The EBA lunched two public consultations on Guidelines on the treatment of shareholders when applying the bail-in tool or the write down or conversion of capital instruments and Guidelines on when and how different conversion rates from debt to equity should be set for different types of liability.
In particular, these Guidelines, together with those on the treatment of liabilities in bail-in and the draft Technical Standards on valuation in resolution, aim to clarify how valuation information should help determine the terms of bail-in.
The first set of Guidelines clarifies the circumstances which should guide the choice between cancellation and severe dilution of existing shares (or other instruments of ownership) when applying the bail-in tool or the write down or conversion of capital instruments power provided for in the BRRD.
Dilution may only be used when, according to the valuation, the institution under resolution has a positive net asset value, and the conversion shall be conducted at a rate that severely dilutes existing holdings of shares and other instruments of ownership. If the net asset value of the institution being resolved is negative or zero, shares should instead be cancelled or transferred. Resolution authorities should not seek to impose losses on other creditors of the institution until shareholders have absorbed losses to the maximum possible extent.
The second set of Guidelines clarifies when and how different conversion rates from debt to equity should be set for different types of liability. Resolution authorities should set conversion rates, first, to seek to ensure that no shareholder or creditor receives worse treatment than they would have done in insolvency. This should be assessed on the basis of the ex ante valuation to inform resolution decisions, and the ex ante valuation estimate of outcomes in insolvency. Subject to that, conversion rates should be set to ensure that the resolution principles of the BRRD, in particular respect for the creditor hierarchy, are complied with.
Comments to these consultations can be sent to the EBA by 6 February 2015. A public hearing will then take place at the EBA premises on 12 January 2015 from 10:00 to 13:00 UK time.
Press release
Consultation paper on guidelines on conversion rates
Consultation paper on Guidelines on shareholders treatment in bail-in
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