EU Bank Recovery and Resolution Directive 'Triumph or tragedy?'
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EU Bank Recovery and
Resolution Directive
‘Triumph or tragedy?’
Hot Topic: European FS
Regulation
January 2014
A new era for crisis
management
1. Overview It clearly establishes the principle that
On 11 December 2013, the European private investors in banks must pick up the
Parliament and the Council reached first costs for banks’ poor risk management,
agreement on the Bank Recovery and before EU countries and their taxpayers are
Resolution Directive (BRRD). This called on for financial support. By doing
important piece of legislation sets so, it directly addresses the question of
a common framework across all 28 moral hazard, through increasing market
countries of the European Union (EU) discipline over banks’ activities and limiting
on how to deal with troubled banks. the risks they take on.
The BRRD will be implemented in the
The BRRD still leaves open the possibility
Eurozone countries through the Single
of temporary public intervention to
Resolution Mechanism (SRM). SRM
respond to systemic threats to the
is one of the three important pillars –
banking and financial markets more
together with the Single Supervisory
widely, but on a very limited basis. Any
Mechanism (SSM) being built by the
such intervention would be subject to the
ECB, and a Single Deposit Guarantee
EU’s rules governing state aid.
Scheme (DGS) - which the Member
States of the Eurozone agreed should be Having agreement on the BRRD sets the
the foundation of their Banking Union. stage for the Eurozone countries to agree
on how the SRM should work.
The BRRD is likely to come into force on
1 January 2015, so banks need to begin
analysing the impacts now. This measure
3. Critical elements
will have important implications, even of the BRRD
for healthy institutions – changing the
nature and availability of equity and • Banks will have to prepare and
debt funding, drawing more supervisory maintain recovery plans, establishing
scrutiny of organisational structures and how they would deal with problems –
recovery planning, and adding more these plans will be subject to ongoing
compliance costs. and attentive scrutiny by regulators.
• National resolution authorities will
2. Why is the BRRD develop resolution plans for individual
firms, identifying the most appropriate
important?
resolution tools to be used in each case;
The BRRD sets common rules for when
these exercises are very likely to lead to
and how authorities will intervene to
supervisors reassessing firms’ recovery
support troubled banks. It foresees a
plans, and perhaps also their business
phased approach to supporting such
models.
banks, encompassing precautionary,
early intervention and measures • Bailing-in investors and creditors will
designed to prevent bank failures. Where be the norm – investors and creditors
failure is unavoidable, the BRRD aims representing 8% of a bank’s total
to ensure orderly resolutions, even for balance sheet will have to be bailed-in
banks operating across national borders. before resolution authorities can access
other forms of stabilisation funding.
Along with the revisions to the DGS This requirement will create a different
Directive, this further harmonises the dynamic between the banks and their
approach to protecting retail depositors shareholders, and may impact the way
in the EU. in which banks raise funding.
2 PwC European FS Regulation
4. Controversial
elements of BRRD?
• It adopts new common EU-wide
rules for how costs of bank
rescues will be met – banks will
have to bail-in bank creditors
before public funds can be used
for rescuing an institution, from
1 January 2016.
• It establishes a (limited) new
source of resolution funds – to be
self-funded by the industry over compliance and the potential impact on Despite progress on BRRD, the potential
10 years. depositors outside the EU. for ‘tragedy’ remains, particularly in the
• Depositors with eligible deposits short term, because the BRRD’s bail-in
The European Banking Authority provisions will not be mandatory until 1
of up to €100k will not be (EBA) is expected to propose technical
bailed-in and senior debt holders January 2016. The resolution funds are
standards on the last two topics. designed to be built up over a 10-year
must be bailed-in before any
depositors. transition period, so initially only limited
6. Our perspective funding will be available. Even at the
• It sets minimum requirements ‘Triumph’ and ‘tragedy’ each represent end of 10 years, such a fund is unlikely to
for banks’ own funds and eligible powerful, end-of-a-spectrum extremes. be able to handle large or multiple bank
liabilities (MREL) based on the If BRRD is to be a ‘triumph’, it will be failures without further backstop.
bank’s size, risk, business model because its explicit bail-in hierarchy
and resolution approach. succeeds in creating a more certain and 7. Impact for banks
orderly legal framework for resolution. Banks can expect these changes to:
The changes are explicitly designed to
address the issue of moral hazard in • require all banks in the EU to prepare
5. The main concerns banks: the presumption that taxpayers recovery and resolution plans – details
Banks will have to make significant will ultimately bail-out banks, socialising will be forthcoming from the EBA,
contributions to the new resolution fund losses from excessive risk-taking. and from national/regional competent
each year, based on the size of covered Under BRRD, any future resolution authorities;
deposits – this may have a wider impact of a European bank should result in a
• drive a wider focus on resolvability
on costs of funding for the markets and very different balance of costs borne
– requiring banks to change their
borrowers. by shareholders and especially, bank
structures, operations and financing,
creditors, instead of being largely borne
under pressure from supervisors;
Bank capital instruments not governed by taxpayers. It remains to be seen how
under EU law will have to include a markets will react – ultimately they will • require greater clarity about where
legally enforceable clause, indicating price these fundamental changes into bail-in capital is held and in what
the instrument could be used for bail-in the costs of the capital they provide to forms – about the contractual terms
purposes … and whether this will need the banks. governing conversion/deployment,
to be applied to existing liabilities, or and the precise mechanisms for
only new liabilities. If this is applied By setting out common rules, the EU transmission around a group. Because
retroactively, banks and creditors is also aiming to facilitate cross-border bail-in must occur before public funds
may need to renegotiate instruments, resolutions in Europe. In a system with can be tapped, this clarity will be
resulting in increased compliance costs separate national legal frameworks, particularly important; and
and possibly impacting costs of funding. supervisors and bankruptcy procedures,
this common framework is a necessary • require new contributions to build an
Deposits’ ranking in an insolvency step. Whether it results in a safer industry resolution fund – the balance-
hierarchy may change. Particularly banking system will ultimately depend sheet impacts of these contributions
controversial is the definition of natural on the way the precautionary measures will need to be assessed.
persons; how this definition will apply to and early intervention powers are
natural persons not in the EU; and how exercised, and how well interactions
hierarchy may be affected by bilateral between national and regional
bail-in agreements between Member supervisors and resolution authorities
States and non-EU countries. The main across the EU work.
concerns are how the rules will be
interpreted for implementation, the
administrative complexity of achieving
PwC European FS Regulation 3
Single Resolution Mechanism
(SRM) for the Eurozone
On 19 December 2013, the European Council agreed a ‘general approach’ for the SRM. This is an
important step for EU legislation; trilogue negotiations with the Commission and Parliament will now
take place, based on the Council text; the general approach may be tweaked, but final deals are typically
based around these concepts. The Banking Union seeks to ‘break the linkages’ – the negative feedback loop
between bank debt and sovereign debt, which has perpetuated European financial crises. Mutualisation
of liabilities would make this possible, demonstrating that resources from across the whole Eurozone
could be marshalled to stabilise banks in any part of it. Fundamentally, banks that will be supervised at
European level cannot then be expected to be resolved at national level.
So the SRM is important as a signal of A system for resolutions:
the commitment of Eurozone countries
to stabilising banks in future – avoiding • The Resolution Board prepares
the interference of national interests in resolution plans for all banks directly
a resolution. Achieving a deal has been supervised by the ECB; national
challenging; strong political forces and authorities remain responsible for the
interests exist at national levels, which plans for all other Eurozone banks.
mitigate against mutualisation.
• The ECB (SSM) is responsible for
notifying the Resolution Board, the
Key elements of the SRM Commission, and the relevant national
Mario Draghi, President of the ECB, has
resolution authorities and ministries
suggested that the SRM should have
that a bank should be resolved.
three core elements: “a single system,
a single authority, and a single fund”. • The Resolution Board assesses
In effect, the SRM must be capable of whether there is a systemic threat and
acting quickly and decisively to address any private sector solution. If not, it
bank crises, and it must have access to adopts a resolution scheme including
funds to do so. the relevant resolution tools and use of
the Fund
The Council’s general approach
consists of: • The Resolution Board Executive will
have limited powers to deploy the
An authority: The system will be run
Fund, up to a threshold. Use of the
by a new Single Resolution Board
Fund above the threshold would
(the ‘Board’). There will be defined
require a plenary vote.
roles for the Commission, the Council,
the ECB and the national resolution
authorities. The Board will be made up
of an Executive Director and four other
permanent members.
4 PwC European FS Regulation• The Resolution Board cannot require Our perspective • How will the proposed resolution
a Member State to use its national From a standing start, Europe has Board take shape? What will be the
budget to provide public support to moved quickly from agreeing the initial base for its permanent secretariat?
any entity under resolution. concept for the Banking Union in 2012, How will Members be selected?
to an SSM that is being implemented,
• In line with the prescription of the The Council also agreed that use of the
and agreement on an approach for
Bank Recovery and Resolution resolution Fund will be the subject of a
an SRM.
Directive (BRRD), bank shareholders further intergovernmental agreement.
and creditors would have to be But without mutualisation, there is
bailed-in before any public funds or It’s clear that much more negotiation
effectively no Banking Union. The SRM
the Single Resolution Fund could be lies ahead before the Eurozone’s
calls for mutualisation to be achieved
used deployed. resolution approach is complete.
gradually, which reflects the political
compromise required for agreement.
A fund: A Single Resolution Fund (SRF)
However, important questions remain:
will be created by pooling contributions
from all the banks in the participating • The size of the SRF – is it likely to
Member States. It will be “owned and be big enough? A fund of €50bn by
administrated” by the Board: the Board year 10 does not seem large, but it is
will recommend any use of the SRF. The designed to be used only after bail-in
SRF would be designed to reach a target of creditors and shareholders.
level of 1% of covered deposits over a
10-year period. The Fund will also be • What backstop, beyond the SRF,
gradually mutualised over the 10-year ultimately exists to confront wider
transition period, moving in increments systemic crises? For example, under
to be a single, fully mutual SRF at the what circumstances could a bank
end of 10 years. resolution call directly on the wider
resources of the European Stability
Mechanism (a pot of €500bn
designed primarily to support
sovereigns), or the European Central
Bank?
PwC European FS Regulation 5Contacts
If you would like to discuss any of the issues raised in this paper in more detail, please contact one of the
following or your usual PwC contact.
Alvaro Benzo Matthias Memminger
PwC (Spain) PwC (Switzerland)
T: +34 915 684 155 T: +41 58 792 13 22
E: alvaro.benzo.gonzalez-coloma@ E: matthias.memminger@ch.pwc.com
es.pwc.com
Nicolas Montillot
Alberto Calles PwC (France)
PwC (Spain) T: +33 1 56 57 77 95
T: +34 915 684 931 E: nicolas.montillot@fr.pwc.com
E: alberto.calles.prieto@es.pwc.com
Georg Ogrinz
Laura Cox PwC (Austria)
PwC (UK) T: +43 1 501 88 1180
T: +44 20 7212 1579 E: georg.ogrinz@at.pwc.com
E: laura.cox@uk.pwc.com
Brian Polk
Burkhard Eckes PwC (UK)
PwC (Germany) T: +44 20 7804 8020
T: +49 30 2636-2222 E: brian.polk@uk.pwc.com
E: burkhard.eckes@de.pwc.com
Wendy Reed
Ullrich Hartmann PwC (Beligum)
PwC (Germany) T: +32 2710 7245
T: +49 69 9585-2115 E: wendy.reed@pwc.be
E: ullrich.hartmann@de.pwc.com
André Wallenberg
Duncan McNab PwC (Sweden)
PwC (UK) T: +46 (0)10 2124856
T: +44 20 7804 2516 E: andre.wallenberg@se.pwc.com
E: duncan.mcnab@uk.pwc.com
6 PwC European FS RegulationPwC European FS Regulation 7
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