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). Its 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 and 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 CA after consulting with the RA or, when national legislation so provides, also by the RA 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 CA 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 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.
On June 2019, the second Bank Recovery and Resolution Directive (BRRD 2 or Directive (EU) 2019/879) and the second Single Resolution Mechanism Regulation (SRMR 2 or Regulation (EU) 2019/877) were published in the Official Journal of the European Union (‘EU’). BRRD 2 amends BRRD (Directive 2014/59/EU) while SRMR 2 amends SRMR (Regulation No 806/2014) regarding the loss-absorbing and recapitalisation capacity of credit institutions and investment firms. Both BRRD 2 and SRMR 2 entered into force on 27 June 2019. BRRD 2 states that member states must have applied the transposed measures no later than December 28, 2020 (with certain exceptions) while SRMR 2 must have also applied from December 28, 2020.
BRRD 2 introduces a range of reforms for the BRRD, including the following:
- Amendments to the requirement for contractual recognition of bail-in: Member States shall require institutions to include a contractual term by which the creditor recognises that the said liability may be subject to the write down and conversion and agrees to be bound by any reduction of the principal or outstanding amount due provided that the liability complies with the conditions set out by the directive. Under BRRD 2, the EU introduced an exemption to the aforementioned requirement where it would be legally or otherwise impracticable to include a contractual recognition of bail-in in an agreement. The said exemption will not be applicable where the liability is an Additional Tier 1 instrument, Tier 2 instrument or instrument that are unsecured liabilities.EBA shall develop draft regulatory technical standards in order to further specify a) the conditions under which it would be legally or otherwise impracticable for an institution to include the contractual term of bail-in b) the conditions for the NRA to require the inclusion of the contractual term and c) the reasonable timeframe for the NRA to require the inclusion of a contractual term; The draft RTS are due to be submitted to the European Commission by June 28, 2020.
- New powers for regulators: National regulators will be able to a) suspend any payment or delivery obligations pursuant to any contract to which an institution with maximum suspension duration of two business days, b) to restrict the enforcement of security interests and c) temporarily suspend termination rights.
- The introduction of a requirement for contractual recognition of Resolution Stay powers: Financial contracts entered by EU banks located in a non-EU country will need to include a clause with contractual recognition of the Resolution Stay Powers. The requirement will apply to new obligations created and to material amendments to existing obligations. The EBA will submit draft RTS on the content of such terms to the European Commission by June 28, 2020.
- Amendments to the Minimum Requirement for Own Funds and Eligible Liabilities (MREL) calibration: Currently, MREL’s requirements are based upon own funds and eligible liabilities expressed as a percentage of total liabilities and own funds and this is set for each institution. Under BRRD 2, a fixed MREL will apply to EU Global Systemically Important Institutions (“G-SIIs”), with institution-specific MREL being applied where appropriate. The global Total Loss-Absorbing Capacity (“TLAC”) standard has been implemented for G-SIIs in the EU. EU Member States are required to transpose the amending Directive into their national laws and to apply the provisions by no later than 28 December 2020, except for provisions relating to MREL, which apply from 1 January 2024.
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;
- Assistance with the preparation of the Form 20-01, and;
- Consultation regarding BRRD enquiries.
For more information, please feel free to contact us