1.   Resolution as an alternative to liquidation in the event of bank failure

The European framework now offers two possible ways of dealing with bank failure. Thus, bank failure can either lead to liquidation under the bankruptcy law applicable in the jurisdiction concerned or to resolution. Orderly resolution of the bank implies the activation of several tools including bail-in. Bail-in means the internal bail-in (loss absorption and recapitalization) of the bank through the contribution of funds from the bank’s shareholders and creditors in strict compliance with the NCWO principle. This principle implies that a creditor under the implementation of the resolution could not have to suffer losses greater than those it would have had under the strict application of the bank liquidation in accordance with the applicable bankruptcy law.

Inevitably, there are several legal, organizational and financial obstacles to the implementation of the resolution. These difficulties are all the greater when the failed institution:

  • Is important with a possible regional or global systemic dimension.
  • Is established in several countries with several cross-border legal issues.
  • Has several critical functions important for the functioning of financial market infrastructures in particular or for the functioning of financial and economic systems in general.
  • Has insufficient debt in its liabilities with subordination clauses allowing conversion into capital (so-called bail-in clause) in case of bankruptcy.

2.   The importance of preparing for bank resolution at the heart of BRRD2

The resolvability assessment process is a key element of resolution planning in that it ensures that the preferred resolution strategy can be implemented effectively and that barriers to resolution are removed.

Resolution authorities are responsible for resolution planning and, eventually, for the orderly resolution of institutions. BRRD2 requires resolution authorities to assess the resolvability of an institution or group based on the following steps:

  • An assessment of the feasibility and credibility of winding up the institution or group under normal insolvency conditions.
  • The selection of a preferred resolution strategy for the evaluation.
  • Assessing the feasibility and credibility of the chosen resolution strategy.

3.   The objective of the EBA resolvency guidelines

These guidelines aim to implement existing international standards on resolvability and to take stock of the best practices developed so far by EU resolution authorities on resolvability issues. These include requirements for improving resolvability in the following areas:

  • Operational continuity in resolution.
  • Access to financial market infrastructure.
  • Funding and liquidity for resolution.
  • The execution of the bail-in.
  • Commercial reorganisation and communication on resolvability.

However, the guidelines do not cover all issues related to resolution either because:

  • These are covered elsewhere. For example, the calibration and eligibility of loss-absorbing capacity through MREL is largely covered in the BRRD2.
  • These issues will be further specified in future EBA texts, including issues relating to the transferability of assets in the event of resolution.

These guidelines will be regularly updated as progress is made on relevant policy issues at both international and EU level. The guidelines will be the political reference point for authorities and institutions on issues related to resolvability in the EU. This will help to ensure consistent progress on resolvability for all institutions and facilitate resolvability work for cross-border groups and its follow-up in resolution colleges.

These guidelines also aim to define the resolvability requirements for institutions or resolution groups for which the strategy involves the use of resolution powers as opposed to a winding-up procedure. And some of the requirements set out in these guidelines may be specific to one resolution tool (e.g. a bail-in manual) and the extent of their application to other resolution tools is left to the discretion of the resolution authority.

Similarly, and for the sake of proportionality, these guidelines are not mandatorily applicable to institutions, banking groups or resolution groups benefiting from the simplified obligation regime, for which the extent of their possible application is left to the discretion of the competent resolution authorities.

The aim is to publish the final guidelines by the end of the first half of 2021. The institutions and authorities affected by these guidelines must comply fully by 1 January 2024.

4.   The guideline corpus

The document specifies the steps that institutions, for which the preferred bankruptcy management strategy is not liquidation, should take to improve their resolvability.

BRRD2 and the EBA RTS on resolution planning specify that obstacles should be identified in at least the following categories:

  • Structure and operations:
    • Operational continuity.
    • Access to financial market infrastructure.
    • Governance in resolution planning.
  • Financial resources:
    • Loss Absorption Capacity (MREL).
    • Funding and liquidity in resolution.
  • Information:
    • Management information systems.
    • Information systems for evaluation.
  • Cross-border issues:
    • Cross-border recognition.
    • Coordination between resolution authorities.
  • Implementation of the resolution:
    • Implementation of the lease in.
    • Restructuring of the entity in resolution.
    • Governance in the implementation of the lease in.
    • Communication around the lease in.
  • Legal issues:
    • Complementing the existing legal framework by implementing recently available international standards.
    • Clarification of the definition of resolvability for institutions and authorities.
    • Bringing the guideline into the EU legal framework defined by BRRD2.

5.   References


Abbreviations and glossary

NCWO: No creditor Worse than Off liquidation

IMF: Financial Market Infrastructures

EBA: European Banking Authority