EC on Ranking of Unsecured Debt Instruments in Insolvency Hierarchy
EC published Directive (EU) 2017/2399 on the ranking of unsecured debt instruments in insolvency hierarchy. This Directive was published in the Official Journal of the European Union and it amends Directive 2014/59/EU. This Directive shall enter into force on the day following that of its publication in the Official Journal of the European Union.
A number of member states have amended or are in the process of amending the rules on insolvency ranking of unsecured senior debt under their national insolvency law. The national rules adopted so far diverge significantly. The absence of harmonized EU rules creates uncertainty for issuing institutions and investors alike and is likely to make the application of the bail-in tool for cross-border institutions more difficult. Thus, in its resolution of March 10, 2016 on the Banking Union, the European Parliament called on the Commission to present proposals to reduce further the legal risks of claims under the no creditor worse off principle. Moreover, in its conclusions of June 17, 2016, the Council invited the Commission to put forward a proposal on a common approach to the bank creditors’ hierarchy to enhance legal certainty in the event of resolution. Consequently, this Directive harmonizes the ranking under normal insolvency proceedings of unsecured claims resulting from debt instruments and does not cover the insolvency ranking of deposits beyond the existing applicable provisions of Directive 2014/59/EU.
To reduce, to a minimum, the costs of compliance with the subordination requirement and any negative impact on funding costs, this Directive allows member states to keep, where applicable, the existing class of ordinary unsecured senior debt, which is less costly for institutions to issue than any other subordinated liabilities. To enhance the resolvability of institutions, this Directive should, nevertheless, require member states to create a new class of non-preferred senior debt that should rank in insolvency above own funds instruments and subordinated liabilities that do not qualify as own funds instruments, but below other senior liabilities. Institutions should remain free to issue debt in both the senior and the non-preferred senior classes. Of those two classes, and without prejudice to other options and exemptions provided for in the TLAC standard to comply with the subordination requirement, only the non-preferred senior class should be eligible to meet the subordination requirement. To ensure that the new non-preferred senior class of debt instruments meets the eligibility criteria as described in the TLAC standard and as set out in Directive 2014/59/EU, thereby enhancing legal certainty, member states should ensure that those debt instruments have an original contractual maturity of at least one year, do not contain embedded derivatives and are not derivatives themselves, and that the relevant contractual documentation related to their issuance and, where applicable, the prospectus explicitly refer to their lower ranking under normal insolvency proceedings.
Related Link: Directive (EU) 2017/2399
Effective Date: December 28, 2017
Keywords: Europe, EU, Banking, Resolution, Insolvency Hierarchy, Directive 2017/2399, EC
Previous Article
BCBS Issues Basel III Monitoring Report for Data as of December 2016Related Articles
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.
BIS Bulletin Examines Cognitive Limits of Large Language Models
The use cases of generative AI in the banking sector are evolving fast, with many institutions adopting the technology to enhance customer service and operational efficiency.
ECB is Conducting First Cyber Risk Stress Test for Banks
As part of the increasing regulatory focus on operational resilience, cyber risk stress testing is also becoming a crucial aspect of ensuring bank resilience in the face of cyber threats.
EBA Continues Momentum Toward Strengthening Prudential Rules for Banks
A few years down the road from the last global financial crisis, regulators are still issuing rules and monitoring banks to ensure that they comply with the regulations.
EU and UK Agencies Issue Updates on Final Basel III Rules
The European Commission (EC) recently issued an update informing that the European Council and the Parliament have endorsed the Banking Package implementing the final elements of Basel III standards