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Directive for the recovery and resolution of credit institutions and investment firms

  • Netherlands
  • Banking and finance

05-06-2014

The Directive aims to introduce instruments at a European level to solve financial problems within banks and to, if required, wind down banks in an orderly way. The aim is to put the burden of insolvent banks on the shareholders and creditors and thus to minimize tax payer costs in that respect.

The measures introduced by the Directive can be divided into three pillars:

  • to prevent and prepare for financial problems;
  • early intervention; and
  • resolution and financing thereof.

Resolution Authorities

The Directive requires Member States to confer resolution powers on public administrative authorities which will have the powers laid down in the Directive. It is open to Member States to designate as their resolution authorities, for example, national central banks, financial supervisors, deposit guarantee schemes, ministries of finance, or special authorities. In the Netherlands, the Dutch Central Bank is likely to be appointed as resolution authority.

Prevention and preparation: recovery plans and intra-group support

Recovery plan

The Directive requires institutions to draw up recovery plans containing measures and arrangements to enable them to take early action to restore their long term viability in the event of a material deterioration of their financial situation. Groups will be required to develop plans at both group level and for the individual institutions within the group, after which such plans will have to be assessed and approved by the supervisor. If a resolution authority identifies significant impediments to the resolvability of an institution or group, it may require the institution or group to take measures in order to facilitate its resolvability.

Intra group support

The Directive aims to overcome current legal impediments to the provision of financial support from one entity within a group to another. Institutions that operate in a group structure will be able to enter into agreements to provide financial support (in the form of a loan, the provision of guarantees, or the provision of assets for use as collateral in transaction) to other entities within the group that experience financial difficulties. As a safeguard, the supervisor of the transferor will have the power to prohibit or restrict financial support pursuant to the agreement when that transfer threatens the liquidity or solvency of the transferor or financial stability.

Early intervention: powers of the supervisors

The Directive expands the powers of supervisors to intervene at an early stage in cases where the financial situation or solvency of an institution is deteriorating. Powers of early intervention include the power to request the institution to implement arrangements and measures set out in the recovery plan; draw up an action program and a timetable for its implementation; request the management to convene, or convene directly, a shareholders' meeting, propose the agenda and the adoption of certain decisions; and request the institution to draw up a plan for restructuring of debt with its creditors.

In addition, supervisors have the power to appoint a special manager for a limited period, when the solvency of an institution is deemed to be sufficiently at risk. The primary duty of a special manager is to restore the financial situation of the institution and the sound and prudent management of its business. A special manager will replace the management of the institution and have all its powers without prejudice to ordinary shareholder rights.

Resolution and financing, bail in

Resolution

A resolution authority may implement resolution measures only if the institution is failing or likely to fail, and there is no other solution that would restore the institution within an appropriate timeframe. In addition, the intervention by means of resolution measures must be justified by reasons of public interest.

Losses are to be allocated between the shareholders and the creditors of the institution in accordance with the hierarchy of claims established by each national insolvency regime. However, the Directive establishes certain principles for the allocation of losses that would have to be respected irrespective of what each national insolvency regime establishes. These principles are: (i) that the losses should first be allocated in full to the shareholders and then to the creditors and (ii) that creditors of the same class might be treated differently if it is justified by reasons of public interest and in particular in order to underpin financial stability. In those cases where the creditors receive less than would have been the case if the institution had been liquidated under normal insolvency proceedings, the authorities have to ensure that they receive the difference, which is paid out from the resolution fund.

The above principles apply to all resolution measures, which each may be be applied individually or in combination with one or more other measures. The Directive lists the following measures:

(i) sale of the business or a part thereof on commercial terms, without the approval of the shareholders being required;

(ii) transfer of all or part of the assets to a government owned institution acting as bridge institution. The bridge institution must be licensed according to the Capital Requirements Directive and should, to the extent permitted under the state aid rules, operate as a commercial business;

(iii) separation of problematic assets to a separate vehicle on commercial terms, so that these can be managed and restructured. As opposed to the other resolution measures, asset separation may only take place in combination with one or more other resolution measures; and

(i) bail in, which means that the resolution authority may write down the claims of unsecured creditors of a failing institution and, if possible, convert debt claims into equity. Certain claims may not be written down, such as employee claims, covered deposits and secured claims. In principle all shareholder claims should first be written off prior to the claims of subordinated creditors, and only thereafter unsubordinated claims will be available for bail in. This may be different if the institution still has some residual capital, in which case the resolution authority may convert the subordinated and unsubordinated claims into equity.

Financing

Member States may either use a combined fund that is used for both the compensation of deposits in case of a failure of a bank as well as resolutions referred to in the Directive, or install two separate funds: one as deposit guarantee fund and another as resolution fund. The (combined) fund will be financed by the institutions themselves.

Implementation

Member States have until 31 December 2014 to implement the Directive into their national legislation, but the Dutch Minister of Finance has indicated that this timeline is, at least for the Netherlands, not realistic. The bail in rules will take effect on 1 January 2016.