Topic:

Bank Recovery & Resolution Directives - BRRD/BRRD II
Summary

The Bank Recovery and Resolution Directive (BRRD) was adopted in 2014 and creates a framework for the recovery and resolution of banks and investment firms (and their holding companies, as well as for EU branches of non-EU banks and investment firms). It is the first step towards a Banking Union in the EU and sits alongside several related pieces of legislation: the Deposit Guarantee Scheme Directive (which harmonises the protection offered by national deposit guarantee schemes in all Member States), the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM) as well as proposed measures relating to bank structural reform (still not finalised). Its overriding aim is to put in place a framework that will allow a bank to fail – whatever its size, complexity or importance for the financial system - while ensuring the continuity of essential banking services, minimising the impact of that failure on the financial system and avoiding costs to taxpayers. This is essential to avoid the 'moral hazard' that arises from the perception that some banks are too big, complex or interconnected to fail.

The Directive harmonises national laws on recovery and resolution of credit institutions and investment firms to the extent necessary to ensure that Member States have the same tools and procedures to address systemic failures. The framework equips the relevant authorities with a range of powers consisting of three elements: prevention, intervention and resolution:

-Crisis prevention - which includes requirements for recovery and resolution plans, the removal of obstacles to resolvability and intra-group support arrangements;

-Early Intervention - which includes the power for relevant authorities to intervene in the activities of a struggling institution and to require institutions to take remedial steps;

-Crisis management - resolution - which includes rules for the relevant authorities to take certain actions using one or more ‘resolution tools’ to resolve institutions which have failed or are likely to fail in order to minimise systemic impacts and recourse to taxpayer funds; and also resolution financing - which includes national resolution funds, financed via ex ante industry contributions and "no creditor worse off" principle limits application of resolution tools ex ante and also sets ex post benchmark for creditor compensation.

The aim of such a framework is to minimise the likelihood of firm failure and to equip the relevant authorities with common and effective tools and powers to pre-empt banking crises, safeguarding financial stability and minimising taxpayers' exposure to losses.

Although some of these tools already existed under national regimes, for some Member States this would be new, requiring a smooth transition between the current national arrangements and the future framework. The early intervention and resolution measures will give authorities a wide range of options and, subject to the triggers, the framework should not be prescriptive as to which measures are used in a particular case.

The European Central Bank (ECB) as a banking supervisor, has a consultative role in resolution assessment and planning under the BRRD and the Single Resolution Mechanism Regulation (SRMR). Although resolution authorities will be responsible for deciding on the appropriate resolution action, the ECB will cooperate closely with the respective resolution authorities and notify them about the failure, or likely failure, of a bank.

In July 2018 the the ECB published a Report on recovery plans in which it highlights the lessons ECB Banking Supervision has learned and best practices identified after three successive cycles of analysing recovery plans in order to help significant institutions (SIs) further shape their plans and make them even more operational. The ECB notes that not all banks are adequately complying with the requirements of BRRD and the relevant delegated regulation and that there is room for improvement.

Amendments to BRRD regarding loss-absorbing and recapitalisation

In November 2016, the Commission presented a proposal to amend the BRRD in order to incorporate international standards on loss-absorbing and recapitalisation. The Financial Stability Board (FSB) published the Total Loss-absorbing Capacity (TLAC) in November 2015, which was later endorsed by the G20 group. This standard aims to reduce the impact of banking failures on public funds. It applies to all Globally important systemic institutions (GSIIs) worldwide as of January 2019. Since TLAC is not binding, it has to be transposed into national or European legislation. As of 1 January 2019, G-SIIs will have to comply with a minimum TLAC requirement of 16% of RWA and 6% of the Basel III leverage ratio denominator (TLAC Leverage Ratio Exposure (LRE) Minimum).

The amending Directive sets out to revise the Minimum Requirement for own funds and Eligible Liabilities (MREL) and implement the TLAC for credit institutions and investment firms, aligning the international TLAC requirement with the existing MREL standard by avoiding duplication by applying two parallel requirements.

Directive (EU) 2019/879 amending Directive 2014/59/EU as regards the loss-absorbing and recapitalisation capacity of credit institutions and investment firms and Directive 98/26/EC (BRRD II) was published in the Official Journal of the EU on 7 June 2019. Member States have until 28 December 2020, with the exception of provisions relating to MREL (which apply from 1 January 2024), to implement the new measures.

Amendments to BRRD regarding ranking of unsecured debt instruments in insolvency hierarchy

Following the adoption of the total loss absorbing capacity (TLAC) standard by the G20, and in order to facilitate a more efficient path towards compliance with TLAC, a number of EU Member States have amended (or are in the process of amending) the ranking of creditor claims under their national insolvency law, creating significant divergences. In November 2016 the Commission proposed amendments to the BRRD setting out harmonised rules for the insolvency ranking of unsecured debt instruments for the purposes of the Union recovery and resolution framework especially with regard to ensuring a credible bail-in regime. The Directive amends Article 2 and Article 108 of the BRRD by partially harmonising bank insolvency creditor hierarchy as regards the priority ranking of holders of bank senior unsecured debt eligible to meet the BRRD rules and the TLAC standard on loss absorbency and recapitalisation capacity for banks, in particular the 'subordination' requirement.

Directive (EU) 2017/2399 amending Directive 2014/59/EU as regards the ranking of unsecured debt instruments in insolvency hierarchy (Bank Creditor Hierarchy Directive) was published in the Official Journal in December 2017.