16 July 2013

EU Presidency amends BRRD compromise proposal

Annex 2

I. Bail-in - Article 38

Introduction

Article 38 sets out a revised proposal on the scope of the bail-in tool. The proposal remains broadly in line with the flexibility model proposed by the Presidency during the ECOFIN of 21 June, with further clarity around existing discretionary exclusions, Commission ex ante approval, and the role of alternative financing arrangements.

Defined exclusions

The list of defined exclusions from bail-in in the ECOFIN draft has been retained, with one addition. The list has been expanded to so as to exclude inter-bank liabilities with an original maturity of less than one week (Art 38(2)(d)). This was agreed at the ECOFIN of 21 June following a proposal by the European Central Bank.

Flexibility – resolution fund use only after minimum bail-in

In line with the “minimum bail-in” model of flexibility proposed by the Presidency during the ECOFIN, Article 38(3c)1 has been expanded into a “general” discretionary exclusion.

• Grounds for discretionary exclusions: The resolution authority would have the discretion to exclude liabilities or classes of liabilities for reasons of (i) impossibility, (ii) preservation of critical functions, (iii) avoidance of contagion, or (iv) avoidance of value destruction that would leave other creditors worse off.

• Full and partial exclusions: These exclusions could be full exclusions (i.e., the liability would not be written down or converted at all) or partial exclusions (i.e., the liability would be written down or converted, but the haircut applied to the liability would be reduced).

• Creditor substitution v resolution fund contribution: The cost of such exclusions could be absorbed in one of two ways:
  • 1. Creditor substitution: the cost could be shifted to other creditors. There would not be a quantitative cap on such exclusions, or a minimum amount of bail-in that must be undertaken before such exclusions were used, but the “No creditor worse off than liquidation” principle would cap the amount of the burden that could be shifted to other creditors.
  • 2. Resolution fund contribution: the resolution fund could make a contribution to the institution under resolution to absorb the cost of the exclusion or partial exclusion. This contribution could be used to absorb losses (i.e., in lieu of creditor write down) and/or to recapitalise the institution (i.e. in lieu of creditor conversion).

• Resolution fund contribution conditions – minimum bail-in and quantitative cap: The resolution fund could only make contributions in this way provided a certain “minimum bail-in” had first been undertaken: i.e., shareholders and creditors had absorbed losses of at least 8 per cent of the total liabilities (including own funds) of the institution. In addition, as a further safeguard, the contribution of the resolution fund would be capped at the minimum of either: (i) 5 per cent of the total liabilities of the institution, or (ii) the amount of resources available to the resolution fund that has been raised by levies plus the amount that could be raised by ex post levies within three years. For the avoidance of doubt, the text clarifies that the 8 per cent of losses that must be absorbed are measured prospectively from the point of resolution. Losses that have been absorbed prior to resolution action (through, for example, the decline in the institution’s own funds as its financial position deteriorates in the period before resolution) do not count towards the 8 per cent minimum level of bail-in.

• Extraordinary circumstances and alternative financing arrangements: In extraordinary circumstances, where liabilities have been excluded and the resolution fund has been used to contribute to bail-in in lieu of these liabilities up one of the permissible quantitative limits, the resolution authority may seek funding from alternative financing arrangements (Art 39(3cab)). This provides for the option of using ESM or other public monies in extraordinary circumstances.

Full compromise proposal

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