EU States Ponder How to Write Down Bank Creditors, Officials Say

  • Resolution authorities can exempt some assets under BRRD
  • EU resolution agency focused on about 40 banks in initial plan

European nations are working out ways to clarify how senior creditors and other investors can be forced to pay should the banks they invest in fail, European Union officials said Tuesday.

Under EU laws that took full effect across the bloc this year, bank bondholders must take losses -- known as a bail-in -- before taxpayer-funded backstops can be used. The Single Resolution Mechanism, which also took up its full duties on Jan. 1, is now ready to handle any case that may come its way, the officials told reporters in Brussels, speaking on condition they not be identified.

The Bank Recovery and Resolution Directive makes most categories of liabilities subject to losses, and requires that creditors not be worse off than they were if a bank were liquidated under standard procedure, the officials said. At the same time, the law allows regulators to make exemptions under certain conditions, they said.

Some countries are considering proposals on ways of addressing the risk of legal challenge associated with bail-in rules by clarifying hierarchies of liabilities, the officials said. That’s separate from any considerations of how the EU’s single market might be affected, they said.

The European Commission, the bloc’s executive arm, is discussing the issue with member states, along with its implications for bank funding and the functioning of financial markets, the officials said. So-called precautionary bank recapitalizations using public money will be harder to qualify for now that that the BRRD is in effect, they said.

As the new resolution regime takes effect, the SRM began its planning by looking at a group of about 40 banks it judges to be the most systemically important or likely to face resolution in a crisis, the officials said. By the end of this year, the agency will have resolution plans for all the banks in its remit, which includes cross-border lenders and those that are under direct European Central Bank supervision.

The agency is also working on risk-based formulas that will determine how much healthy banks pay into EU and national bank resolution funds. It’s also working on the implementation of the minimum requirement for eligible liabilities, or MREL. The provision sets out the amount of liabilities each EU bank will have to have available to be bailed in should the measure be necessary.

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