Abstract
In addition to automatic trigger mechanism based on regulatory capital ratio level, European Union’s (EU) competent resolution authorities are granted discretionary power to start write-down or conversion of contingent convertibles (CoCos) and determine its exact scope on reaching the point of non-viability (PONV) that marks an institution is ‘failing or likely to fail’. These two trigger mechanisms are effective parallelly and their interrelation is subject of detailed study in this chapter. The PONV loss-absorption mechanism that came with the new EU’s resolution regime in 2014 is a determinant for the whole ‘bail-in’ bonds class. In this chapter, we examine the subordinated bail-in bonds in the form of Tier 2 and new class of non-preferred senior instruments. The general concept of bail-in bonds led to the introduction of total loss-absorption capacity (TLAC) for globally systemically important banks and minimum requirement for own funds and eligible liabilities (MREL) for all EU banks in 2014, which is referred to in this chapter.
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Notes
- 1.
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.
- 2.
Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No 1093/2010.
- 3.
‘Relevant authority’ is either the competent authority (i.e. supervisory authority—see CRR Article 4[1][40]) or the resolution authority of the EU member country where the institution has been authorized or, in the group context, has been established, of the member state of the consolidating supervisor. Under SRM it is either the ECB or the SRB (Schillig, 2016).
- 4.
There is one more situation in which state aid can still be used in the EU, potentially for full protection of remaining creditors once 8% of the balance sheet has been bailed-in. But it would not apply to a single bank or a small group of banks. It could apply only ‘in the very extraordinary situation of a systemic crisis’, as laid out in BRRD Article 37(10).
- 5.
‘Competent authority’ means supervisory authority under CRR Article 4[1][40]).
- 6.
Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU.
- 7.
‘Instruments of ownership’ means shares, other instruments that confer ownership, instruments that are convertible into or give the right to acquire shares or other instruments of ownership, and instruments representing interests in shares or other instruments of ownership (BRRD Article 2[61]). For further discussion on instruments of ownership other than shares please refer to Liberadzki (2016) Section 7.1.2 of Chapter 7.
- 8.
Specified in BRRD Articles 32 and 33.
- 9.
The Recital 41 of BRRD states that ‘The resolution framework should provide for timely entry into resolution before a financial institution is balance-sheet insolvent and before all equity has been fully wiped out. Resolution should be initiated when a competent authority, after consulting a resolution authority, determines that an institution is failing or likely to fail and alternative measures as specified in this Directive would prevent such a failure within a reasonable timeframe’. This should be read together with recital 49: ‘The resolution tools should therefore be applied only to those institutions that are failing or likely to fail, and only when it is necessary to pursue the objective of financial stability in the general interest. In particular, resolution tools should be applied where the institution cannot be wound up under normal insolvency proceedings without destabilising the financial system and the measures are necessary in order to ensure the rapid transfer and continuation of systemically important functions’.
- 10.
EBA/GL/2018/03.
- 11.
The ex-ante valuation (BRRD Article 36) revealed the base scenario economic value of Banco Popular of € minus 2 bn, in adverse scenario the economic values fell to € minus 8.2 bn.
- 12.
Many controversies aroused whether liquidation was carried out under ‘normal insolvency proceedings’ as defined in BRRD Article 2(10(47)).
- 13.
MREL – SRB Policy for 2017 and Next Steps, Single Resolution Board, 20 December 2017</InternalRef>.
- 14.
See Sect. 2.9.6.
- 15.
Principles on Loss-absorbing and Recapitalisation Capacity of G-SIBs in Resolution, Financial Stability Board, 9 November 2015.
- 16.
Loi n° 2016–1691 du 9 décembre 2016 relative à la transparence, à la lutte contre la corruption et à la modernisation de la vie économique.
- 17.
Directive (EU) 2017/2399 of the European Parliament and of the Council of 12 December 2017 amending Directive 2014/59/EU as regards the ranking of unsecured debt instruments in insolvency hierarchy.
- 18.
Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC.
- 19.
- 20.
- 21.
A material sub-group is a subsidiary, whose RWAs leverage exposure or operating income amount to 5% or more of the group’s.
Bibliography
References
Cahn, A., & Kenadijan, P. Contingent Convertible Securities: From Theory to CRD IV. In Busch, D., & Ferrarini G. (Eds.). (2016). European Banking Union. Oxford: Oxford University Press.
Koenig, E. (2018, April 26). MREL: Stocktaking and the Way Forward. Retrieved September 30, 2018, from https://srb.europa.eu/en/node/545.
Schillig, M. (2016). Resolution and Insolvency of Banks and Financial Institutions. Oxford: Oxford University Press.
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Liberadzki, M., Liberadzki, K. (2019). CoCo Bonds and Bail-in Mechanism. In: Contingent Convertible Bonds, Corporate Hybrid Securities and Preferred Shares. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-92501-1_2
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