BANK RECOVERY AND RESOLUTION DIRECTIVE (BRRD) Public Consultation DECEMBER 2014

Transcription

1 BANK RECOVERY AND RESOLUTION DIRECTIVE (BRRD) Public Consultation DECEMBER 2014

2 Public Consultation Paper: Bank Recovery and Resolution Directive Department of Finance December 2014 Department of Finance Government Buildings, Upper Merrion Street, Dublin 2 Ireland BRRD.consult@finance.gov.ie Website:

3 Contents Page 1. Introduction Consultation Process Why BRRD is necessary The Banking Union context Protection for deposits under BRRD Overview of the BRRD and its transposition Preparatory and preventative measures Articles 5-9: Recovery planning: Articles 10-18: Resolution planning & Resolvability: Articles 27-30: Early intervention Resolution Article 31: Resolution objectives Article 32: Conditions for resolution Consultation Questions Question 1: Should the resolution authority have the power to make a failing or likely to fail determination? Article 36: Valuation Articles 73-75: Valuation of difference in treatment Articles 38-39: Sale of business tool Articles 40-41: Bridge institution tool Article 42: Asset separation tool Article 44: The bail-in tool Article 45: Minimum requirement for own funds and eligible liabilities (MREL): Question 2: Timing for the transposition of Section 5 of Chapter IV of Title IV (bailin tool and minimum requirements for eligible liabilities) Articles 56-58: Government financial stabilisation tools Question 3: Government financial stabilisation tools Articles 59-62: Write down of capital instruments Question 4: Should the competent authority or the resolution authority be responsible for the decision to write down or convert capital instruments? Resolution powers Article 63: General powers Article 64: Ancillary powers Department of Finance BRRD: Public Consultation Paper December 2014 Page 3

4 8.17. Article 65: Power to require the provision of services and facilities Article 66: Power to enforce crisis management measures or crisis prevention measures by other Member States Article 67: Power in respect of assets, rights, liabilities, shares and other ownership located in third countries Article 68: Exclusion of certain contractual terms in early intervention and resolution Article 69: Power to suspend certain obligations Article 70: Power to restrict the enforcement of security interests Article 71: Power to temporarily suspend termination rights Articles 73 80: Safeguards Question 5: Safeguards and how appropriate protection should be provided Articles 85-86: Right of appeal and rights to challenge decisions Question 6: Ex-ante judicial approval Articles 87-92: Cross-border group resolution Articles 93-98: Relations with third countries Financing arrangements Article 102: Target level Article 103: Ex-ante contributions Question 7: Calculation and payment of contributions process Article 104: Extraordinary ex-post contributions Article 108: Ranking of deposits in insolvency hierarchy Article 109: Use of deposit guarantee schemes in the context of resolution Question 8: Cap on deposit guarantee scheme (DGS) contribution in resolution action? Question 9: Do you have any other comments on the transposition of this Directive? Department of Finance BRRD: Public Consultation Paper December 2014 Page 4

5 1. Introduction The objective of this Consultation is fourfold: (i) (ii) (iii) (iv) to provide an overview of the Bank Recovery and Resolution Directive (BRRD) and to put it into the appropriate banking union context. In this regard, there is a description of the most important Articles; to highlight the protection for deposits in BRRD; to outline the major areas in which the Directive provides a discretion for Member States. These are set out in boxes underneath the relevant Articles; to seek the view of all relevant stakeholders on the Directive as a whole and in particular in relation to its transposition in Ireland. It should be noted that this document does not seek to address every element of the BRRD. In addition, where it expresses the Minister s views, these are of a preliminary nature and are subject to further consideration of the legal requirements of the BRRD. The Directive, which applies to all banks and a subset of investment firms that meet certain initial capital requirements, entered into force on 2 July 2014 and is required to be transposed into Irish law by 31 December 2014 in order to be applied from 1 January Consultation Process Responses are requested by Tuesday 16 th December. The Minister cannot guarantee that responses received after this date will be considered. Responses should be sent by to BRRD.consult@finance.gov.ie. Responses to this consultation are subject to the provisions of the Freedom of Information Acts. Parties should also note that responses to the consultation may be published on the website of the Department of Finance. Responses received will be taken into consideration when finalising the Department s policy choices for each of the options specified in this paper. Department of Finance BRRD: Public Consultation Paper December 2014 Page 5

6 2. Why BRRD is necessary The purpose of the BRRD is to establish a common framework for the recovery and resolution of credit institutions and certain investment firms throughout the EU (including cross-border banks). The Directive will apply to all 28 Member States. The Directive does not apply to credit unions. The overarching objective of the BRRD is to shift the cost of bank failure from taxpayers to shareholders and creditors of the institutions themselves. The European financial crisis has made clear that a strong, harmonised legal framework is necessary to achieve this objective. This is particularly the case in a highly integrated cross-border financial services market such as the EU: the failure of a national bank can create ripple effects elsewhere, or the failure of a cross-border bank can affect the financial stability of financial markets in the different Member States in which it operates. In the absence of a mechanism to resolve such banks or banking groups satisfactorily, there is a significant risk of the internal market being undermined as a result of a lack of consistency and coordination in the responses of different Member States. Consequently, the development of a harmonised set of tools and powers for the management of bank failures is considered essential. A number of Member States, including Ireland, already have domestic resolution regimes in place. However, national regimes vary in their scope and content there are no common minimum standards which apply across the Union. In many instances Member States simply apply their standard insolvency regime to the banking sector. The recent crisis has highlighted that ordinary insolvency mechanisms are often inadequate to take account of the particular characteristics of banks and investment firms: the intrinsic importance of the banking sector, including credit supply and payments systems, to the real economy; the necessity in many cases for rapid intervention; the need to ensure the continuity of institutions critical functions; the need to avoid contagion effects and financial instability; the public policy objective of providing certain protections for depositors. Department of Finance BRRD: Public Consultation Paper December 2014 Page 6

7 3. The Banking Union context The intention of BRRD is to provide a minimum level of harmonisation in the future application of resolution tools in all Member States and ensure a broad uniformity of approach to such matters. However, the nature of such a regime is that there will continue to be some flexibility for Member States, and consequently the possibility of diverging approaches in supervision and resolution. Differences in perceived regulatory approaches may lead to divergences in funding costs for banks because of where they are located, irrespective of the underlying creditworthiness of the institution. Any such divergences in funding costs are likely to be passed on to bank customers, in the form of higher borrowing costs. In response to this, and in order to try and break the link between the sovereign and the banking sector, Euro Area Member States committed to establishing a Banking Union. Banking Union consists of several elements: (i) (ii) (iii) a Single Rulebook which consists of a harmonised set of rules on supervision (Capital Requirements Directive and Regulation 1 ), resolution (BRRD) and deposit insurance (recast Deposit Guarantee Scheme Directive 2 ); centralised supervision under which the ECB will act as the central supervisor in the banking union (Single Supervisory Mechanism Regulation 3 ); and a single resolution mechanism that will ensure an effective EU response where a bank finds itself in serious difficulties (Single Resolution Mechanism Regulation 4 ). It should be noted that the SRM Regulation, which was published in July 2014, will take effect from January It will complement the BRRD for Banking Union Member States, by establishing a pan-european resolution authority, the Single Resolution Board (SRB), with the power to restructure and wind-down failing banks. The SRB will have access to a single resolution fund (SRF), with a target level of 1% of covered deposits within banking union Member States (approximately 55bn). The fund will be paid for by contributions from the EU banking sector and will have operational effect from 1 January As a result, the BRRD will be superseded in some respects by the SRM Regulation after 1 January However, the BRRD will remain in effect it will provide the legal basis 1 Directive 2013/36/EU 2 Directive 2014/49/EU 3 Council Regulation (EU) No 1024/ Regulation (EU) No 806/2014 Department of Finance BRRD: Public Consultation Paper December 2014 Page 7

8 for a national resolution authority to implement a resolution decision of the SRB, and will continue to govern the resolution of less significant banks and investment firms. The major practical changes which the SRM Regulation will ultimately bring from 1 January 2016 are: (i) (ii) (iii) (iv) Resolution fund levies will continue to be collected by the relevant Member State, but will be transferred to the Single Resolution Fund rather than to the national resolution fund; The time within which the resolution fund target must be built up will fall from 10 years to eight years. In addition, the basis for the calculation of the resolution levies will change from 1% of national covered deposits to 1% of Euro Area covered deposits. The combined effect of these factors is that, because of the relative mix of deposit and non-deposit liabilities in the Irish banking sector generally, Irish institutions will be likely to pay higher contributions under the SRM post-2016 than they will pay under BRRD in 2015; The SRB will be responsible for making resolution decisions for (i) significant banks and (ii) less significant banks where it is necessary to draw upon the single resolution fund. The definition of significant in the SRM Regulation to a large extent mirrors the scope of ECB direct supervision under the SSM Regulation. Under the SRM, authorities will potentially be able to draw on a much larger resolution fund than under BRRD. However, as under BRRD, certain restrictions and pre-conditions will be placed on the use of the Single Resolution Fund. Department of Finance BRRD: Public Consultation Paper December 2014 Page 8

9 4. Protection for deposits under BRRD It is important to note that the Directive provides certain protections which enhance the position of depositors. First, the existing Deposit Guarantee Scheme protection for eligible deposits up to 100,000 will not be affected. Second, the Directive provides that covered deposits (i.e., eligible deposits up to 100,000) are excluded from the scope of the bail-in tool. While certain other creditors can be bailed-in, covered deposits cannot. Third, the Directive introduces in all Member States depositor preference, which further strengthens the position of (i) covered deposits and (ii) eligible deposits from natural persons and SMEs which exceed the 100,000 coverage threshold. Such deposits will no longer rank pari passu with senior bonds and other unsecured creditors. Instead, they will have statutory preference in insolvency and resolution. The practical effect of this is that, where a bank fails, shareholders and other unsecured creditors (including senior bondholders) will have to be fully written down before losses are imposed on preferred depositors. It is envisaged that in most cases, this preference will be sufficient to ensure that preferred deposits do not ultimately suffer any losses in the event of insolvency, bail-in, or another resolution action being taken. Fourth, in addition to the above, the bail-in rules allow in exceptional circumstances for the exclusion or partial exclusion of certain liabilities (with a key focus being eligible deposits) from the application of the write down or conversion powers. In particular, it might be possible for authorities exclude such liabilities where: the exclusion is strictly necessary and proportionate to avoid giving rise to widespread contagion, in particular as regards eligible deposits held by natural persons and micro, small and medium sized enterprises, which would severely disrupt the functioning of financial market, including the financial market infrastructures, in a manner that could cause a serious disturbance to the economy of a Member State or of the Unions. (Article 44 (3) (c)) The cumulative effect of these protections is to significantly strengthen the position of both covered depositors, and natural persons and SMEs with deposits which exceed 100,000. Department of Finance BRRD: Public Consultation Paper December 2014 Page 9

10 5. Overview of the BRRD and its transposition The main objective of the BRRD is to ensure that, when a bank or investment firm fails, authorities have the tools and powers to manage that effectively, critical functions are maintained, financial instability is avoided, depositors are protected, and shareholders and creditors bear the losses to the extent necessary, while taxpayers are protected to the greatest extent possible. In order to lay the ground for the implementation of the transposition the Minister for Finance has already made two important decisions in relation to the transposition: (i) (ii) To confer the powers and functions of the Irish national resolution authority upon the Central Bank of Ireland (Article 3 of BRRD). The Minister recognises, however, the need to ensure that adequate structural arrangements are put in place to ensure operational independence and to avoid conflicts of interest between supervisory functions and resolution functions within the Central Bank, while at the same time providing for the necessary exchange of information and cooperation between the two functions; Banks will no longer be subject to the Central Bank and Credit Institutions (Resolution) Act 2011, from the start of 2015, with possible limited exceptions for certain provisions of the Act. The 2011 Act will continue to apply to credit unions, which are not covered by the BRRD. The three pillars of the BRRD are: (i) Preparatory and preventative measures (recovery and resolution planning, etc.) (Articles 5-26) (ii) Early intervention measures (actions designed to remedy deteriorations in institution s financial position) (Articles 27-30) (iii) Resolution Measures (resolution tools and powers) (Articles 31-58) These three main pillars are complemented by a series of ancillary provisions and powers. Department of Finance BRRD: Public Consultation Paper December 2014 Page 10

11 6. Preparatory and preventative measures The purposes of the first pillar are, firstly, to seek to ensure that an institution will not need to be resolved in the first place and, secondly, in the event that it does, that authorities are adequately prepared to manage its failure Articles 5-9: Recovery planning: While Article 61 of the European Union (Capital Requirements) Regulations 2014 provide for recovery planning obligations, Articles 5-9 of the BRRD set out in greater detail the recovery planning process which will apply to institutions and groups. Some important points to note about such recovery plans are: (i) (ii) (iii) they shall not assume any access to or receipt of extraordinary public financial support; they shall include where applicable an analysis of how and when an institution may apply, in the conditions addressed by the plan, for the use of central bank facilities and identify those assets which would be expected to qualify as collateral; they should also include what possible measures an institution would carry out where the conditions for early intervention in Article 27 are met. A key element of the recovery planning process is the assessment of recovery plans by the competent authority in order to ensure that they are reasonably likely to maintain or restore the viability and financial position of the institution or group, and that they are capable of being implemented quickly and effectively in situations of financial stress while at the same time avoiding to the maximum extent possible any significant adverse effect on the financial system. As part of an assessment of recovery plans, the competent authority will consult the resolution authority to seek its view on how the plan may impact on the resolvability of the institution. Where the competent authority assesses that there are material deficiencies in the recovery plan or material impediments to its implementation it shall inform the institution and give it an opportunity to address them. Ultimately, if the institution does not identify and implement suitable changes to its plan, the competent authority has the power to direct the institution to take certain measures. Department of Finance BRRD: Public Consultation Paper December 2014 Page 11

12 6.2. Articles 10-18: Resolution planning & Resolvability: Again, while Article 62 of European Union (Capital Requirements) Regulations 2014 require institutions to draw up resolution plans, the BRRD sets out greater detail about what such plans should contain, how they should be assessed and the resolution authority s powers to address impediments to resolvability. Unlike for recovery plans, it is the resolution authority that draws up the resolution plan rather than the institution itself. In essence, the resolution plan sets out the resolution actions which the resolution authority may take in the event that the institution meets the conditions for resolution. A key part of this process is the assessment of resolvability of an institution or group. In particular, the resolution authority will assess the extent to which the institution or group is resolvable without the assumption of public support or central bank liquidity assistance. The Directive states at Article 15(1) that an institution shall be deemed to be resolvable if it is feasible and credible for the resolution authority to either liquidate it under normal insolvency proceedings or to resolve it by applying the different resolution tools and powers to the institution while avoiding to the maximum extent possible any significant adverse effect on the financial system, including in circumstances of broader financial instability or system-wide events, of the Member State in which the institution is established, or other Member States or the Union with a view to ensuring the continuity of critical functions carried out by the institution. Article 17 and 18 deal with the power to address or remove impediments to resolvability. They provide that where the resolution authority determines that there are substantive impediments to the resolvability of an institution, it shall notify the institution in order to give it the opportunity to propose measures to address or remove these impediments. If the authority is of the view that the measures proposed by the institution would not effectively address the impediments to resolvability, the authority may either directly or indirectly through the competent authority require the institution to take alternative measures that may achieve this goal. Resolution authorities will have the power to take a range of measures as outlined in Article 17 (5). These include: to require the institution to limit its maximum individual and aggregate exposures; to require the institution to divest specific assets; to require the institution to limit or cease specific existing or proposed activities; Department of Finance BRRD: Public Consultation Paper December 2014 Page 12

13 restrict or prevent the development of new or existing business lines or sale of new or existing products; to require an institution or a parent undertaking to set up a parent financial holding company in a Member State or a Union parent financial holding company Articles 27-30: Early intervention The second pillar provides a number of powers to the competent authority which can be exercised where an institution infringes or is likely in the near future to infringe prudential requirements, including capital, liquidity and leverage rules. These powers include the right to: direct that the institution implement elements of a recovery plan; require changes to the institution s business strategy; require changes to the legal or operational structure of the institution; require the removal of some or all of the management body or senior management; appoint a temporary administrator to the institution. In addition, it should be noted that Article 59 allows authorities to write down or convert capital instruments (i.e., non-equity Tier 1 or Tier 2 instruments) independently of resolution action, in a situation where there is a capital shortfall, but the appropriate authority is of the view that this write down or conversion of capital instruments is sufficient to restore the institution s financial position to a viable level without the need for resolution action which would impose losses on other creditors. Department of Finance BRRD: Public Consultation Paper December 2014 Page 13

14 7. Resolution The third pillar of BRRD addresses, among other issues, the objectives of resolution (Article 31), the conditions for resolution (Article 32), the general principles governing resolution (Article 34), the appointment of a special manager (Article 35), valuation for the purposes of resolution (Article 36). In addition, it sets out the resolution tools available to a resolution authority. The most important Articles are described in more detail below: 7.1. Article 31: Resolution objectives When using these resolution tools and exercising resolution powers, a resolution authority is required to have regard to the following resolution objectives : (i) (ii) (iii) (iv) (v) to ensure the continuity of critical factors; to avoid a significant adverse effect on the financial system, in particular by preventing contagion, including to market infrastructures, and by maintaining market discipline; to protect public funds by minimising reliance on extra-ordinary public financial support; to protect covered deposits; to protect client funds and client assets. The Authority, in pursuing the above objectives, is required to seek to minimise the cost of resolution and avoid destruction of value unless necessary to achieve the resolution objectives Article 32: Conditions for resolution This Article provides that the resolution authority is required take a resolution action in relation to an institution, only if the authority considers that all of the following conditions are met: (i) a determination that the institution is failing or likely to fail 5 has been made by the competent authority, after consulting the resolution authority, or 5 In broad terms an institution is deemed to be failing or likely to fail in one or more of the following circumstances (see Article 32(4) of Directive for more detail) (i) It is infringing the requirements for continuation of authorisation in a way that would justify the withdrawal of its authorisation by the competent authority Department of Finance BRRD: Public Consultation Paper December 2014 Page 14

15 (ii) (iii) subject to the conditions in paragraph (2) by the resolution authority after consulting the competent authority; having regard to timing and other relevant circumstances, there is no reasonable prospect that any alternative private sector measures, including early intervention measures or the write down or conversion of relevant capital instruments taken in respect of the institution would prevent its failure within a reasonable timeframe; and a resolution action is necessary in the public interest. Paragraph (2) provides that Member States may provide that, in addition to the competent authority, the determination that the institution is failing or likely to fail under point (a) of paragraph 1 can be made by the resolution authority, after consulting the competent authority, where resolution authorities under national law have the necessary tools for making such a determination, including in particular, adequate access to relevant information. The competent authority shall provide the resolution authority with any relevant information that the latter requests in order to perform its assessment without delay. (ii) (iii) (iv) The assets of the institution will in the near future be less than its liabilities The institution will in the near future be unable to pay its debts or other liabilities as they fall due Extraordinary public financial support is required (except in certain specified situations) Department of Finance BRRD: Public Consultation Paper December 2014 Page 15

16 8. Consultation Questions 8.1. Question 1: Should the resolution authority have the power to make a failing or likely to fail determination? Question 1: Should the resolution authority have the power to make a failing or likely to fail determination? The BRRD provides that the decision on whether an institution is failing or likely to fail in other words, the financial assessment which triggers possible resolution action is made by the competent authority (supervisory side of the Central Bank). In addition, Member States have a discretion to provide that the decision can also be made by the resolution authority (resolution side of the Central Bank). The main reason this discretion was introduced was because some Member States felt that in its absence a competent authority might exercise inappropriate regulatory forbearance. The Minister s initial view is that this decision should be made by the competent authority only (after consultation with the resolution authority). The rationale for this is that the supervisor is better positioned to assess the financial position of the institution, and providing two public authorities with identical powers blurs responsibilities and creates a risk of a dis-coordinated approach by the respective authorities. Do you have any comments on this matter? 8.2. Article 36: Valuation Before taking resolution action, authorities are obliged to carry out a valuation of the assets and liabilities of the institution under resolution in order to ensure that a fair, prudent and realistic valuation is obtained. This valuation must in general be carried out by an independent person; however, some flexibility is provided to allow a provisional valuation to be carried out by the resolution authority itself in urgent circumstances. The purpose of the valuation, among other things, is to: (i) inform the determination of whether the conditions for resolution or the conditions for the write down or conversion of capital instruments are met; Department of Finance BRRD: Public Consultation Paper December 2014 Page 16

17 (ii) (iii) (iv) if the conditions for resolution are met, to inform the decision on the appropriate resolution decision to be taken in respect of the institution; when the bail-in tool is applied, to determine the extent of the write down or conversion of eligible liabilities; when the sale of business tool or bridge bank tools are applied, to inform the price at which the assets or liabilities are sold or transferred Articles 73-75: Valuation of difference in treatment Related to Article 36 is Article 74. Its purpose is give effect to the safeguard for creditors contained in Article 34(1)(g): no creditor shall incur greater losses than would have been incurred if the institution or entity had been wound up under normal insolvency proceedings and in accordance with the safeguards in Articles 73 to 75 This valuation, which occurs after the resolution action has taken place, aims to determine whether shareholders and creditors whose claims have been written down or converted would have received better treatment if the institution had been liquidated. If so, these shareholders and creditors may be entitled to compensation from the resolution fund Articles 38-39: Sale of business tool The first of the four resolution tools is the sale of business tool. This tool enables a resolution authority to sell either an institution under resolution in full or in part to one or more purchasers, without the consent of shareholders of the institution under resolution. In applying this tool there is a requirement to conduct the transaction in an open transparent and non-discriminatory way while aiming to maximise the sale price. The resolution authority has flexibility to avoid the strict application of these marketing requirements where it believes that complying with them would undermine the resolution objectives. Department of Finance BRRD: Public Consultation Paper December 2014 Page 17

18 8.5. Articles 40-41: Bridge institution tool The purpose of the second resolution tool, the bridge institution tool, is to enable the transfer of some or all of the assets and liabilities of an institution under resolution to a bridge institution, a State-owned bank which holds the assets and liabilities on a temporary basis with a view to reselling them. The tool aims to enable critical functions continue to be provided to the clients of the failing institution Article 42: Asset separation tool The purpose of the asset separation tool is to transfer some or all of the assets and liabilities of the institution under resolution to an asset management vehicle. The asset management vehicle will wind down or sell the assets over a medium or long-term horizon, in order to maximise their value. This tool might be employed, for instance, if the market for particular assets is of such a nature that the liquidation of those assets under normal insolvency proceedings could have an adverse effect on financial markets Article 44: The bail-in tool The fourth resolution tool, the bail-in tool, is among the most important changes which the Directive introduces. It enables a resolution authority to write down the value of certain liabilities or convert them into equity, to the extent necessary to absorb losses and recapitalise the institution. The scope of the bail-in tool is wide: in general, it applies to all liabilities, in order of preference, unless they are specifically excluded from its scope. Article 44(2) defines certain classes of liabilities which are to be always excluded from the scope of bail-in: these liabilities include covered deposits, secured liabilities (unless the value of the liability exceeds the value of the security), liabilities that the bank has by virtue of holding client assets, etc. In addition, in exceptional circumstances, where the bail-in tool is applied, the resolution authority may exercise a discretion to exclude or partially exclude further liabilities from the bail-in tool. This can only be done where: (a) it is not possible to bail-in that liability within a reasonable time notwithstanding the good faith efforts of the resolution authority; (b) the exclusion is strictly necessary and is proportionate to achieve the continuity of critical functions and core business lines in a manner that maintains Department of Finance BRRD: Public Consultation Paper December 2014 Page 18

19 the ability of the institution under resolution to continue key operations, services and transactions; (c) the exclusion is strictly necessary and proportionate to avoid giving rise to widespread contagion, in particular as regards eligible deposits held by natural persons and micro, small and medium sized enterprises, which would severely disrupt the functioning of financial markets, including of financial market infrastructures, in a manner that could cause a serious disturbance to the economy of a Member State or of the Union; or (d) the application of the bail-in tool to those liabilities would cause a destruction in value such that the losses borne by other creditors would be higher than if those liabilities were excluded from bail-in. Where an Authority decides that such a discretionary exclusion is necessary, the level of write down or conversion to other liabilities may be increased to take account of such discretionary exclusions. This is subject to the constraint that no creditor shall incur losses greater than would have been incurred if the institution had been wound up under normal insolvency proceedings. In certain cases, where liabilities have been excluded from bail-in and the losses that these liabilities would otherwise have suffered have not been fully passed on to the holders of other liabilities, the resolution fund may contribute to the institution under resolution in order to help absorb these losses. However, the use of the resolution fund in this way is subject to certain conditions being met: (i) (ii) (iii) a contribution to losses of not less than 8% of total liabilities including own funds measured at the time of the commencement of the resolution action has been made by shareholders and creditors through the write down or conversion process; the contribution of the resolution financing does not exceed 5% of the total liabilities including own funds of the institution measured at the time of the commencement of the resolution action; the use of the resolution fund has been approved by the European Commission. Department of Finance BRRD: Public Consultation Paper December 2014 Page 19

20 8.8. Article 45: Minimum requirement for own funds and eligible liabilities (MREL): In order to prevent institutions from structuring their liabilities in such a manner as to impede the effectiveness of the bail-in tool, the Directive requires that institutions must at all times meet a minimum requirement for own funds and eligible liabilities (MREL). This new prudential ratio expresses qualifying equity and liabilities as a percentage of the total liabilities and own funds of the institution. Eligible liabilities shall only be included in MREL if they meet the following conditions: (i) (ii) (iii) (iv) (v) (vi) the instrument is issued and fully paid up; the liability is not owed to, secured by or guaranteed by the institution itself; the purchase of the instrument was not funded directly or indirectly by the institution; the liability has a remaining maturity of at least one year; the liability does not arise from a derivative; the liability does not arise from a deposit which benefits from preference in the national insolvency hierarchy in accordance with Article 108. The MREL for each institution shall be determined by the resolution authority after consulting the competent authority on the basis of at least the following criteria: (i) (ii) (iii) the need to ensure that the institution can be resolved by the application of the resolution tools including, where appropriate, the bail-in tool, in a way that meets the resolution objectives; the need to ensure, in appropriate cases, that the institution has sufficient eligible liabilities to ensure that, if the bail-in tool were to be applied, losses could be absorbed and the Common Equity Tier 1 (CET1) ratio of the institution could be restored to a level necessary to enable it continue to comply with the conditions for authorisation and to continue to carry out the activities for which it is authorised and to sustain sufficient market confidence in the institution; the need to ensure that, if the resolution plan anticipates that certain classes of eligible liabilities might be excluded from bail-in under Article 44(3) or that certain classes of eligible liabilities might be transferred to a recipient in full under a partial transfer, that the institution has sufficient other liabilities to ensure that losses could be absorbed and the CET1 ratio of the institution could be restored to a level necessary to enable it to continue to comply with the conditions for authorisation and to continue to carry out the activities for which it is authorised. Department of Finance BRRD: Public Consultation Paper December 2014 Page 20

21 8.9. Question 2: Timing for the transposition of Section 5 of Chapter IV of Title IV (bail-in tool and minimum requirements for eligible liabilities) Question 2: Timing for the transposition of Section 5 of Chapter IV of Title IV (bailin tool and minimum requirements for eligible liabilities) Article 130 of the BRRD requires that the Directive be transposed by 31 December 2014, in order for it to come into effect on 1 January However, it also provides that Member States need not apply Section 5 of Chapter IV of Title IV (bail-in tool and MREL) until 1 January The reason that the BRRD permits flexibility in the duration of the transition period is to enable Member States to ensure that adequate notification is provided to the holders of eligible liability before the bail-in provisions take effect, and to allow institutions adequate time to build up sufficient liabilities in order to meet the new MREL requirements. In practical terms, if Ireland decides to defer the introduction of bail-in until 2016, the following would be the major effects: (i) should an Irish bank need to be resolved in 2015, eligible liabilities which include senior debt and deposits over 100,000, could not be bailed in (although they might nonetheless suffer losses as a result of the application of one of the other resolution tools); (ii) the resolution authority would have more time to determine the appropriate MREL for banks and banks would have more time to build up a sufficient stock of qualifying liabilities. Member States are reasonably evenly split between those which intend to transpose the bail-in provisions from January 2015, and those which intend to defer transposition until The Minister s preliminary view is that the application of the bail-in tool and MREL provisions should be deferred until January 2016 in order to allow for banks and other market participants to have more time to fully adapt to this aspect of the new resolution regime before it takes effect. Do you have any comments on this matter? Department of Finance BRRD: Public Consultation Paper December 2014 Page 21

22 8.10. Articles 56-58: Government financial stabilisation tools In addition to the resolution tools referred to above, the Directive also provides for what are known as Government financial stabilisation tools. These comprise a public equity support tool and a temporary public ownership tool. These tools can only be used in the very extraordinary situation of a systemic crisis and certain conditions need to be met first including a requirement that 8% of total liabilities including own funds have been bailed in first. The use of Government financial stabilisation tools facility would not be permissible under the SRM regime Question 3: Government financial stabilisation tools Question 3: Government financial stabilisation tools The public equity support tool and a temporary public ownership tool available under Articles are an option for Member States under BRRD. As this option is not available under the SRM Regulation, it is unlikely that it will be transposed into Irish law. Do you have any comments on this matter? Articles 59-62: Write down of capital instruments In addition to the bail-in powers, authorities have the power to write down or convert capital instruments (i.e., non-equity Tier 1 or Tier 2 instruments). It provides the basis for writing down or converting such capital instruments either (i) independently of resolution action or (ii) in combination with a resolution action, where the conditions for resolution are met. The write down of capital instruments can be used independently of resolution tools if its use is sufficient to restore the financial health of the institution, without the need for further resolution action. Alternatively, the write down powers can be applied in conjunction with resolution powers; for example, the write down powers would be first applied to impose losses on holders of capital instruments, and the bail-in tool would then be used to impose losses on eligible liabilities. Department of Finance BRRD: Public Consultation Paper December 2014 Page 22

23 8.13. Question 4: Should the competent authority or the resolution authority be responsible for the decision to write down or convert capital instruments? Question 4: Should the competent authority or the resolution authority be responsible for the decision to write down or convert capital instruments? Article 61(2) of the BRRD provides as follows: "Each Member State shall designate in national law the appropriate authority which shall be responsible for making determinations pursuant to Article 59. The appropriate authority may be the competent authority or the resolution authority, in accordance with Article 32." Consequently, a decision needs to be made to designate either the competent authority (supervisor) or the resolution authority as the responsible body for making the determination that capital instruments should be written down or converted. There a number of arguments in favour of providing the competent authority with such powers: similar powers are already provided to it under the Capital Requirements Regulation; these powers can be used in a pre-resolution scenario and therefore can be used as a means of restoring a bank's capital position and thus avoiding resolution; the supervisor has the best knowledge and insight into the capital position of a bank. On the other hand, however, it could be argued that since write down/conversion powers are directly analogous to bail-in powers and involve forcing losses on holders of certain instruments, the resolution authority is the more appropriate decision maker. The Minister s initial view is that these powers should be exercised by the competent authority. Do you have any comments on this matter? Department of Finance BRRD: Public Consultation Paper December 2014 Page 23

24 8.14. Resolution powers The powers that enable a resolution authority to apply the resolution tools are set out in Articles 63 to Article 63: General powers This sets out a series of specific powers which an authority can exercise singly or in combination. They provide amongst other things the power: to transfer shares or other instruments of ownership by an institution under resolution; to reduce including to zero, the principal amount of or outstanding amount due in respect of eligible liabilities of an institution under resolution; to convert eligible liabilities into ordinary shares; to cancel debt instruments issues by an institution under resolution except for secured liabilities which are excluded from write down or conversion as per Article 44(2) Article 64: Ancillary powers This provides the Resolution Authority with, inter alia, the power to: subject to Article 78 provide for a transfer to take effect free from any liability or encumbrance affecting the financial instruments, rights, assets or liabilities transferred; remove the right to acquire further shares; cancel or modify the terms of a contract to which the institution under resolution is a party or substitute a recipient as a party Article 65: Power to require the provision of services and facilities This gives the resolution authority the power to require an institution under resolution to provide any services or facilities that are necessary to enable a recipient to operate effectively the business transferred to it. Department of Finance BRRD: Public Consultation Paper December 2014 Page 24

25 8.18. Article 66: Power to enforce crisis management measures or crisis prevention measures by other Member States This provision enables the recognition of a transfer of shares, assets, rights or liabilities in a Member State other than the Member State of the resolution authority that makes the decision Article 67: Power in respect of assets, rights, liabilities, shares and other ownership located in third countries This Article provides the resolution authority with powers to handle the transfer, write down or conversion of assets, rights or liabilities located in a country outside of the EU Article 68: Exclusion of certain contractual terms in early intervention and resolution This Article provides that a party to a contract with a bank that is subject to a crisis prevention or crisis management measure cannot deem it to be an enforcement event within the meaning of Directive 2002/47/EC or as insolvency proceedings within the meaning of Directive 98/26/EC, provided that the substantive obligations under the contract continue to be met Article 69: Power to suspend certain obligations This Article provides a resolution authority with the power to suspend for a very limited period of time any payment or delivery obligations in relation to a contract to which the institution under resolution is a party Article 70: Power to restrict the enforcement of security interests This allows the resolution authority to prevent a secured creditor from enforcing its interests in relation to any assets of the institution under resolution for a very short period of time. Department of Finance BRRD: Public Consultation Paper December 2014 Page 25

26 8.23. Article 71: Power to temporarily suspend termination rights This provides a resolution authority with the power to suspend the termination rights of any party to a contract with an institution under resolution for a very limited time, provided that payment and delivery obligations and the provision of collateral continue to be met Articles 73 80: Safeguards These Articles are primarily designed to ensure that when only some of the assets, rights and liabilities of a failing institution are being transferred to another entity, that there are safeguards built in to prevent the splitting of linked liabilities, rights and contracts. These safeguards cover contracts with the same counterparty covered by security arrangements, title transfer financial collateral arrangements, set-off arrangements, close out netting arrangements, and structured finance arrangements. The Directive provides Member States with a degree of discretion in determining what it considers to be appropriate protections Question 5: Safeguards and how appropriate protection should be provided. Question 5: Safeguards and how appropriate protection should be provided. The Minister is conscious of the need to ensure that the following arrangements and the counterparties to them are appropriately protected: i. security arrangements, under which a person has by way of security an actual or contingent interest in the assets or rights that are subject to transfer, irrespective of whether that interest is secured by specific assets or rights or by way of a floating charge or similar arrangement; ii. title transfer collateral arrangements under which collateral to secure or cover the performance of specified obligations is provided by a transfer of full ownership of assets from the collateral provider to the collateral taker, on terms providing for the collateral taker, to transfer assets if these specified obligations are performed; Department of Finance BRRD: Public Consultation Paper December 2014 Page 26

27 iii. set-off arrangements under which two or more claims or obligations owed between the institution under resolution and a counterparty can be set off against each other; iv. netting arrangements; v. covered bonds; vi. structured finance arrangements, including securitisation and instruments used for hedging purposes which form an integral part of the cover pool and which according to national law are secured in a way similar to the covered bonds which involve the granting and holding of security by a party to the arrangement or a trustee, agent or nominee. The Minister has asked that this issue be closely examined in order to ensure we get it right. In this regard, there are ongoing discussions with the Central Bank and the Attorney General s Office on this matter. Do you have any comments on this matter? Articles 85-86: Right of appeal and rights to challenge decisions Article 85 provides the option for Member States to require resolution authorities to obtain judicial pre-approval before taking a crisis prevention measure or a crisis management measure Question 6: Ex-ante judicial approval Question 6: Ex-ante judicial approval Article 85 provides that Member States may require that a decision to take a crisis prevention measure or a crisis management measure is subject to ex-ante judicial approval. Crisis prevention measures are pre-resolution measures involving the exercise of powers to direct removal of deficiencies or impediments to recoverability under Article 6(6), the exercise of powers to address or remove impediments to resolvability under Article 17 or 18, the application of an early intervention measure under Article Department of Finance BRRD: Public Consultation Paper December 2014 Page 27