30 March 2012

European Commission published discussion paper on the banking resolution regime

The debt write down tool is a tool by which Resolution authorities could be given a statutory power, exercisable when an institution meets the trigger conditions for entry into resolution, to  write off all equity, and either write off subordinated liabilities or convert it into an equity claim.

The debt write down tool can be used both in a going concern scenario and a liquidation scenario. In a going concern scenario, bail-in would be used to absorb losses and recapitalise the entity. The entity would be then restructured and maintained as a going concern. In a liquidation scenario, bail-in would be used to wind down the entity.

As mentioned above, one of the features of reorganization or wind down under insolvency law is that shareholders and creditors bear losses. This should also be the case in a resolution regime.

But this cannot always be done relying only on consensus or on the agreement of the majority of creditors. In view of the critical intermediary role that banks play in our economies, financial difficulties in banks need to be resolved in an orderly, quick and efficient manner, avoiding undue disruption to the bank's activity and to the rest of the financial system and minimizing the cost and length of the proceedings. This is why we need legal mechanisms that allow identifying and imposing losses on shareholders and creditors without delay. One of the mechanisms that could serve this purpose is the debt write-down tool or "bail-in".

Full discussion paper

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