Does your jurisdiction know a bail-in tool in bank resolution and which liabilities are covered?
Banking & Finance (2nd edition)
One of the resolution tools at the FMA’s disposal is the tool for bailing-in of creditors (bail-in) as core element of the BRRD. It permits the resolution authority to write down the eligible liabilities in a cascading contribution to absorb losses of an institution, or to convert them into equity. The most important examples for exceptions to the scope of application of the bail-in tool are protected deposits, secured liabilities and liabilities against employees.
As already mentioned, the bail-in tool was first applied within the Eurozone in Cyprus in 2013. The bail-in tool is meant to cover the following liabilities :
(a) To recapitalise an ACI or a relevant person that meets the conditions for resolution to the extent sufficient to:
- restore its ability to comply with the conditions for authorisation of the entity or, where such conditions exist for the relevant person, of the relevant person and
- to continue to carry out the activities for which it is authorised under the Investment Services and Activities and Regulated Markets Law or the Business of Credit Institutions Law as applicable, and
- to sustain sufficient market confidence in the institution or relevant person;
(b) To convert to equity or reduce the principal amount of claims or debt instruments that are transferred:
- To a bridge institution with a view to providing capital for that bridge institution; or
- Under the sale of operations measure or the measure to transfer assets and rights to an asset management company.
The liabilities of Finnish credit institutions may be subject to write-down or conversions subject to decisions by the Financial Stability Authority under the Resolution Act.
The Financial Stability Authority may also decide on the write-down of the nominal value or cancellation of shares/participation rights in the credit institution and the reduction and/or conversion of additional Tier 1 capital and/or Tier 2 capital into own funds (regulatory capital). The conversion order set out in the BRRD, as amended, must be observed. The same order of priority must be observed in the bail-in proceedings as in bankruptcy, subject to the provisions of Article 54 of the Capital Requirements Regulation.
When a failing bank enters into resolution, a tool known as a "bail-in' can be applied to force sharehold-ers and creditors to absorb the losses and recapitalise the bank.
Under this mechanism, shareholders and creditors are required to shoulder some of the entity's losses or take part in its recapitalisation.
It consists of two phases:
- eligible liabilities are reduced as much as possible to absorb losses and bring the en-tity's net asset value down to zero;
- eligible liabilities are converted in order to recapitalise the entity or contribute to the capital of the bridge institution.
However, depositors are always protected, whether a bank is placed under resolution or into straightfor-ward liquidation.
In the case of a resolution:
- Covered deposits (up to EUR 100,000) are protected as they are excluded from the scope of the bail-in.
- The ordinance transposing the BRRD into French law stipulates that no depositor may incur losses greater than they would have incurred under normal insolvency proceedings (NCWO – no creditor worse off than in liquidation).
In the case of a liquidation, depositors are also protected:
- Deposits of up to EUR 100,000 are protected by the deposit guarantee scheme, and reimbursed from a fund previously built up using contributions from financial institutions.
- Depositors are given a preferential ranking in the hierarchy of claims, and are thus re-imbursed before ordinary creditors: amounts covered by the deposit guarantee scheme (up to EUR 100,000) are given a high ranking, followed by any amounts in excess of this thresh-old. Depositors are the last to be asked to make a contribution in the event of a resolution (after holders of capital shares and debt securities).
Depositors are placing even higher up in the ranking of claims for credit institutions. This makes it easier to apply the bail-in tool and provides depositors with greater protection.
Credit institutions can also issue a new category of debt securities which absorb losses after subordi-nated debt instruments and before preferred liabilities.
The concept of Bail-in is regulated under Turkish law slightly different than the EU. As explained in detail under Question 22, the SDIF is entitled to take any and all measures in relation to Distressed Banks, the management and audit of which is transferred to it with the focus on to ensure cost efficiency and preserve the trust in the financial system and stability of the same including but without limitation to increase the share capital or perform any transaction in relation to the Distressed Bank’s assets and liabilities and to convert the same into cash for the purposes of strengthening and restructuring the Distressed Bank’s financial structure.
Parallel with the SDIF’s exceptional powers in bank resolution, the legal framework enacted by the BRSA in line with the Basel III compliance process also allows for one of the most well-known and preferred capital boosting methods utilized globally by the financial institutions: liability conversion into capital. As such debt instruments, premiums and loans (“Subordinated Liabilities”) fulfilling certain conditions set forth under the Regulation on Own Funds of Banks can be included in the calculation of Additional Tier I and Tier II capital of banks, as the case may be, upon the approval of the BRSA following the respective application by the board of directors of banks.
Subordinated Liabilities shall meet the following conditions in order to be qualified as Additional Tier I or Tier II capital:
(i) Debt instruments shall be issued by the respective bank, registered with the CMB and fees shall be collected in full and cash;
(ii) Initial maturity shall be at least 5 years, and there shall not be any principal repayment within the first 5 years or any repayment option before the end of maturity;
(iii) There shall not be more than one repayment option before the end of maturity, and if there is a repayment option before the end of maturity, such repayment option shall be exercised before 5 years as of the execution of the agreement and is subject to the consent of and approval by BRSA;
(iv) lenders or investors shall accept that they will repaid before the share certificates and primary subordinated loans, but after all other debts and loans, in the case of liquidation of the respective bank;
(v) There shall not be any association with any derivative instrument and contract so as to lead to breach of the condition specified in sub-paragraph (iii) or such items shall not be directly or indirectly secured by any means or in any manner; and
(vi) It shall be clearly specified in writing that such items shall not to be assignable or transferred to the affiliates and subsidiaries of the bank.
The BRSA would require some additional conditions to be met in order to grant approval for the treatment of such Subordinated Liabilities as Additional Tier I or Tier II capital and such conditions vary depending on the respective capital type requested to be supported by way of such treatment.
As a side benefit of capital boosting through the use of Subordinated Liabilities, banks may also increase their lending limits by elevating their Additional Tier I or Tier II capitals to facilitate the lending activities and consequently, profit generation. Recent data on Turkish financial sector reveal that there is an increasing tendency in the use of Subordinated Liabilities for these purposes.
In restructuring proceedings with respect to Swiss banks, a restructuring plan may provide for a broad range of restructuring measures, depending on the concrete circumstances of the case at hand and sub-ject to the principle of proportionality. FINMA has broad discretion to take decisive action, including, among other things, converting the bank's debt into equity (a debt-to-equity swap); and/or partially or fully writing-off (certain of) the bank’s obligations (a haircut). A debt-to-equity swap and a haircut are generally referred to as a bail-in and are FINMA's preferred restructuring measure for systemically rele-vant banks.
As a general rule, all debt capital may be converted into equity capital. The following are excluded:
- privileged claims (including privileged deposits, see above at Question 23.) to the extent that they are classed as preferential;
- secured claims to the extent that they are secured; and
- offsettable claims to the extent that they are offsettable.
Yes. The Slovak Act on Solving of Crisis Situations on the Financial Market entitles the national resolu-tion authority to either convert certain claims into shares or to write-down their value. All claims against a credit institution are, in principle, eligible for bail-in except those specifically stated in the Act on Solving of Crisis Situations on the Financial Market.
Yes. Section 90 of the German Reorganisation and Winding-up Law (Sanierungs- und Abwicklungsgesetz – “SAG”) entitles the national resolution authority to either convert certain claims into shares or to write-down their value. All claims against a credit institution are, in principle, eligible for bail-in. However, section 91 SAG carves out certain claims, such as claims deriving from covered deposits, covered claims (including claims deriving from covered bonds), claims deriving from the safekeeping of customers’ monies, claims deriving from a trust relationship, claims against other credit institutions with a maturity of less than seven days, claims vis-à-vis payment systems, clearing and settlement systems resulting from the participation in such system with a maturity of less than seven days, claims vis-à-vis employees deriving from unpaid salaries, pensions or other fixed remunerations (the variable parts of the remuneration are not necessarily excluded), claims of business partners provided they derive from the delivery of goods or services that are material for the operation of the business such as IT applications, premises rent etc., claims deriving from membership fees for deposit protection schemes.
Under PMB published by the BoI, certain “contingent convertible” capital instruments issued by a bank may be included in its tier 1 and tier 2 capital if they meet certain conditions. Among others, under the terms of such instruments in case of a trigger event for non-viability such instruments will be converted to equity or will be written off.
Yes. Please see the response to question 22 above.
Japan has adopted the contractual bail-in approach in its capital adequacy regulation, which requires that the terms and conditions of Additional Tier 1 Capital instruments and Tier 2 Capital instruments of Japanese banks must incorporate a provision writing off the principal or converting the instruments to common equities when public finance aid is necessary to maintain bank operations. The FAQ published by the FSA states that the necessity for public finance aid is confirmed when 2-go sochi, 3-go sochi or Tokutei 2-go sochi are authorised pursuant to the Deposit Insurance Act (see No. 22). If the Prime Minister triggers the write-off or conversion provision pursuant to the Deposit Insurance Act in such authorisation, these capital instruments will be written off or converted to common equities by operation of the terms and conditions of those instruments.
There is no bail-in tool in bank resolution in Oman.
Yes. Liechtenstein has transposed the BRRD into national law, which inter alia encompasses a bail-in tool as possible resolution mechanism.
Yes, the bail-in tool is available in Luxembourg (please see the answer to Question 22. above in this re-spect).
In principle, all the liabilities of credit institutions and investment firms are covered, except for those for those expressly excluded from the scope of the bail-in tool, being, amongst others:
- covered deposits;
- secured liabilities, including covered bonds;
- liabilities to institutions, excluding entities that are part of the same group, with an original maturi-ty of less than seven days; and
- employee’ salaries.
Bail-in tool may apply as a resolution measure in order to restore the credit institution under resolution with the ability to comply with the conditions for authorisation and to continue to carry out its activity. Therefore, the following measures may be applied by Banco de Portugal:
a) write down the nominal value of the claims which are liabilities of the credit institution under resolution that are not own funds instruments and which are not excluded from the application of bail-in;
b) recapitalisation through conversion of eligible claims by issuing ordinary shares or other instruments of ownership of the credit institution under resolution.
In some circumstances Banco de Portugal may also convert the eligible claims of the credit institution under resolution into share capital of the bridge institution by issuing ordinary shares and write down the nominal value of the eligible claims of the credit institution under resolution to be transferred to the bridge institution.
National law establishes a list of exemptions. For instance, and generally, these measures shall not be applied to claims on the provision of goods and services that are critical to the daily functioning of the credit institution, deposits that are guaranteed by the Deposit Guarantee Fund, claims for which there is collateral, claims on tax and local authorities, claims on employees in relation to accrued salary, pension benefits or other fixed remuneration.
Yes, the Recovery and Resolution Regulations provide for a bail-in tool which can be applied by the Resolution Committee for any of the following purposes:
(a) to recapitalise an institution to the extent sufficient to restore its ability to comply with the conditions for obtaining a licence and to continue to carry out the activities for which it is licensed and to sustain sufficient market confidence in the institution;
(b) to convert to equity or reduce the principal amount of claims or debt instruments that are transferred:
(i) to a bridge institution with a view to providing capital for that bridge institution; or (ii) under the sale of business tool or the asset separation tool.
The bail-in tool may be applied to all liabilities of an institution, excluding the following liabilities whether they are governed by the law of Malta, of another Member State or of a third country:
a. covered deposits:
b. secured liabilities including covered bonds and liabilities in the form of financial instruments used for hedging purposes which form an integral part of the cover pool and which according to Maltese law are secured in a way similar to covered bonds;
c. any liability that arises by virtue of the holding by the institution of client assets or client money including client assets or client money held on behalf of UCITS or of AIF’s, provided that such a client is protected under the applicable insolvency law;
d. any liability that arises by virtue of a fiduciary relationship between the institution (as fiduciary) and another person (as beneficiary) provided that such a beneficiary is protect-ed under the applicable insolvency or civil law;
e. liabilities to institutions, excluding entities that are part of the same group, with an original maturity of less than seven days;
f. liabilities with a remaining maturity of less than seven days, owed to systems or opera-tors of systems designated according to Directive 98/26/EC or their participants and arising from the participation in such a system;
g. a liability to any one of the following: (i) an employee, in relation to accrued salary, pension benefits or other fixed remuneration, except for the variable component of remuneration that is not regulated by a collective bargaining agreement (provided that this shall not apply to the variable component of the remuneration of material risk takers as identified in Article 92(2) of the CRD); (ii) a commercial or trade creditor arising from the provision to the institution of goods or services that are critical to the daily functioning of its operations, including IT services, utilities and the rental, servicing and upkeep of premises; (iii) tax and social security authorities, provided that those liabilities are preferred under the applicable law; (iv) deposit guarantee schemes arising from contributions due in accordance with Directive 2014/49/EU.
In exceptional circumstances, where the bail-in tool is applied, the Resolution Committee may exclude or partially exclude certain liabilities from the application of the write-down or conversion powers where:
- it is not possible to bail-in that liability within a reasonable time notwithstanding the good faith efforts of the Resolution Committee;
- the exclusion is strictly necessary and is proportionate to achieve the continuity of critical functions and core business lines in a manner that maintains the ability of the institution under resolution to continue key operations, services and transactions;
- the exclusion is strictly necessary and proportionate to avoid giving rise to widespread contagion, in particular as regards eligible deposits held by natural persons and micro, small and medium sized enterprises, which would severely disrupt the functioning of financial markets, including of financial market infrastructures, in a manner that could cause a serious disturbance to the economy of Malta, of another Member State or of the EU; or
- the application of the bail-in tool to those liabilities would cause a destruction in value such that the losses borne by other creditors would be higher than if those liabilities were excluded from bail-in.
Yes, in accordance with EU regulatory requirements (e.g. Directive 2014/59/EU) and EU level banking sector guidelines (i.e. EBA guidelines). The liabilities excluded from the bail-in tool are specifically presented in the Banking Recovery and Resolution Directive.
In accordance with Moreover, the National Bank of Romania (NBR), the resolution authority, may exclude or partially exclude, liabilities from bail-in on a discretionary basis:
a. if they cannot be bailed-in within a reasonable time;
b. to ensure the continuity of critical functions;
c. to avoid contagion (in particular regarding eligible deposits held by natural persons and micro, small and medium-sized enterprises); or
d. to avoid value destruction that would increase the losses borne by other creditors.
Our jurisdiction recognizes the bail-in instrument in bank resolution (distribution of loss to shareholders and creditors). This covers all the obligation of the bank in resolution, less the exceptions prescribed by law, such as: obligations from insured deposits, under the amount of EUR 50,000; secured obligations by pledge, mortgage, financial securities or other similar rights; liabilities from asset and cash management of clients, including assets or cash of clients kept by the bank in resolution for investment and pension funds; tax obligations and obligations from contributions for mandatory social security, etc.
Yes. Bail-in involves shareholders of a failing institution being divested of their shares, and creditors of the institution having their claims cancelled or reduced to the extent necessary to restore the institution to financial viability. The shares can then be transferred to affected creditors, as appropriate, to provide compensation. Alternatively, where a suitable purchaser is identified, the shares may be transferred to them, with the creditors instead receiving, where appropriate, compensation in some other form.
Certain arrangements are subject to safeguard provisions to protect netting and set-off.
There are a range of excluded liabilities including:
- liabilities representing protected deposits
- any liability, so far as it is secured
- liabilities that the bank has by virtue of holding client assets
- liabilities with an original maturity of less than 7 days owed by the bank to a credit institution or investment firm
- liabilities arising from participation in designated settlement systems and owed to such systems or to operators of, or participants in, such systems
- liabilities owed to central counterparties recognised by the European Securities and Markets Authority in accordance with Article 25 of Regulation (EU) 648/2012 (EMIR) of the European Parliament and the Council of 4 July 2012 on OTC derivatives, central counterparties and trade depositaries
- liabilities owed to an employee or former employee in relation to salary or other remuneration, except variable remuneration
- liabilities owed to an employee or former employee in relation to rights under a pension scheme, except rights to discretionary benefits
- liabilities owed to creditors arising from the provision to the bank of goods or services (other than financial services) that are critical to the daily functioning of its operations
A “protected deposit” is defined in section 48C as one which is covered by the FSCS, or equivalent deposit guarantee scheme, up to the coverage limit of that scheme.
US law does not provide for a ‘bail-in tool’.
Yes, the BRRD was transposed into Italian law under Legislative Decree no. 180/2015 (“Decree”).
The following liabilities are excluded from the application of the bail-in tool and, consequently, they can not be written down or converted into shares:
- deposits protected under the deposit guarantee scheme, i.e. up to Eur 100,000.00;
- secured liabilities, including covered bonds and other guaranteed instruments;
- liabilities resulting from the holding of customers’ goods or in virtue of a relationship of trust;
- interbank liabilities (except those within the same banking group) with an original maturity of less than 7 days;
- liabilities deriving from participation in payment systems with a residual maturity of less than 7 days;
- debts to employees, commercial payables and tax liabilities, if these are privileged under bankruptcy law.
Liabilities that have not been expressly excluded can be included in a bail-in. However, pursuant to article 49, paragraph 2, of the Decree, in exceptional circumstances, such as when the bail-in entails a risk for financial stability with significant negative effects on the economies of a Member State or EU, the authorities may, at their discretion, exclude other liabilities as well. Such exclusion shall be notified in advance by the Bank of Italy to the European Commission.
The creditors included in a bail-in are ranked as follows: i) shareholders; ii) holders of other capital instruments; iii) other subordinated creditors; iv) unsecured creditors; v) individuals and small businesses for the part of their deposits above Eur 100,000; vi) the deposit guarantee fund, which contributes to the bail-in in the place of guaranteed depositors.
Pursuant to article 52, paragraph 2, of the Decree, the shareholders and creditors cannot, in any event, be required to suffer greater losses than they would incur under normal insolvency proceedings.
Under the FIB Act, as part of taking control of a financial institution if the condition or operation of the financial institution may cause damage to public interest, in case the financial institution control committee considers that the deposits of the controlled financial institution have unreasonably high and unjust interest, the financial institution control committee shall, with the approval of the Deposit Protection Agency Board, be authorized to decrease the rate of such interest, provided that it shall be announced to depositors and the decrease in interest rate shall be commenced after the expiration of seven days from the date of announcement.
In addition, in case the financial institution control committee considers that the contractual obligations of the controlled financial institution exceed the benefits receivable, the financial institution control committee may enter into an understanding with the property owner, contractual party or person concerned to reduce such obligations.
Slovenia provides the Bail-in tool in accordance with the Resolution and Compulsory Dissolution of Credit Institutions Act (which transposes BRRD and implements SRM).
Bail-in tool permits Bank of Slovenia to write down the eligible liabilities in a cascading contribution to absorb losses of the resolution bank, or to convert them into ordinary shares or other instruments of ownership issued by the resolution bank or the bridge bank to which the assets, rights or liabilities of the resolution entity are transferred.
The bail-in tool may in principle be applied to all liabilities of an institution. However, specifically excluded are guaranteed deposits, secured liabilities (covered bonds), liabilities used for hedging purposes, liabilities that arise by virtue of the resolution entity holding cash or other repayable funds of clients and liabilities to the employees, creditors arising from the provision of goods or commercial services, tax and social security authorities or liabilities from deposit guarantee schemes.