On 15 May 2014, the European Parliament and Council adopted a directive "establishing a framework for the recovery and resolution of credit institutions and investment firms". On 15 July 2014, a regulation was adopted to implement these mechanisms in the context of the banking union. The directive notably requires the adoption of resolution plans and enables the resolution authority to use resolution tools to resolve the failure of credit institutions and hence avoid recourse to public financial support. The financial burden of the efforts required to resolve the failure of such an institution will primarily be borne by the shareholders and unsecured creditors.
New legal framework
Directive 2014/59 of 15 May 2014 (the "BRRD") completes the tool kit to protect the financial system and attempts to limit the impact of the crisis on public finances. As a continuation of the creation of the single supervisory mechanism (SSM), Regulation (EU) No 806/2014 of 15 July 2014 establishes a single resolution mechanism (SRM), a single resolution board (SRB) and a single resolution fund (the "SRM Regulation"). The Belgian legislator has made an early implementation of numerous BRRD provisions in the act of 25 April 2014 on the legal status and supervision of credit institutions (the "Banking Act") (see Eubelius Spotlights June 2014).
The BRRD establishes a minimum set of uniform rules and procedures for the recovery and resolution of credit institutions and investment firms in the European Union. The BRRD also has important implications at the level of the group that controls such institutions. The EU branches of non-EU credit institutions may be subject to resolution measures in application of a resolution implemented in the home country, or pursuant to an independent measure taken within the Union.
Resolution plan
A resolution authority must be established in each Member State (for Belgium, see Eubelius Spotlights June 2014). The national authority or the SRB, as the case may be, will adopt a resolution plan for each establishment (Article 10 BRRD). Simplified obligations may be adopted for institutions presenting low systemic risks, depending on the potential impact of their failure on the whole economy (Article 4).
As part of developing the resolution plan, the resolution authority, after having consulted the competent supervisory authorities, will notify the institution of the impediments to resolution that it has identified and will request that the institution proposes measures to address them. If the institution does not respond adequately within four months, the resolution authority will require, in a reasoned decision, the implementation of structural measures. This decision is subject to appeal (Article 17).
For each institution which is part of a group subject to consolidated supervision, a group resolution plan will be developed by the resolution authority situated in the Member State where the consolidating supervisory authority is located, together with the subsidiaries' authorities and after consultation with the resolution authorities of the relevant and significant branches (Article 11). A resolution authority that identifies impediments to resolvability will notify and, if necessary, require measures at the group level (Article 18).
Resolution mechanism
If the institution is "failing or likely to fail" (Article 32), four resolution tools are at the disposal of the resolution authority and may be applied individually or in any combination: the forced sale of business tool, the bridge institution tool, the asset separation tool and the bail-in tool. The implementation of these instruments is subject to various principles. The shareholders must first bear losses; creditors must then absorb losses after the shareholders, according to the priority of their claims, it being understood that their situation may not be worse than it would have been in the context of an insolvency proceeding ("no creditor worse off") (Article 34). The implementation of a resolution tool entails a "just, prudent and realistic" prior valuation of assets and liabilities by an independent third party (Article 36).
Bail-in tool
The bail-in tool must enable the resolution authority to recapitalise the institution, to convert some debt instruments into equity and to reduce the principal amount of the institution's claims to ensure its "internal" rescue (Article 43(2)).
A set of specific claims is excluded from the scope of the bail-in tool and, for natural persons and SMEs, a lien is created on their bank deposit (Article 108). In exceptional circumstances, the resolution authority may exclude certain other liabilities (Article 44).
Intervention of a resolution fund and public intervention
The BRRD establishes a "European system of financing arrangements" which includes all national financing arrangements established by Member States (Articles 99 and 100). These arrangements will be completed, as part of the banking union, by a single resolution Board (SRB) pursuant to the SRM Regulation. These arrangements may be used by the resolution authorities to ensure the effective application of the resolution tools (Section 101). These arrangements are funded by institutions that fall within the scope of the BRRD (Article 103).
The BRRD expressly allows Member States to provide extraordinary public financial support in the event of the "very extraordinary situation of a systemic crisis" (Article 37(10) and Article 56), in compliance with the state aid rules.
The implementation of the financing arrangements and the implementation of public financial support are subject to the prior bail-in by the shareholders and, where appropriate, the relevant creditors, in order to absorb the existing losses up to at least 8% of the institution's total liabilities (Article 37(10) and Article 43(5)).
The authorities will supervise the existence of a sufficient mass of "eligible liabilities", namely the liabilities that may contribute to a bail-in (Article 45). This supervision will cover the "asset encumbrance ratio", which is currently under consideration in Belgium.
Entry into force and prospects
The BRRD must be implemented into national law no later than 31 December 2014 and the national provisions will enter into force on 1 January 2015, except for the provisions relating to the bail-in tool, which will enter into force on 1 January 2016 at the latest (Article 130).
Currently, the Banking Act does not yet provide for the bail-in tool. The Act empowers the Government to take all necessary measures for the adoption thereof by royal decree (article 255 §2 of the Banking Act).
The question is whether the bail-in mechanism will release public finances from the weight of the implicit state guarantee of institutions considered by markets as being "too important to fail". The answer will become apparent as from 2016, in possible adjustments to these institutions' credit ratings.