Shearman & Sterling LLP | FinReg | Revisions to EU Bank Recovery and Resolution Directive Finalized
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  • Revisions to EU Bank Recovery and Resolution Directive Finalized

    A new Directive amending the EU's Bank Recovery and Resolution Directive, widely referred to as "BRRD2", has been published in the Official Journal of the European Union.

    The amendments to BRRD include:

    1.  Amendments to the requirement for contractual recognition of bail-in.

    The EU is introducing an exemption to the requirement where it would be legally or otherwise impracticable to include a contractual recognition of bail-in in a contract. The exemption will not apply where the liability is an Additional Tier 1 instrument, Tier 2 instrument or unsecured debt instrument. Liabilities subject to this waiver cannot count towards MREL and must be senior to unsecured claims arising from debt instruments meeting certain conditions. This reflects the difficulties that banks have faced in getting counterparties to commercial agreements to agree to bail-in language and the low-risk nature of these contracts for resolution, e.g. IT service agreements and contracts with financial market infrastructure providers. In many cases, the need for a bail-in clause would only have arisen due to the possibility of a contingent liability, e.g. for unpaid fees or a breach of warranty claim.

    The European Banking Authority is responsible for preparing Regulatory Technical Standards on the conditions where it would be impracticable to include a bail-in term. Recitals in BRRD II confirm that a refusal from the counterparty to agree to be bound by the contractual bail-in recognition clause should not per se be considered as a cause of impracticability. Examples of some impracticable circumstances are also given, such as where it is illegal under the law of the counterparty to include such a claim or where the liability is contingent on a breach of contract or arises from guarantees or other instruments used in trade finance. In addition, a Member State's Resolution Authority will be able to prescribe categories of liabilities that might be considered as impracticable. The U.K. implementation of BRRD captures not only the firms' debt but also other liabilities, irrespective of whether the liability is "present or future, certain or contingent, ascertained or sounding only in damages". The impracticable exemption in BRRD 2 does not address the issue of contingent liabilities requiring a bail-in clause and banks may still face difficulties complying with the EU contractual recognition of bail-in requirement.

    The EBA will also be preparing RTS on the conditions where a national regulator may determine that it disagrees with a firm's assessment of impracticability. Some difficulties may arise where a contract has been entered into and then the regulator determines that a bail-in clause must be inserted.

    The draft RTS are due to be submitted to the European Commission by June 28, 2020.

    2.  New early intervention powers for regulators.

    National regulators will be able to:
    • suspend any payment or delivery obligations, subject to certain conditions being met, for a fixed period of two business days (the previously proposed five-day power has not been adopted in the final text);
    • restrict the enforcement of security interests; and
    • temporarily suspend termination rights.

    3.  The introduction of a requirement for contractual recognition of resolution stay powers.

    Financial contracts entered into by EU banks that are governed by the laws of a non-EU country will need to include a clause with contractual recognition of the resolution stay powers. The requirement will apply to new obligations created and to material amendments to existing obligations.

    The EBA must submit draft RTS on the content of such terms to the European Commission by June 28, 2020.

    4.  Amendments to the MREL calibration.

    Currently, MREL's requirements are based upon own funds and eligible liabilities expressed as a percentage of total liabilities and own funds and this is set for each institution. Under BRRD II, a fixed MREL will apply to EU G-SIIs, with institution-specific MREL being applied where appropriate. The global total loss absorbing capacity (TLAC) standard has been implemented for global systemically important institutions in the EU in changes to the EU's Capital Requirements Regulation.

    EU Member States are required to transpose the amending Directive into their national laws and to apply the provisions by no later than December 28, 2020, except for provisions relating to MREL, which apply from January 1, 2024.

    View the Directive amending the BRRD.

    View details of the amendments to the CRR.

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