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Addressing troubled financial institutions’ problems

Addressing troubled financial institutions’ problems

 

SUMMARY OF:

Directive 2014/59/EU — rules for the recovery and resolution of credit institutions and investment firms

WHAT IS THE AIM OF THIS DIRECTIVE?

  • Because many EU countries had to inject public money into their banking systems to rescue banks in the wake of the 2008 financial crisis, this act sets out new rules to deal with troubled institutions.
  • It aims to avoid ‘bail-outs’ that involve the use of taxpayers’ money in future cases of bank failure.
  • It establishes common European rules for the recovery and restructuring of failing banks.

KEY POINTS

Banks in difficulties — prevention

  • Each bank has to prepare a recovery plan which it submits to its national competent authority.
  • The national resolution authority has also to draw up a resolution plan in case recovery is not effective and restructuring (resolution) is necessary.
  • Both plans set out the actions to be taken in the event that a bank were to run into difficulties leading to its failure.

Banks in a difficult financial situation — early intervention

When a bank is in a difficult financial situation, the national competent authority has the power to intervene, such as by appointing a temporary administrator of the bank.

Failing banks — restructuring (resolution)

  • If the bank’s downward spiral continues, the national resolution authority has a variety of powers to minimise the cost to taxpayers of its failure. The most important power is to require the private sector to bear the costs first.
  • This ‘bail-in’ mechanism, which marks a change of tack compared to the public ‘bail-out’ tool, entered into force, at the latest, in January 2016. EU countries could already decide to incorporate the bail-in tool into their legal systems before that date.
  • When a bank collapses, shareholders are first in line to cover the restructuring costs; then creditors would be asked to contribute, with those with non-guaranteed deposits (over €100,000) stepping in last.
  • The shareholders and creditors have to contribute to the losses of the failing institution; they cover the losses up to at least 8 % of the total liabilities (debts or obligations) of the bank undergoing a restructuring plan. If there are still losses to cover, the resolution fund (see below) can intervene. Other powers in the hands of national authorities include the possibility to sell the institution undergoing restructuring or merge it with another one.

National resolution funds to provide financial support for banks’ restructuring plans

Each EU country has to establish a national resolution fund financed in advance by credit institutions and investment firms established in its territory. This fund is to be used to finance the restructuring of a failing bank.

Between 2015 and 2017, the European Commission adopted a series of acts that supplement Directive 2014/59/EU. These include:

  • Regulation (EU) 2015/63 on
    • the calculation and the adjustment to the risk profile of institutions, of the contributions to be paid by banks to resolution funds
    • information that banks must provide so their contribution to a resolution fund can be calculated.
  • Regulation (EU) 2016/778 on
    • the circumstances and conditions under which the institution’s repayment contributions to a resolution fund may be partially or entirely postponed;
    • the criteria to determine the activities, services and operations with regard to the institution’s functions which are essential to the economy; and
    • criteria to determine the business lines and associated services with regard to core business lines.
  • Regulation (EU) 2016/911 on technical standards with regard to the form and the content of the description of group financial support agreements;
  • Regulation (EU) 2016/962 on technical standards with regard to the uniform formats, templates and definitions for the identification and transmission of information by competent authorities and resolution authorities to the European Banking Authority;
  • Regulation (EU) 2016/1075 on, among other things, standards for the content of recovery plans, resolution plans and group resolution plans;
  • Regulation (EU) 2016/1400 on the minimum elements of a business reorganisation plan and the minimum contents of the reports on its implementation;
  • Regulation (EU) 2016/1401 on standards for methodologies and principles on the valuation of liabilities arising from derivatives;
  • Regulation (EU) 2016/1450 on criteria relating to the methodology for setting the minimum requirement for own funds and eligible liabilities;
  • Regulation (EU) 2016/1066 on standards for presenting information for the purpose of resolution plans for credit institutions and investment firms;
  • Regulation (EU) 2016/1712 on standards for information on financial contracts;
  • Regulation (EU) 2017/867 on classes of arrangements to be protected in a partial property transfer.

In 2017, Directive 2014/59/EU was amended by Directive (EU) 2017/2399. It incorporates into EU law the G20 Total Loss-Absorbing Capacity (TLAC) standard. This standard ensures that if the global systemically important banks fail, they will have sufficient funds available for authorities to implement an orderly resolution that:

  • minimises the impact on financial stability,
  • ensures that core activities can be maintained, and
  • avoids exposing public funds to loss.

In 2018, Regulation (EU) 2018/308 was adopted. It lays down implementing technical standards for Directive 2014/59/EU with regard to formats, templates and definitions for the identification and transmission of information by resolution authorities for the purposes of informing the European Banking Authority of the minimum requirement for own funds and eligible liabilities.

FROM WHEN DOES THIS DIRECTIVE APPLY?

It has applied since 2 July 2014 and it had to become law in the EU countries by 31 December 2014.

BACKGROUND

For more information, see:

MAIN DOCUMENT

Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council (OJ L 173, 12.6.2014, pp. 190-348)

Successive amendments to Directive 2014/59/EU have been incorporated in the original text. This consolidated version is of documentary value only.

RELATED DOCUMENTS

Commission Implementing Regulation (EU) 2018/308 of 1 March 2018 laying down implementing technical standards for Directive 2014/59/EU of the European Parliament and of the Council with regard to formats, templates and definitions for the identification and transmission of information by resolution authorities for the purposes of informing the European Banking Authority of the minimum requirement for own funds and eligible liabilities (OJ L 60, 2.3.2018, pp. 7-15)

Commission Delegated Regulation (EU) 2017/867 of 7 February 2017 on classes of arrangements to be protected in a partial property transfer under Article 76 of Directive 2014/59/EU of the European Parliament and of the Council (OJ L 131, 20.5.2017, pp. 15-19)

Commission Delegated Regulation (EU) 2016/1712 of 7 June 2016 supplementing Directive 2014/59/EU of the European Parliament and of the Council establishing a framework for the recovery and resolution of credit institutions and investment firms with regard to regulatory technical standards specifying a minimum set of the information on financial contracts that should be contained in the detailed records and the circumstances in which the requirement should be imposed (OJ L 258, 24.9.2016, pp. 1-7)

Commission Implementing Regulation (EU) 2016/1066 of 17 June 2016 laying down implementing technical standards with regard to procedures, standard forms and templates for the provision of information for the purpose of resolution plans for credit institutions and investment firms pursuant to Directive 2014/59/EU of the European Parliament and of the Council (OJ L 181, 6.7.2016, pp. 1-38)

Commission Delegated Regulation (EU) 2016/1450 of 23 May 2016 supplementing Directive 2014/59/EU of the European Parliament and of the Council with regard to regulatory technical standards specifying the criteria relating to the methodology for setting the minimum requirement for own funds and eligible liabilities (OJ L 237, 3.9.2016, pp. 1-9)

Commission Delegated Regulation (EU) 2016/1401 of 23 May 2016 supplementing Directive 2014/59/EU of the European Parliament and of the Council establishing a framework for the recovery and resolution of credit institutions and investment firms with regard to regulatory technical standards for methodologies and principles on the valuation of liabilities arising from derivatives (OJ L 228, 23.8.2016, pp. 7-15)

Commission Delegated Regulation (EU) 2016/1400 of 10 May 2016 supplementing Directive 2014/59/EU of the European Parliament and of the Council with regard to regulatory technical standards specifying the minimum elements of a business reorganisation plan and the minimum contents of the reports on the progress in the implementation of the plan (OJ L 228, 23.8.2016, pp. 1-6)

Commission Delegated Regulation (EU) 2016/1075 of 23 March 2016 supplementing Directive 2014/59/EU of the European Parliament and of the Council with regard to regulatory technical standards specifying the content of recovery plans, resolution plans and group resolution plans, the minimum criteria that the competent authority is to assess as regards recovery plans and group recovery plans, the conditions for group financial support, the requirements for independent valuers, the contractual recognition of write-down and conversion powers, the procedures and contents of notification requirements and of notice of suspension and the operational functioning of the resolution colleges (OJ L 184, 8.7.2016, pp. 1-71)

See consolidated version.

Commission Implementing Regulation (EU) 2016/962 of 16 June 2016 laying down implementing technical standards with regard to the uniform formats, templates and definitions for the identification and transmission of information by competent authorities and resolution authorities to the European Banking Authority according to Directive 2014/59/EU of the European Parliament and of the Council (OJ L 160, 17.6.2016, pp. 35-49)

Commission Implementing Regulation (EU) 2016/911 of 9 June 2016 laying down implementing technical standards with regard to the form and the content of the description of group financial support agreements in accordance with Directive 2014/59/EU of the European Parliament and of the Council establishing a framework for the recovery and resolution of credit institutions and investment firms (OJ L 153, 10.6.2016, pp. 25-27)

Commission Delegated Regulation (EU) 2016/778 of 2 February 2016 supplementing Directive 2014/59/EU of the European Parliament and of the Council with regard to the circumstances and conditions under which the payment of extraordinary ex post contributions may be partially or entirely deferred, and on the criteria for the determination of the activities, services and operations with regard to critical functions, and for the determination of the business lines and associated services with regard to core business lines (OJ L 131, 20.5.2016, pp. 41-47)

Commission Delegated Regulation (EU) 2015/63 of 21 October 2014 supplementing Directive 2014/59/EU of the European Parliament and of the Council with regard to ex ante contributions to resolution financing arrangements (OJ L 11, 17.1.2015, pp. 44-64)

See consolidated version.

last update 07.04.2020

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