A new European framework for resolution cases: the BRRD

Pierre-Arnaud Proux Task Force Financial Crisis DG Competition European Commission 11 September 2015

A new European framework for resolution cases: the BRRD

1. The control of State aid during the financial crisis

2. A new comprehensive framework: the BRRD

3. Implementation of the BRRD and upcoming challenges

This presentation reflects the view of the author and does not express the view of the European Commission.

The control of State aid during the financial crisis

1. An unprecedented and unexpected financial crisis…

2. … and the massive bail-outs by governments

- Recapitalisations and asset relief measures: € 671 billion (5.4% of EU GDP)

- Total amount of State guarantees and liquidity support granted to EU banks: €1288 billion at the peak in 2009 (10.3 % of EU GDP)

- Massive impact on public finances (IE, SI, ES, UK)


3. The enforcement of EU State aid rules, the only (partially) available tool

- Article 107(1) Treaty Functioning of the European Union ("TFEU") notion of State aid and general prohibition

- Guidelines on State aid for rescuing and restructuring firms in difficulty of 2004 (200 companies o/w Royal Mail, PSA, Austrian airlines) not

applicable

- Article 107(3)(b) TFEU: " the following aid may be considered to be compatible with the internal market: aid to promote the execution of an important project of common European Interest or to remedy a serious disturbance in the economy of a Member State".

- Advantage: exclusive competence of the Commission under the Treaty, level-playing field, credible threat for banks, enforceable beyond European Court of Justice


4. But never used… need to develop new guidelines

- 3 pillars proportionality, appropriateness and necessity


5. Proportionality of the aid: burden sharing and limitation of the aid to the minimum

- Could the same results have been achieved with less aid?

- The aid must be limited to the minimum necessary, banks and stakeholders are required to participate.

- 2008: the State should be remunerated (receive rights in the event of recapitalisation or remuneration for the guarantees)

- 2009: restructuring communication: banks should first use their own resources to finance restructuring. This may involve, for instance, the sale of assets.

- 2013: mandatory write-down or conversion of subordinated debt holders in case of capital support, no creditor worse-off principle (NCWOP)


6. Appropriateness of the aid: limitation of competition distortions

- Could the same results be achieved with less distortive instruments?

- 2008: behavioural commitment, reduction of balance sheet size

- 2009: adequate remuneration price for State aid, structural measures – divesture and reduction of business activities – avoiding the use of State aid to fund anti-competitive behaviour


7. Necessity of the aid: return to viability

- Is the result achieved by the aid?

- Banks should return to viability, otherwise liquidation.

- 2008: Restructuring plan to be submitted within 6 months

- 2009 restructuring communication: guideline for the redaction of the restructuring plan

- 2013: restructuring plan necessary before the approval of the aid


1. An important element of the Banking Union

- Single rulebook: an important and comprehensive regulatory effort : CRR, DGSD, BRRD, but also regulation of rating agencies, etc…

- Single Supervision Mechanism : the main task of the ECB and the national supervisors, working closely together within an integrated system, is to check that banks comply with the EU banking rules and to tackle problems early on.

- Single Resolution Mechanism: the mechanism will allow bank resolution to be managed effectively through a Single Resolution Board, financed by the banking sector.

A new comprehensive framework: the BRRD

2. Ambitious objectives art 31(2)

- to ensure the continuity of critical functions;

- 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 extraordinary public financial support;

- to protect depositors covered by DGSD and investors covered by Investor Compensation Scheme Directive;

- to protect client funds and client assets.


3. Principles of the BRRD art 34(1)

- Shareholders bear first losses;

- Creditors bear losses in order of priority of their claims under normal

insolvency proceedings (NCWOP);

- Management to be replaced (unless needed for resolution);

- Management to assist in resolution;

- Those responsible for bank’s failure made liable;

- Creditors of same class treated equitably;

- No creditor worse off [than under insolvency] principle’;

- Covered deposits are fully protected;

- Resolution action taken in accordance with BRRD’s safeguards.


4. Resolution triggers and interaction with State aid rules

- Article 32(4)(d) an institution shall be deemed to be failing or likely to fail – and thus put in resolution - if extraordinary public financial support (State aid) is required except:

• State guarantee to back liquidity provided by central banks;

• State guarantee of newly issued liabilities;

• Precautionary recap.

- State aid rules continue to apply if extraordinary public financial support is granted (independently of resolution) SA decision to check compliance

with the BRRD


5. Enhanced powers compared to State aid rules but similar tools

- Early intervention and resolution planning:

• Enhanced supervisory power if the bank does not meet or is likely not to meet the prudential requirements

• Recovery (drafted and submitted by banks) and resolution plans (drafted by resolution authorities) are designed ex-ante (identification of critical functions removal of impediments)

- Resolution tools have already been used during the financial crisis under State aid rules controls:

• Sale of business tool

• Bridge institution tool

• Asset separation tool

• Bail-in tool (01.01.2016 at the latest)


• 6. Focus on bail-in tool: enhanced requirements


Implementation of BRRD and upcoming challenges

1. First test in 2015: resolution of Panellinia Bank (Greece) (sale of asset), and Banca Romagna (Italy)

- 2 small banks with a relatively simple business model

- Difficult choice of an adequate resolution tool

- Short term funding constraint (no fund available)


2. Challenges ahead

- A partial implementation in the EU: resistance of some Member States?

- Reduced flexibility?

• Tools

• Procedure

- Coordination of multiple actors in a limited period of time

- Resolution authorities will need to determine the Minimum required of eligible liabilities (MREL) to ensure that there is sufficient loss-absorbing capacity


3. Implementation of the bail-in tools

- A procedure to be tested

- Implementation of article 36 valuation in a resolution framework

• Is there time for an independent valuation?

• Or for several valuations due to multiple objectives of the valuation?

• Consistency of the article 36 with other valuations?

- Risk of legal challenges

- Hierarchy of claims: necessity to adapt national legislations

4. Impact on the balance sheet structure of credit institutions

- Study by Paolo Santella, Sebastiano Laviola and Giuseppe Loiacono:

L’Unione bancaria e il possibile impatto dei nuovi strumenti di risoluzione delle crisi: un’analisi empirica, forthcoming 2015, Bancaria

- Compares the liability side of banks in the euro area and the UK, and analyses the effect of the new framework for senior unsecured debt holders

- Their main finding (based on data as of 31/12/2013) is that in some Member States senior unsecured creditors would have to contribute before the resolution fund can intervene


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Economy & Finance

A new European framework for resolution cases: the BRRD