On 13 November 2015, the Council of Ministers approved and sent for advice to the Council of State two draft royal decrees that complete the implementation of Directive 2014/59 establishing a framework for the recovery and resolution of credit institutions and investment firms ("BRRD").
These decrees incorporate the principles of "bail-in" and provisions relating to group recovery and group resolution into the act of 25 April 2014 relating to the status and control of credit institutions ("Banking Act").
The context
The Banking Act implemented most of the European provisions on the prudential banking regime resulting from CRD IV into Belgian law. At that time, the BRRD had not yet been enacted. It was only enacted on 15 May 2014.
Two main sections of the BRRD were not yet implemented: the bail-in mechanism and resolution within a group. Those elements will be implemented very soon by way of royal decrees to be adopted pursuant to article 387 of the Banking Act and by way of legal provisions passed under an act containing various financial provisions, the draft of which is currently pending in Parliament (draft dated 17 November 2015, Parl. Doc 54-1459/001).These provisions should be passed quickly and should enter into force on 1 January 2016.
Group resolution plans
The draft act containing various financial provisions notably amends article 229 of the act of 25 April 2014 in order to remove the possibility of exempting a credit institution from a resolution plan, except for some institutions that are part of a federation under article 239 of the Banking Act. The new provision will enable the resolution authority to derogate from the requirements relating to the content of the resolution plan insofar as "such a derogation is justified having regard to the impact that the failure and the winding up of the credit institution under normal insolvency proceedings would be likely to have on financial markets, on other credit institutions, on funding conditions, or on the wider economy" (article 229, § 4, new, paraphrasing the wording of Article 4.1, BRRD).
The organisation of a group resolution is the subject of one of the two draft royal decrees. The BRRD organises a complex system of cooperation between the resolution authorities in order to arrive at, to the extent possible, a group resolution plan as a result of "a joint decision of the group-level resolution authority and the resolution authorities of subsidiaries" (Article 13.4 BRRD). The national interests at stake being very significant, it is not excluded that this ambition could encounter significant difficulties. Arriving at an early solution to obstacles to a joint decision will considerably test the European institutional framework which demonstrated, during the crisis of 2008, a significant lack of cooperation between competent authorities.
Bail-in – MREL
The provisions relating to bail-in need to be regulated by the draft royal decrees. They will identify "eligible liabilities" (liabilities other than those referred to in Article 44.2 BRRD), which means liabilities of the institution which, with the institution's own funds (together the MREL, Article 45 BRRD), can be reduced by decision of the resolution authority if so required (Article 43.3 BRRD) and if this does not result in a less favourable position for the holders of those liabilities than if the resolution authority had let the institution fail under ordinary law ("no creditor worse off").
The provisions of the BRRD relating to the minimum requirement for own funds and eligible liabilities ("MREL") should, in principle, be applicable from 1 January 2016 onwards (Article 130.1 BRRD). Resolution actions applicable to liabilities composing the MREL (reduction and conversion of eligible liabilities) should ensure recapitalisation consistent with the prudential requirements that are applicable to a banking entity following the execution of these resolution actions. The draft regulatory technical standards of the EBA of 3 July 2015 (EBA/RTS/2015/05) specify the level of MREL that would be imposed on credit institutions.
How these requirements will be applied at the group level raises complex questions, and there is very little guidance from the European authorities regarding how these requirements will have to be met in a consolidated perspective.