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    Council Agreement on Creditor Hierarchy, IFRS 9 and Large Exposures

    June 16, 2017

    The European Council agreed on part of a package of proposals aimed to reduce risk in the banking industry. Agreement was reached on a draft directive on the ranking of unsecured debt instruments in insolvency proceedings (bank creditor hierarchy) and on a draft regulation on transitional arrangements to phase in the regulatory capital impact of the IFRS 9 international accounting standard. The EC Vice President Valdis Dombrovskis also spoke about these recent agreements in the context of the banking package, at the ECOFIN press conference in Luxembourg.

    The draft directive on ranking of unsecured debt instruments requires member states to create a new class of non-preferred senior debt, eligible to meet the subordination requirement. It will facilitate the application of EU bail-in rules in cross-border situations and avoid distortions of the EU single market. A number of member states have amended, or are in the process of amending, their insolvency laws. The absence of harmonized EU rules creates uncertainty for both banks and investors. The draft, which mainly amends article 108 of the bank recovery and resolution directive (BRRD), has been made a priority among other banking proposals presented by the EC in November 2016. The aim is to provide legal certainty for banks and investors.


    The draft regulation on IFRS 9 transitional arrangements will mitigate the potential negative regulatory capital impact of the IFRS 9 introduction on banks. This draft regulation would allow banks to add back to their common equity tier 1 capital a portion of the increased expected credit loss provisions as extra capital during a five-year transitional period. That added amount will progressively decrease to zero during the course of the transitional period. The draft regulation also provides for a three-year phase-out of an exemption from the large exposure limit for banks' exposures to public sector debt denominated in the currency of any other member state. The exemption is used by banks in several non-eurozone member states for their euro-denominated holdings of those member states' public debt. Unless Capital Requirements Regulation (575/2013) is amended, the exemption will cease to apply after December 31 , 2017. The phase-out is intended to soften the impact of its termination. The draft regulation and directive shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.


    Related Links

    Draft Regulation on Transitional Period for IFRS 9 (PDF)

    Draft Directive on Creditor Hierarchy (PDF)

    Press Release


    Keywords: Europe, EC, Banking, IFRS 9, Creditor Hierarchy, Large Exposures

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