that do not always fully reflect the logic and intention of the legislation. In some cases, particularly within the Banking Union, the PIA has been applied rather restrictively.
To minimise divergences and widen the application of the PIA, i.e. broadening the scope of resolution, the proposal includes the following legislative amendments:
The current definition of ‘critical functions’ does not include an explicit reference to the impact of their disruption on the real economy and financial stability at a regional level, leading to possible interpretation that functions may only be deemed critical when their discontinuation has impacts at a national level. To avoid divergent interpretation, in the definition of ‘critical functions’ reference is added to the ‘national or regional level’ of the impact of the disturbance of their discontinuation to the real economy or to financial stability (Article 2(1), point (35)).
The resolution objective requiring minimising the reliance on extraordinary public financial support does not allow for a distinction between the use of national budget money and the use of industry-funded safety nets (national resolution funds, SRF or DGSs). Therefore, this resolution objective is amended to include a specific reference to support provided by the budget of a Member State, to indicate that funding provided by the industry-funded safety nets should be considered preferable to funding supported by taxpayers’ money (Article 31(1), point (c)). This is complemented with a change in the procedural rules on PIA, requiring the resolution authority to consider and compare all extraordinary public financial support that can reasonably be expected to be provided to the institution in resolution against those in the insolvency counterfactual. If liquidation aid is expected in the insolvency counterfactual, this should lead to a positive PIA outcome (Article 32(5), second subparagraph).
The resolution objective related to depositor protection is amended to clarify that resolution should aim at protecting depositors, while minimising losses for deposit guarantee schemes. This means that resolution should be preferred if insolvency would be more costly for the DGS.
Under the current BRRD, resolution authorities are expected to choose insolvency unless opting for resolution would better achieve the resolution objectives. The current text of Article 32(5) provides that resolution shall only be chosen when winding up the institution under normal insolvency proceedings would not meet the resolution objectives to the same extent. To allow broadening the resolution application, Article 32(5), first subparagraph, is amended to clarify that national insolvency proceedings should be selected as the preferred strategy only when they achieve the framework’s objectives better than resolution (and not to the same extent). While keeping insolvency as the default option, the amendment leads to an increase in the burden of proof for resolution authorities in demonstrating that resolution is not in the public interest. Nevertheless, the PIA will remain a case-by-case decision at the discretion of the resolution authority.
A fundamental principle of the current resolution framework is that funding in resolution should be first and foremost provided by the bank’s internal resources (its capital and other liabilities, including certain categories of deposits), which are used to cover its losses. These can be complemented by external sources of funding, namely (1) the resolution financing arrangement – but only after 8% of the capital and liabilities of the bank have been used to cover its losses – and (2) the DGS – in lieu of covered depositors up to the amount of losses that they would have suffered (were it possible for them to be subject to losses in resolution). For certain smaller and mid-sized banks, especially those primarily financed with deposits, it can be very difficult to meet these requirements to access industry-financed external funding without bailing-in deposits above the coverage level and those excluded from coverage. However, in certain cases incurring losses on deposits can lead to widespread contagion and financial instability, exacerbating the risks of broader banks runs, and thereby also have serious adverse impact on the real economy.
Therefore, to ensure a higher degree of proportionality of the resolution framework, enhance the application of transfer tools in resolution for smaller or medium-sized banks that will exit the market, and facilitate DGS interventions in support of such tools where needed to prevent depositors from bearing losses, Article 109 is amended to clarify certain aspects of the use of DGS in resolution. The fundamental principle that the first line of defence in case of bank distress should always be the banks’ internal loss absorption capacity, as well as the conditions for access to the resolution financing arrangement, are preserved. In particular, Article 109 clarifies that the DGS can be used to support transfer transactions that include covered deposits, and, under certain conditions, also eligible deposits beyond the coverage level and deposits excluded from the DGS guarantee. The DGS contribution should cover part of or the entire difference between the value of the deposits transferred to a buyer or to a bridge institution and the value of the transferred assets. Where a contribution is required by the buyer as part of the transaction to ensure its capital neutrality and preserve compliance with the buyer’s capital requirements, the DGS is also allowed to contribute to this effect.
To avoid depletion and ensure that the DGS has sufficient resources to maintain its functions, the contribution of the DGS in resolution remains subject to certain limits.
On the one hand, Article 109(1) requires that any loss which the DGS may bear as a result of an intervention in resolution does not exceed the loss that the DGS would bear in insolvency if it paid out covered depositors and subrogated to their claims. This amount is determined by the DGS on the basis of the least cost test, in accordance with the criteria and methodology set out in DGSD for any possible use of DGS. These same criteria and methodology are also to be used when determining the treatment that the DGS would have received had the institution entered normal insolvency proceedings when carrying out the ex-post valuation under Article 74 for the purposes of assessing compliance with the ‘no creditor worse off’ principle and determining whether any compensation is owed to the DGS.
On the other hand, the amount of the DGS contribution may not exceed any shortfall in the value of the assets of the institution under resolution transferred to the buyer or the bridge institution in comparison to the value of the transferred deposits and liabilities with the same or a higher priority ranking in insolvency than those deposits. This is to ensure that the contribution of the DGS is only used for the purposes of depositor protection, where appropriate, and not for the protection of creditors that rank below deposits in insolvency.
Furthermore, it is clarified in Article 109(1) that the DGS can only contribute to a transaction including all deposits if it is concluded by the resolution authority that the eligible deposits exceeding the coverage level provided by the DGS, as well as the deposits excluded from coverage, should be protected from losses and cannot be bailed-in nor left in the residual institution under resolution, which will be wound up. In particular, this would be the case where the exclusion is strictly necessary and proportionate in order to preserve the continuity of critical functions and core business lines or where necessary to avoid widespread contagion and financial instability which could cause a serious disturbance to the economy of the Union or of a Member State. To ensure access to resolution financing arrangements where necessary for the implementation of a transfer strategy, paragraph 2b of Article 109 provides that the DGS contributions in resolution should count towards the 8% total liabilities and own funds (TLOF) requirement for accessing the resolution financing arrangement. If the contribution made by shareholders and creditors of the institution under resolution through reductions, write-down or conversion of their liabilities, summed with the contribution made by the DGS amounts to at least 8% of the institution’s total liabilities including own funds, it will be possible for the resolution authority to use the resolution financing arrangement to finance the resolution action, which must lead to the failing institution’s exit from the market. To ensure that MREL remains the first line of defence and to preserve level playing field, this should only be possible for institutions for which the resolution plan or group resolution plan does not provide for its winding up in an orderly manner in case of failure, given that the MREL of these institutions has been set at a level that includes both the loss absorption as well as the recapitalisation amounts.
The use of DGS funds enabling access to the resolution financing arrangements is not expected to impact institutions’ incentives to comply with MREL. This is because the incentives to comply with MREL are built into the governance of the framework. Resolution authorities calibrate MREL requirements for all institutions with resolution strategies, including smaller and mid-sized institutions where appropriate, according to the existing legal provisions and address any failure to comply through several measures. Additionally, institutions’ obligation to disclose publicly their MREL requirement and capacity, that will start to apply in 2024 (as provided under the existing rules), will reinforce market discipline and compliance. Moreover, the use of the DGS to facilitate access to the resolution financing arrangement will be possible only for transfer strategies with market exit and on a case-by-case basis where justified by resolution authorities. Therefore, since the failed institution will exit the market after resolution should DGS funds be used, this mechanism de facto prevents any advantage with regard to MREL calibration or the use of DGS funds compared to other institutions that would continue operating after being restructured. Importantly, moral hazard exists due to the possibility of subsidies outside resolution in the form of public funds in insolvency. By allowing a more credible application of resolution through DGS use in specific cases, the reform aims to disincentivise the recourse to taxpayer money, which may affect market expectations ex ante, leading to more market discipline and decreasing the risk of moral hazard. Finally, the use of the DGS contribution towards compliance with the 8% TLOF threshold to access the resolution financing arrangements is restricted to those institutions for which MREL has been set (i.e. institutions and entities that have not been identified as liquidation entities) and includes both the loss absorption as well as the recapitalisation components, in light of the fact that the respective resolution plan or group resolution plan does not provide for their winding up in case of failure.
Under the current wording of Article 108(1), BRRD creates a three-tier depositor preference in the hierarchy of claims. It provides that covered deposits and DGS claims must have a so-called ‘super-preference’ in the creditor ranking in the insolvency laws in each Member State relative to non-covered preferred deposits (the part of eligible deposits from natural persons and SMEs exceeding the coverage level of EUR 100 000). The latter must rank above the claims of ordinary unsecured creditors.
BRRD is presently silent on the ranking of the remaining deposits, that is, non-covered non-preferred (i.e., corporate non-SME deposits exceeding the coverage level of EUR 100 000) and excluded deposits (which, under the current framework include deposits of public authorities, financial sector entities and pension funds). In most Member States, the non-covered non-preferred deposits rank in insolvency alongside ordinary unsecured claims, including senior debt instruments eligible for MREL (section A of figure below), while in a minority of Member States, they already rank above ordinary unsecured claims (section B of figure below).
The super-preference of the DGS in the current framework (i.e., its rank above claims of depositors that are not covered) impacts the results of the least cost test in a way that the DGS funds can almost never be used outside the payout of covered deposits in insolvency, because the DGS would expect a full or very high recovery of the resources used to reimburse covered deposits.
On the other hand, the lack of general depositor preference (i.e., the ranking of all deposits above ordinary unsecured claims) in some Member States creates an unlevel playing field and potential impediments to resolution in cross-border contexts and might lead to breaches of the ‘no creditor worse off’ principle, where, for financial stability reasons, it is necessary to exclude non-covered deposits from bearing losses.
To facilitate the use of the DGS in resolution under the least cost test safeguard where this is necessary to maintain financial stability and protect depositors, as well as to remove impediments to resolution, Article 108(1) is amended to introduce a general depositor preference with a single-tiered ranking. This would be achieved thanks to two modifications. First, the legal preference in the insolvency laws of Member States required by BRRD relative to ordinary unsecured claims is extended to include all deposits. This entails that all deposits, including eligible deposits of large corporates and excluded deposits, rank above ordinary unsecured claims. Second, the relative ranking between the different categories of deposits is replaced by a single-tier depositor preference, where the super-preference of the DGS/covered deposits is removed, and where all deposits rank pari passu (i.e., at the same level amongst themselves) and above ordinary unsecured claims.
Stylised view of creditor hierarchy in insolvency under the current framework (three-tier depositor preference) and under the proposed reform (single-tier general depositor preference)
Source: Commission staff.
As shown by the impact assessment, a single-tier depositor preference would not impinge on the protection currently enjoyed by covered depositors, who are always insured under the DGSD in case their accounts become unavailable and are mandatorily excluded from bearing losses in resolution (Article 44(2) BRRD). The higher preferred ranking of the DGS claims protects instead the banking industry, which pays contributions to the DGS. Nevertheless, from the perspective of the banking industry itself, the higher priority of the DGS does not necessarily lead to less frequent need for replenishment of the DGS given that the result of this higher priority would be more frequent use of DGS resources for payout than for transfer strategies in resolution. This is so because a payout requires using the DGS available financial means to cover the gross amount of covered deposits, and there is a time lag between the payout and recovery in sometimes lengthy insolvency procedures, as well as a loss on the franchise value of assets.
Additionally, regarding the argument of cost-efficiency associated with the use of DGS funds in resolution compared to the cost of payout of covered deposits in insolvency, empirical evidence referenced in the impact assessment 21 shows that paying out covered deposits can quickly deplete the financial means of the DGS (even when fully-filled) or that, in some cases, the DGS financial means cannot sustain a payout event when the amount of covered deposits is significant. In this regard, the CMDI review aims to enable cheaper, more cost-efficient alternative uses of the DGS in resolution, when compared to the cost of DGS payout in insolvency, to support a transfer of assets and liabilities (including deposits) followed by market exit. See the impact assessment for a comprehensive analysis (including by the EBA in its reply to the Commission’s call for advice from October 2021).
In order to ensure that public funds in the form of extraordinary public financial support are not used to support institutions or entities that are not financially viable, it is necessary to provide for strict conditions on when such support can be provided and what form it can take. The existing rules provide for certain limitations but are not sufficiently precise. Extraordinary public financial support outside of resolution should be limited to cases of precautionary recapitalisation, preventive measures of DGS aimed at preserving the financial soundness and long-term viability of credit institutions, measures taken by DGS to preserve the access of depositors and other forms of support granted in the context of winding up proceedings. Providing extraordinary public financial support in any other situations outside of resolution should not be permitted and should result in the receiving institution or entity being considered as failing or likely fail.
Particular attention must be paid to the extraordinary public financial support granted in the form of precautionary recapitalisation. It is necessary to lay down more clearly the permissible forms of precautionary measures provided outside of resolution and aimed at recapitalising the entity concerned. The measures granted should be temporary in nature because they are supposed to address adverse consequences of external shocks and not used to compensate for intrinsic weaknesses linked, for example, to an outdated business model. Use of perpetual instruments, such as Common Equity Tier 1, should become exceptional and possible only if other forms of capital instruments would not be adequate. Such change is necessary to ensure that the support remains temporary in nature. Stronger and more explicit requirements on determining in advance the duration and exit strategy for the precautionary measures are also needed. The entity receiving support should be solvent at the time the measures are applied, i.e. assessed by the competent authority as not being in breach and not likely to breach the applicable capital requirements in the next 12 months. If the conditions under which the support is granted are not adhered to, the entity receiving the support should be considered as failing or likely to fail.
Regardless of a potential expansion of the application of resolution, the resolution of some EU banks will not be in the public interest. In such cases banks should be wound up in accordance with national law. The applicable national rules are very heterogeneous across EU Member States, both in terms of the conditions which trigger the initiation of a procedure, and the structure of the procedure itself. In some Member States, the bank would go into normal insolvency, in others a special insolvency or liquidation regime for banks exists or there are several procedures available, not necessarily leading in all cases to the exit of the bank from the market. Furthermore, the triggers for commencing national insolvency proceedings are not always aligned with the failing or likely to fail determination under the BRRD. This can create uncertainty as to whether insolvency proceedings can start (so called “limbo situations”) or whether the procedure leads to a clear outcome in terms of ensuring exit from the market.
To address such situations, the 2019 Banking Package introduced Article 32b, requiring Member States to ensure the orderly winding up in accordance with the applicable national law of failing banks, which are not resolved due to a negative PIA. However, the implementation of this provisions in national legal frameworks is not sufficient to address all residual risks of failing institutions not exiting the market. In particular, there is still uncertainty as to which procedure should apply in these cases, and particularly whether only normal insolvency proceedings should apply or whether any other national procedures could also apply.
Therefore, to resolve the existing inconsistency and uncertainty across Member States, Article 32b is amended to provide further framing and clarity, and to ensure that applicable national procedures lead to the market exit of the bank within a reasonable timeframe. The amendments neither aim at, nor lead to harmonisation of national insolvency rules, and a margin at national level is preserved as to how this market exit should occur (i.e., whether through a sale or otherwise).
In this context, it is also proposed to further enhance the role of the withdrawal of the bank’s license when failing or likely to fail is declared, and no resolution ensues. The new provision of Article 32b(3) empowers the supervisor to withdraw the license solely based on the failing or likely to fail determination, which on its turn shall be a sufficient condition for relevant national administrative or judicial authorities to initiate without delay the applicable national winding-up procedure.
MREL for transfer strategies
As part of resolution planning, resolution authorities are defining the preferred and variant resolution strategies and preparing the application of the relevant tools to ensure their effective execution. For large and complex institutions, open-bank bail-in is, in general, expected to be the preferred resolution tool, implying the write-down and conversion of own funds and eligible liabilities to absorb losses and recapitalise the bank emerging from resolution.
In parallel, certain smaller and medium-sized institutions with business models based predominantly on funding through equity and deposits may be candidates for transfer tool strategies which involve selling parts or all of the business to a purchaser or a bridge institution, transferring non-performing assets to an asset management vehicle, and market exit.
As already provided under the current framework, the level of the MREL requirement should reflect the preferred resolution strategy. The existing provision of Article 45c focuses on MREL calibration for bail-in strategies (requirement for loss absorption and recapitalisation amount, with detailed rules on how each should be adjusted, and on subordination requirements mostly geared towards ensuring compliance with the 8% TLOF requirement). While acknowledging the possibility to use resolution tools other than bail-in, the current BRRD does not regulate in detail MREL calibration for transfer strategies. In practice, this leads to legal uncertainty and divergent methodologies applied by resolution authorities when setting MREL for such strategies.
It is therefore necessary to provide a clearer legal basis for distinguishing MREL calibration for transfer strategies from the one for bail-in, also for the sake of proportionality and consistent application. In this respect, and taking into account also current practices of resolution authorities, a new Article 45ca is added which sets out the principles which should be considered when calibrating MREL for transfer strategies - size, business model, risk profile, transferability analysis, marketability, whether the strategy is asset transfer or share deal and complementary use of asset management vehicle for assets which cannot be transferred.
The amendments reinforce the principle that MREL should remain the first and main line of defence for all banks, including for those that will be subject to a transfer strategy and market exit, to ensure that losses are absorbed to the maximum extent possible by shareholders and creditors.
To address an existing gap in legal clarity of the current framework with respect to the power of the resolution authorities to prohibit certain distributions in case of failure of an entity to meet the combined buffer requirement in addition to its MREL, and in particular where the entity is not subject to the combined buffer requirement (under Article 104a of Directive 2013/36/EU) on the same basis as its MREL, a new paragraph 7 is added to Article 16a to clarify that the power to prohibit certain distributions should be applied on the basis of the estimation of the combined buffer requirement resulting from the delegated act under Article 45c i that specifies the methodology to be used by resolution authorities to estimate the combined buffer requirement in such circumstances.
Under the MREL rules in BRRD, structurally subordinated liabilities referred to in Article 72b(2)(d)(iii) CRR are captured by the definition of ‘subordinated eligible instruments’ used throughout Article 45b BRRD. However, liabilities that are permitted to be eligible in CRR under the de minimis exemption in Article 72b i CRR do not qualify as ‘subordinated eligible instruments’ under BRRD because paragraph 4 of Article 72b CRR is explicitly excluded from the definition in Article 2(1), point (71b), of BRRD.
To correct this inconsistency, a new paragraph is added to Article 45b BRRD, allowing resolution authorities to permit resolution entities to comply with the MREL subordination requirements using senior liabilities when the conditions in Article 72b i CRR are met.
To ensure alignment with the TLAC framework, resolution entities benefitting from the de minimis exemption may not have their MREL subordination requirement adjusted downwards by an amount equivalent to the 3.5% TREA allowance for TLAC pursuant to the second sentence of the first subparagraph of Article 45b i BRRD.
The proposal also introduces clarifications regarding the status of contingent liabilities and provisions for the purposes of resolution planning and execution. The amendments take in to account the International Accounting Standards Board’s (IASB) International Accounting Standard (IFRS) 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ and introduce references to (i) provisions (liabilities of uncertain timing or amount) and (ii) contingent liabilities (possible obligations depending on whether some uncertain future event occurs, or present obligations for which payment is not probable or the amount cannot be measured reliably). The two categories differ from the perspective of the degree of likelihood of a payment having to be made and provisions should be treated as liabilities whereas contingent liabilities would not be treated as such. From a resolution perspective this means that provisions which have been recognised should, in principle, be bail-inable while contingent liabilities are unlikely to be bailed in given their uncertain nature.
To take into account the end of the initial period for the build-up of the resolution financing arrangements and the ensuing reduction in the amount of regular ex ante contributions, technical amendments are made to Articles 102 and 104 to disconnect the maximum amount of ex post contributions that may be raised from the amount of the regular ex ante contributions, thus avoiding a disproportionately low cap on ex post contributions, as well as to allow for a deferral of the collection of the regular ex ante contributions in case the cost of an annual collection would not be proportionate to the amount to be raised. The treatment of irrevocable payment commitments is also clarified in Article 103, both as regards their use in resolution and as regards the procedure to follow in case an institution or entity ceases to be subject to the obligation to pay contributions.
In addition, to provide more transparency and certainty with respect to the share of irrevocable payment commitments in the total amount of ex ante contributions to be raised, it is clarified that resolution authorities should determine such share on an annual basis, subject to the applicable limits.
Resolution authorities have in the past years developed and implemented a wide set of policies to improve banks’ resolvability and ensure an adequate level of preparation in the implementation of resolution tools and powers in the event of resolution. The EBA has developed common standards to supplement the provisions set out in BRRD and harmonise authorities’ practices across the Union.
To ensure that the applicable standards remain fit for purpose, and that new ones are adopted where appropriate, new roles and responsibilities are given to the EBA to report on the existing practices, foster convergence and promote a high level of preparedness among the competent and resolution authorities. New mandates are introduced for the EBA to monitor the actions taken by resolution authorities to ensure an effective implementation of the framework and assess possible divergences among Member States in the areas of resolvability assessments and the operationalisation of resolution tools and powers. In addition, a new role for EBA is introduced to foster convergence and exchanges between competent and resolution authorities through the coordination of Union-wide exercises to test the application of the framework, in recovery and resolution.
Moreover, in light of the multiple national options available to Member States under Article 44a, EBA is asked to report on the application of that article, comparing the way it has been implemented in the Member States and analysing the impact of any divergences on cross-border operations.
Finally, as institutions and entities may be required to comply with internal MREL either on an individual or consolidated basis, practice has shown that, in some situations, the additional own funds requirements and the combined buffer requirement provided in CRD are not set on the same basis as the internal MREL. For this reason, the existing regulatory technical standards on the estimation of the additional own funds requirements and the combined buffer requirement, which have been adopted through Commission Delegated Regulation (EU) 2021/1118 22 , should be expanded to capture not just resolution entities but also entities that have not been identified as resolution entities. The EBA mandate in Article 45c i is amended accordingly.
To reduce the administrative burden on institutions as regards obligations to update recovery plans on an annual basis, a third subparagraph is added to Article 5, paragraph 2, which provides that supervisors shall have the discretion to waive the requirement to update certain parts of the plan for a given cycle in the absence of any changes to the legal or organisational structure of the institution, its business or its financial situation.
Under the current text of the BRRD, recovery plans shall not assume any access to or receipt of extraordinary public financial support. The rule in Article 5, paragraph 3 is supplemented to provide that, in addition to public financial support, recovery plans shall not assume access to or receipt of central bank emergency liquidity assistance or any central bank liquidity assistance provided under non-standard collateralisation, tenor and interest rate terms.
Resolution authorities are required to identify measures to be taken with respect to group entities when drafting group resolution plans. The intensity and level of detail of this work with respect to subsidiaries that are not resolution entities may vary depending on the size and risk profile of the institutions and entities concerned, the presence of critical functions and the group resolution strategy. BRRD is thus amended with the introduction of a new subparagraph in Article 12(1), which will allow resolution authorities to follow a simplified approach, where appropriate, when carrying out this task.
The current provision of Article 44(7) is unclear as to what are the condition and the sequence of use of the resolution financing arrangement and alternative financing sources after the provision of initial financing of up to the 5 % TLOF limit and after all unsecured, non-preferred liabilities, other than eligible deposits, have been written down or converted in full. Therefore, paragraph 7 of Article 44 is amended to provide legal clarity and additional flexibility to use the RF beyond the 5% TLOF.
To ensure alignment with Article 51(3) of Directive (EU) 2013/36 which provides for the establishment of colleges of supervisors by the competent authorities supervising an institution with significant branches in other Member States to facilitate the cooperation and exchange of information between the home and host supervisors, a new paragraph 6a is added to Article 88 BRRD which provides for the setting up of resolution colleges in these cases to facilitate the cooperation and exchange of information between the home and host resolution authorities.
Ranking of resolution financing arrangements’ claims
Article 37(7) provides that the resolution financing arrangement should be able to recover any reasonable expenses properly incurred in connection with the use of resolution tools and powers from the institution under resolution as a preferred creditor. However, BRRD did not specify the relative ranking of the resolution financing arrangement to other preferred creditors. The new paragraph 9 added to Article 108 clarifies that those claims of the resolution financing arrangement should rank above the claims of depositors and of DGSs.
Additionally, the resolution financing arrangement can be further used in resolution for the purposes identified in Article 101. So far, BRRD has not specified whether such use creates a claim in favour of the resolution financing arrangement and, if so, on the insolvency ranking of such claim. A new paragraph 8 is added in Article 108 specifying that, where the activity of the institution under resolution is partially transferred to a bridge institution or a private purchaser with the support of the resolution financing arrangement, it should have a claim against the residual entity. The existence of such claim should be assessed on a case-by-case basis, depending on the resolution strategy and the way in which the resolution financing arrangement was concretely used, but it should be connected to the use of the resolution financing arrangement to bear losses in lieu of creditors, such as when the arrangement is used to guarantee assets and liabilities transferred to a recipient or to cover the difference between the transferred assets and liabilities.
Where the resolution financing arrangement is used to support the application of the bail-in tool as the primary resolution strategy (Article 43(2), point (a)), in lieu of the write down and conversion of the liabilities of certain creditors, this should not generate a claim against the institution under resolution, as it would eliminate the purpose of the resolution financing arrangement’s contribution. Compensations paid due to the breach of the ‘no creditor worse off’ principle should likewise not generate a claim in favour of the resolution financing arrangement.
Article 128 is amended to allow the Single Resolution Board, the ECB and other members of the European System of Central Banks, the EBA, the resolution authorities and competent authorities to provide the Commission with all information necessary for the performance of its tasks related to policy development.