Bank Recovery and Resolution Directive
The EU Bank Recovery and Resolution Directive 2014/59/EU (“BRRD”) of the European Parliament and Council of 15 May 2014 establishes a framework for recovery and resolution of credit institutions and large investment firms (required to hold initial capital of at least Euro 730,000). The scope of application also includes EU-based parent and intermediate financial holding companies, as well as subsidiaries of EU parent credit institutions or investment firms of financial holding companies. The practical objective of this Directive is to restore confidence and maintain stability in the financial market in order to avoid future bailouts by managing systemic institutions whose failure might trigger a financial crisis.
On 11 February 2016, Cyprus enacted the Deposit Guarantee Scheme and Resolution of Credit institutions and other Institutions Law (Law 5(I)/2016), which is the first of three proposed new laws to align its legislative framework with the BRRD and the Deposit Guarantee Schemes Directive 2014/49/EU (“DGSD”). Both of these Directives provide a unified framework for the recovery and resolution of entities active in financial markets, including credit institutions, investment firms, financial holding companies, and the protection of depositors. In April 2016, the remaining two laws required to complete the legislative framework were enacted; these are the Recovery of Cyprus Investment Firms and Other Entities Law (Law 20(I)/2016) and the Resolution of Credit Institutions and Investment Firms Law (Law 22(I)/2016).
The BRRD provides for three decision-making authorities with different powers and obligations: the Resolution Authority (“RA”), the Competent Authority (“CA”) and the European Banking Authority (“EBA”). Certain powers are to be exercised on the initiative of either the RA (for Cyprus it is the Central Bank of Cyprus) or the CA (for Cyprus it is CySEC), while others (mostly in relation to cross-border resolution planning) require joint decision-making between the RA and EBA.
BRRD provides that the determination that an institution is failing or likely to fail should be based on the circumstances related to the following aspects: a) current or likely infringement of the requirements for continuing authorisation in a way that would justify the withdrawal of authorisation; b) assets currently lower or likely to be lower than liabilities; c) current or likely inability to pay debts or other liabilities as they fall due, and; d) a need for extraordinary public financial support. This determination can be made either by the competent authority after consulting with the resolution authority or, when national legislation so provides, also by the resolution authority after consulting with the competent authority.
BRRD establishes a three-stage mechanism for the management of insolvency situations: preparation/prevention, early intervention and resolution.
The preparation/prevention stage starts with an independent preparation of a Recovery Plan from each Institution, which should be submitted to its national authority. The Recovery Plan must include a wide range of recovery options to cater for a range of scenarios of severe macroeconomic and financial stress that could be relevant to the bank’s specific conditions.
At the early intervention stage, the competent authority is empowered to intervene and require the implementation of the Recovery Plan. BRRD requires Member States shall ensure that competent authorities may require the removal and temporary replacement of the senior management or management body if they are found unfit to perform their duties.
At the final stage or resolution, the failing Institutions are restructured in order to minimise the cost to taxpayers. BRRD empowers the Resolution Authority (‘RA’) to intervene via the application of Resolution Tools and the exercise of Resolution Powers. Furthermore, the RA should take all appropriate measures to ensure that the resolution action is taken in accordance with specific principles, which dictate, inter alia, that the shareholders of the institution under resolution bear first losses, the creditors of the institution under resolution bear losses after the shareholders, the management body and senior management of the institution under resolution shall provide all necessary assistance for the achievement of the resolution objectives, and the covered deposits are fully protected.
Our team of high calibre professionals with years of experience in the financial services industry stands ready to assist in the following ways:
- Analysis and impact of a range of scenarios of severe macroeconomic and financial stress;
- Drafting the Recovery Plan, and;
- Consultation regarding BRRD enquiries.
For more information, please feel free to contact us