Columbia Law School
Sky Blog
2014 was a very active year for financial regulation in the European Union (EU). There was a push to finalise much of the outstanding primary legislation on the regulatory reform agenda in advance of the European Parliamentary elections in May 2014. This resulted in the adoption of many EU Regulations and Directives in the first half of the year. However, much still remains in the in-box of EU legislators and regulators. Most of the legislation that has been adopted envisages a significant amount of further legislation and rulemaking regulation in the form of delegated regulations to be adopted by the EU Commission, much of it to comprise regulatory technical standards (RTS) and implementing technical standards (ITS) to be drafted by the European Supervisory Authorities (the ESAs), being the European Securities and Markets Authority (ESMA), the European Banking Authority (the EBA) and the European Insurance and Occupational Pension Authority (EIOPA). Therefore, even though the EU regulatory reform programme is now beginning the transition from legislation to implementation, a lot remains on the regulatory agenda into 2015 and beyond (with some measures not due to be implemented until 2025).
A summary of two of the main developments during 2014 and the likely key areas of activity during 2015 follow below: (1) implementation of the Bank Recovery and Resolution Directive (BRRD), and (2) implementation of the single resolution mechanism (SRM).
1. BRRD IMPLEMENTATION
The BRRD[1] came into force in July 2014. The majority of the BRRD’s provisions were required to be implemented into EU member states’ national laws by 1 January 2015. The exceptions to this are the provisions relating to the bail-in tool, which are required to be implemented by 1 January 2016 at the latest. However, the UK Treasury has indicated that it will apply all of the provisions of the BRRD in the UK from 1 January 2015, including the bail-in requirements, with the exception of the minimum requirement for eligible (or bail-inable) liabilities (MREL), and the requirements for instruments governing bail-inable liabilities to contain contractual agreement/acknowledgement by the creditor that the liability could be subject to bail-in. The BRRD requires EU credit institutions and certain investment firms to prepare recovery plans and for their relevant competent authorities to prepare resolution plans for such institutions based on information and other data provided to the authority by such firms. It also provides a mechanism for co-operation between resolution authorities in applying resolution tools and powers to cross-border groups. The BRRD also gives powers to competent authorities to take certain early intervention measures to seek to prevent a firm from going into resolution and, where a firm does need to be resolved, sets out resolution tools and powers available to authorities, namely the sale of business tool, the bridge institution tool, the asset separation tool and the bail-in tool. Various general principles are to govern the use of such bail-in powers, including that the firm’s shareholders should bear the first loss, following which creditors should then bear losses in accordance with their order of priority, and no creditor should incur greater loss than would have been the case if the firm had been wound up under a normal insolvency.
The bail-in power gives resolution authorities the power to determine when the firm has reached the point of non-viability and enables them to impose losses on certain creditors by writing their claims down or off or converting them into equity. The power is applicable to a wide range of unsecured liabilities of the firm with certain limited exceptions. The BRRD also requires firms to maintain a minimum amount of own funds and “eligible liabilities” (being liabilities that can be bailed-in under the bail-in tool) and referred to as the MREL. The EBA must produce RTS in respect of the criteria to be used by competent authorities for determining the MREL for individual firms, and it produced a consultation paper setting out draft RTS in this respect in November 2014.[2]
The EBA’s draft RTS were based in part on recommendations published by the Financial Stability Board (FSB) in November 2014[3] on the adequacy of the loss-absorbing capacity of global systemically important banks (G-SIBs). The FSB’s proposals include that the minimum total loss-absorbing capital (TLAC, which is broadly equivalent to the MREL) to be held by a G-SIB should be in the region of 16 to 20% and at least twice the Basel III tier 1 leverage ratio requirement.
In relation to the provisions regarding contractual recognition of bail-in, the EBA must develop draft RTS to determine the contents of the required contractual term, and these must be submitted to the EU Commission by 3 July 2015. It produced a consultation paper with draft RTS in this regard in November 2014.[4] The EBA has also produced various other draft RTS required under the BRRD to be delivered to the EU Commission during 2015, and work will continue on finalising these in 2015.
In the UK, we expect to see the Treasury’s proposals on the required levels of MREL in the first half of 2015, in order that these can be implemented by the end of 2015, as required. In the meantime, it is proposed in the draft version of the UK Bank Recovery and Resolution Order 2014,[5] published in November 2014 that, as from 1 January 2015, the Bank of England will be empowered to set a minimum requirement for own funds and eligible liabilities on an institution-by-institution basis. The Prudential Regulation Authority (the PRA) in the UK is currently considering whether the provisions on contractual recognition of the bail-in tool should be implemented with effect from January 2015 for contracts such as regulatory capital and other debt market instruments, and as from January 2016 for all other relevant liabilities. It acknowledges, though, that the publication of the final draft RTS by the EBA by July 2015 may entail some changes to its rules in this regard.
2. SRM IMPLEMENTATION
Closely coupled with the BRRD is the European SRM established by the SRM Regulation.[6] The SRM applies to all banks that are subject to the Single Supervisory Mechanism (SSM), and the SSM applies to all banks in the Eurozone and in certain other participating member states – around 6,000 of them – and establishes the European Central Bank (the ECB) as the single bank supervisory authority. The SRM further develops the “single rulebook” concept of the SSM. It does this by adopting recovery and resolution mechanisms that essentially mirror those in the BRRD and by establishing a Single Resolution Board (SRB) as the main resolution authority for all banks subject to the SSM. As the UK has opted out of the SSM, banks established in the UK will not be subject to the SRM.
The SRB (which will consist of a member appointed by each SSM member state, as well as an Executive Director, Deputy Executive Director and a member appointed by each of the EU Commission and the ECB) will determine whether the conditions for resolution of an individual bank have been met, and if so will recommend to the EU Commission that the bank be put into resolution, as well as the resolution tools that should be applied, and how the Single Bank Resolution Fund (SBRF) should be used. The EU Commission will then have the final decision as to whether or not to place the bank into resolution and what tools to use.
The SBRF will be funded by bank contributions in a similar way to the national resolution funds under the BRRD, with a similar target fund level and time frame for reaching it. In terms of the interaction between the BRRD and the SRM, where a resolution procedure would affect only banks governed by the SSM, then the SRM would apply. Where a resolution procedure would affect only banks outside the scope of the SSM, then the BRRD would apply. Where a resolution procedure would affect both banks within and outside the scope of the SSM, then the BRRD will apply, with the SRB representing the national resolution authorities of the SSM–participating member states.
The majority of the provisions of the SRM Regulation will apply from 1 January 2016. From 1 November 2014, the EU Commission and the EU Council have had the power to adopt delegated and implementing acts, respectively, in relation to contributions to the funding of the SBRF. The SRB became fully operational on 1 January 2015, and the EU Commission is required to publish an evaluation report by 31 December 2018, and every five years after that, on the application of the SRM Regulation.
ENDNOTES
[1] Directive 2014/59/EU, http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014L0059&from=EN.
[2] https://www.eba.europa.eu/documents/10180/911034/EBA+CP+2014+41+(CP+on+draft+RTS+on+MREL).pdf.
[3] Adequacy of loss-absorbing capacity of global systemically important banks in resolution,
http://www.financialstabilityboard.org/wp-content/uploads/TLAC-Condoc-6-Nov-2014-FINAL.pdf.
[5] http://www.legislation.gov.uk/ukdsi/2014/9780111123782/contents.
[6] Regulation (EU) No. 806/2014, http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014R0806&from=en.
This is an excerpt from a full piece entitled “From EMIR to Eternity? The EU Financial and Regulatory Agenda Into 2015 and Beyond,” published by Morrison & Foerster on January 6, 2015 and available here.