16 June 2017

European Parliament: Precautionary recapitalisations under the Bank Recovery and Resolution Directive: conditionality and case practice

To reduce the cost of bank failures for taxpayers, the Bank Recovery and Resolution Directive (BRRD) provides that resolution costs should be first and foremost borne by banks’ shareholders and creditors.

To that end, the BRRD:

• empowers resolution authorities to bail-in capital and debt instruments,
• create a new requirement for banks to hold such bail-inable instruments at all times (the minimum requirement for own funds and eligible liabilities, MREL), and
• provides that such bail-in would be enforced prior to any injection of State aid into the bank.

Indeed, in line with article 32.4 BRRD, the provision of extraordinary public support entails the recognition that the beneficiary bank is failing or likely to fail, thereby triggering its liquidation or its winding down under regular insolvency proceedings.

However some flexibility was introduced by the legislators to allow for targeted measures aiming at promoting financial stability, and to cater for systemic liquidity shortages or situations where a solvent bank would be unable to raise capital privately in the markets following a stress test or a comprehensive assessment.

Three specific forms of extraordinary public support are thereby allowed outside resolution:

• the provision of a State guarantee to issue new liabilities,
• the provision of a State guarantee to access central bank refinancing, and
• the recapitalisation of a solvent bank subject to strict conditions.

Full briefing

© European Parliament