Member Article

On 6 June 2012, the European Commission announced new crisis management measures to deal effectively on a cross border basis and in a harmonised manner with any future bank crisis. The new crisis management measures take the form of a proposal for a directive establishing a framework for recovery and resolution of credit institutions (and potentially, certain related group companies) and investment firms (the Proposal) and aim to provide member states with common and effective tools to address bank crises swiftly and effectively and to minimise costs to the taxpayer.

Resolution Authorities
The Proposal requires that EU member states establish a resolution authority and confer on that resolution authority, the powers to ensure that the objectives of the framework are carried out. In addition, the European Banking Authority (EBA) will have significant input on the application of the Proposal including proposing technical guidance and liaising with national resolutions authorities and 3rd country authorities in the context of, amongst other things, the cross border elements of the Proposal.

Examples of appropriate resolution authorities include national central banks, financial supervisors, ministries of finance or special authorities (but not necessarily the relevant existing authorities).

Main Focus of Proposal
The Proposal focuses on the following three areas:

• Prevention: 
  Banks will be required to draw up recovery plans to address any deterioration in its financial situation together with a resolution plan to address a situation whereby that bank is no longer a viable entity. These plans will have to address cross border elements of a particular bank/group and will be approved by the relevant national resolution authority/(ies).

Resolution authorities shall assess the resolvability of groups and may require certain measures to take place in order to facilitate a group’s resolvability e.g. changes to legal or operational structures, introducing service agreements and/or restricting or preventing the development of new business lines or products. Intra-group support agreements may also be entered into in an attempt to stem a financial crisis.

• Early Intervention:
  Early intervention powers will be triggered when a bank does not or cannot meet capital requirements and direction may be given to that bank to implement measures set out in the recovery plan referred to above. A special manager may also be appointed to restore the financial situation of the bank.
  

• Resolution:
  If the prevention and early intervention measures are insufficient to save a bank, harmonised resolution tools and powers will apply for all EU member states. The main Resolution Tools include:
  
  
  
  • Sale of Business Tool – this tool will enable resolution authorities to effect an outright sale of a bank on commercial terms without the need to engage with shareholders or comply with procedural requirements that might otherwise apply;
    Bridge Institution Tool – this would involve the identification of “good” and “bad” bank assets and the transfer of such assets to a bridge entity pending sale at a future date;
    
  • Asset Separation Tool – this would involve the transfer of under performing or impaired assets to an asset management vehicle;
    
  • Bail-in Tool – this would involve the recapitalisation of a bank and dilution of shareholder claims, imposition of write downs on existing debt claims, and the conversion of debt claims into equity. It appears that in order to be able to avail of this Tool, certain minimum requirements regarding balance sheet liabilities will have to be met.  

The Resolution Tools can be used singly or in conjunction. National authorities will however be able to retain specific national tools and powers to deal with ailing banks in so far as such powers are compatible with the principles and objectives of the framework.

Other Areas of Interest

A resolution fund will be required in each member state to fund resolution tools. Deposit Guarantee Schemes may be used to contribute to resolution funds.
The Proposal recognises the cross border nature of many financial institutions and to that end, it provides for national authorities to co-operate in the preparation and supervision of recovery and resolution plans. The EBA will have a key role in this regard including liaising with national resolution authorities, preparing and issuing technical guidelines, providing guidance for cross border resolution plans and liaising with 3rd country authorities.
Interaction of Proposal with Central Bank and Credit Institutions (Resolution) Act 2011
Many of the proposed intervention powers in the Proposal reflect the existing powers in domestic resolution legislation for troubled financial institutions i.e. the Central Bank and Credit Institutions (Resolution) Act 2011. 

It is worth noting, however, that there are a number of interesting elements to the Proposal which provide for even greater intervention on the part of the resolution authorities. Examples of such increased powers of intervention include:

Power to effect on outright sale of the business – this is something new in the Irish context and provides for a streamlined sales process disapplying many of the normal steps required for such a sale.
Power to disregard certain provisions of company law directives that protect shareholders and creditors of credit institutions – the Proposal states that the rights of shareholders to participate in decisions regarding maintenance and alteration of capital should be derogated from where such provisions would hamper the swift and effective action and use of resolution tools. It also states that similar derogations should also be provided for in relation to takeover rules.
Power of the resolution authorities to exercise all resolution powers such as taking control of the institution and exercising all powers of the shareholders, the power to cancel debt instruments, the power to reduce the principal amount of eligible liabilities and to remove or replace senior management. 
Implementation Dates
The Directive should be transposed by 31 December 2014 but the “Bail-In Tools” provisions will have a longer transposition period until 1 January 2018 to allow for implementation of new capital requirements under the Capital Requirements Directive.
 
To access the Proposal, please click here. For further information on this article, please contact Peter Walker at [email protected] or Louise McNabola at [email protected].

 

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