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    EBA Proposes Contractual Recognition Standards for Bail-In Under BRRD

    July 24, 2020

    EBA proposed regulatory and implementing technical standards on the impracticability of contractual recognition of write-down and conversion powers and related notifications, as laid down in the Bank Recovery and Resolution Directive (BRRD). The draft implementing technical standards specify uniform formats and templates for notification to resolution authorities of contracts meeting the conditions of impracticability defined in the draft regulatory technical standards. EBA also published the draft templates and instructions for impracticability notifications. The consultation runs until October 24, 2020. After the consultation period, EBA will deliver the final draft regulatory and implementing technical standards to EC.

    These standards aim to promote effective application of resolution powers to banks and banking groups and to foster convergence of practices between relevant authorities and institutions across EU. To facilitate and improve the bail-in process in the event of resolution, BRRD requires inclusion of a contractual recognition of the effects of the bail-in tool in contracts or agreements governed by third country law. However, there might be instances where it is impracticable for institutions or entities to include those contractual terms. EBA is mandated to develop the draft regulatory technical standards to specify the conditions of impracticality. The draft regulatory technical standards define the conditions under which it would be legally or otherwise impracticable for an institution or entity to include the contractual term for the recognition of the bail-in. The regulatory standards also define the conditions and reasonable timeframe for the resolution authority to require the inclusion of contractual terms for the bail-in recognition.

    The draft implementing technical standards are based on Article 55(8) of the BRRD. The mandate for EBA does not cover exclusions from the scope of bail-in or from the scope of the Article 55 of BRRD. The draft regulatory technical standards cannot specify certain instruments as “impracticable,” as the mandate is to identify the underlying conditions creating the impracticability to include in the contractual provisions the term by which the counterparty recognizes the effects of a possible bail-in. The process that would take place in the instances of impracticability would follow these steps:

    • Institutions and entities should notify the relevant resolution authority if they determine that it is legally or otherwise impracticable to include the contractual provisions in a contract. The determination should be based on the conditions of impracticability set in article 1 of the draft regulatory technical standards.
    • The notification to the resolution authority should be made in accordance with the draft implementing technical standards provided in this consultation paper.
    • Resolution authorities should assess the institution’s or entity's determination that it is impracticable to include contractual recognition clauses. If it concludes that it is not impracticable to include the contractual term, it shall, within a reasonable timeframe, require the inclusion of such term. The reasonable timeframe is set by EBA in Article 3 of the draft regulatory technical standards.
    • The resolution authority shall require the inclusion of the contractual term taking into account the conditions defined in Article 2 of the draft regulatory technical standards. The conditions for the resolution authority to require the inclusion of the contractual term is defined in Article 2 of the draft regulatory technical standards
    • Where liabilities not including the contractual term of impracticability lead a resolution authority to determine the existence of a substantive impediment to resolvability, it can apply the powers provided in Article 17 of BRRD as appropriate to remove that impediment to resolvability.
    • Institutions and entities should be prepared to justify their determination. In addition, to ensure that the resolvability of institutions and entities is not affected, liabilities for which the relevant contractual recognition provisions are not included are not be eligible for Minimum Requirement for own funds and Eligible Liabilities or MREL. Furthermore, bail-in-able liabilities arising from contracts that do not include the contractual term are not excluded from bail-in.

     

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    Comment Due Date: October 24, 2020

    Keywords: Europe, EU, Banking, BRRD, Regulatory Technical Standards, Implementing Technical Standards, Contractual Recognition, Bail-In, Resolution Framework, MREL, Basel, EBA

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