Does your jurisdiction know a bail-in tool in bank resolution and which liabilities are covered?
Banking & Finance
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.
Bail-in is one of the resolution tools available to HNB. All liabilities may be subject to bail-in except for those explicitly excluded under the Hungarian resolution act and detailed below.
There are three options for the exclusion of liabilities:
- the first category of excluded liabilities consist of those type of liabilities exhaustively listed in the resolution act being unsecured and uncollateralized liabilities, namely
(i) deposits insured by the NDIF,
(ii) investments backed by the Deposit Guarantee Fund (in Hungarian: Betétbiztosítási Alap),
(iii) liabilities owed to non-group member institutions with an original maturity of less than 7 days,
(iv) liabilities with a remaining maturity of maximum 7 days vis-à-vis the payment and settlement systems or participants thereof,
(v) secured liabilities,
(vi) wages payable to the institution’s employees, and
(vii) taxpayer liabilities and liabilities arising from service contracts.
- the second category of excluded liabilities consist of any liabilities (or any part thereof) which
(i) are required – either directly or indirectly – to maintain critical functions and main business lines of the given institution, or
(ii) are necessary and proportionate to avoid a widespread spillover of a negative process which would result in a severe disturbance in Hungary or any other EEA state.
- the third category of excluded liabilities consist of any liabilities (or any part thereof) which the HNB may exclude in its capacity of resolution authority provided that
(i) such liabilities are not capable of being subject to bail-in tool and
(ii) there would be a higher decrease in the value of the claims of other creditors affected by the bail-in if such liabilities would be subject to bail-in.
Yes. The bail-in tool was introduced in Latvia by transposing the BRR Directive.
Article 44(1) of the BRR Directive states that the EU Member States shall ensure that the bail-in tool may be applied to all liabilities of the bank. However, Article 44(2) of the BRR Directive provides that the resolution authorities shall not exercise the write down or conversion powers in relation to the following liabilities, among others:
- covered deposits;
- 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 national law are secured in a way similar to covered bonds;
- liabilities to institutions, excluding entities that are part of the same group, with an original maturity of less than seven days;
- and others.
Bail-in tool, as defined in BRRD, is transposed in the national law of Lithuania.
Yes, the bail-in tool is has been transposed into Polish law in accordance with Art. 43 of Directive 2014/59/EU. It relates to the following liabilities:
- Common Equity Tier 1 instruments;
- Additional Tier 1 instruments; and
- Tier 2 instruments.
Yes, the bail-in instruments available to the Romanian resolution authority are debt-to-equity swaps and debt waivers.
Such instruments apply as a general rule to all liabilities with the exception of (i) limited categories of liabilities expressly mentioned in the Romanian bank resolution law; or (ii) liabilities excluded following a NBR decision.
The categories of liabilities excluded from the bail-in tools are: covered deposits, 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 are secured in a way similar to covered bonds), any liability that arises by virtue of the holding of client assets or client money (including client assets or client money held on behalf of UCITS or of AIFs), provided that such a client is protected under the Romanian insolvency law, fiduciary liabilities, liabilities outside group with an original maturity of less than seven days or liabilities to payment systems with a remaining maturity of less than seven days, tax and NFBD’s liabilities, liabilities to employees and service providers key for the functioning of the bank.
The concept of bail-in is not a part of the current Indian regulatory framework. Presently, no bank liabilities are subject to a bail-in.
The pending FRDI Bill, however, has detailed provisions for bail-in as a bank resolution tool including a list of liabilities that would be eligible to be bailed-in.
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. 20). 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.
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 protected 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 operators 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.
The Nigerian banking system generally provides for bail out tools in banks resolution with the establishment of the NDIC and AMCON. There is no regulated framework for bail in tools in bank resolution.
Bail-in in the form of creditors and depositors having their claims converted into shares in the bank as the primary measure for recovery of a bank does not currently exist in Norway. However, such bail-in will be introduced with the implementation of BRRD in Norway which is expected to take place in 2018.
However, the current Financial Undertakings Act contains two related bail-in tools. Firstly, a bank's share capital may be written down, either by its shareholders or by the MoF, subject to 25 % or less of its registered share capital having been determined as being intact following an assessment of the bank's assets and liabilities in accordance with Norwegian statutory rules on annual accounts and annual reports.
Secondly, a bank's subordinated loan capital may be written down, either by its shareholders or by the MoF, subject to a substantial amount of the subordinated loan capital being lost, provided that the particular subordinated loan may be written down (either by virtue of provisions in the loan agreement or by virtue of the loan agreement.
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.
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 subject 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 relevant 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 21.) 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.
The concept of Bail-in is regulated under Turkish law slightly different than the EU. As explained in detail under Question 20, 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:
- Debt instruments shall be issued by the respective bank, registered with the CMB and fees shall be collected in full and cash;
- 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;
- 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;
- 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;
- 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
- 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.
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.
Yes, this tool is used for recapitalization of a bank to restore its ability to comply with the licensing terms and credibility or to turn debt into equity or reduce a principal amount of claims/debt instruments.
A bail-in tool is applicable to any obligations of a bank under resolution regime, except the ones that are expressly excluded by law in Art. 66, para.2 and Art. 67 of the RRCIIFA. These statutory exceptions correspond to the exceptions listed in Article 44(2) of Directive 2014/59/EC, and exclude obligations such as covered deposits, mortgage bonds, liabilities arising out of fiduciary relationship, liabilities to institutions, excluding entities belonging to the same group, with original maturity of less than seven days, remuneration and pension benefits to employees, excluding variable remunerations, tax and social security liabilities, if they are preferred by law, etc.
In exceptional circumstances, and under expressly enumerated statutory conditions, BNB has the power to further exclude additionally entirely or partially other obligations from the scope of the bail-in tool. BNB can exercise this power only in case of availability of financing opportunities at the Resolution of Banks Fund and after notification to the European Commission. If the exclusion provides for financing from the Resolution of Banks Fund or from an alternative fund, BNB can exercise it if the European Commission does not forbid or require amendments to the scope of the suggested exclusion within 24 hours or a longer period, which BNB consented to.
A Bail-in tool is included as a preventive measure within the intensive supervision program, such provision must be ordered by the control entity through a resolution before approval of the intensive supervision program or during its implementation. As per Ecuadorian legislation bail-in tools can be used to place the burden on shareholders rather than depositors by writing down existing debt.
The CBI may use the bail-in tool to recapitalise a bank provided the conditions for resolution as set out in question 20 are met. Liabilities that cannot be covered by the bail-in tool are:
(a) covered deposits (the amount actually covered);
(b) covered bonds;
(c) liabilities in the form of financial instruments used for hedging purposes and secured in a manner similar to covered bonds;
(d) liabilities arising by holding client monies or client assets;
(e) liabilities arising in the context of the bank acting as a fiduciary;
(f) liabilities to other institutions (not part of the same group) with a maturity of less than 7 days;
(g) certain liabilities to employees;
(h) liabilities to deposit guarantee schemes;
(i) preferred debts owing to the Revenue Commissioners or the Minister for Social Protection;
(j) liabilities to commercial or trade creditors in respect of goods and services that are critical to the institution’s daily functioning;
(k) liabilities arising from client monies or client financial instruments where the institution is an investment firm; and
(l) liabilities to systems designated under the Settlement Finality Directive (98/26/EC).
(m) secured assets related to a covered bond cover pool. Such secured assets must be kept segregated with enough funding. However, where appropriate, a resolution order may allow a bail-in cover that part of a secured liability which exceeds the value of the collateral pledged.
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.
Yes, following the European directive 2014/59/EU Belgium has implemented a bail-in tool into the new Banking Act. The bail-in tool can be found in Article 267 of the Banking Act and reflects to a large extent the Articles 43 up to 55 of the abovementioned European directive. The different liabilities covered can be found in Article 267/3, §2 of the Banking Act.
In Estonia, the bail-in tool allows the FSA to assess the claims of creditors without collateral in a bank or other financial institution, or to convert debt claims into equity. The FSA may apply the bail-in tool for any of the following purposes:
- to recapitalise a credit institution or investment firm under resolution proceedings or an entity that is part of the same consolidation group as the credit institution or investment firm in accordance with the conditions for authorisation provided for in the Credit Institutions Act or Securities Market Act, and to sustain public confidence in the credit institution or investment firm or the entity, or
- to convert liabilities to equity or reduce the principal amount of claims or liabilities where they are transferred to a bridge institution with a view to increase its capital or with a view to apply the sale of shares or assets tool or the asset separation tool.
Yes (see also Question 20 above). The provisions of Directive 2014/50/EU referring to the write-off or conversion to equity ('bail-in') of claims of credit institutions are transposed by virtue of articles 43 and 44 of law 4335/2015.
In principle, the 'eligible liabilities' covered by the bail-in tool include all liabilities that are not explicitly excluded from its scope. Law 4335/2015 expressly excludes a series of liabilities, such as deposits secured by the HDIGF and other guaranteed deposits, pledged cash collateral in exchange for a loan secured liabilities such as covered bonds, client assets and money held on behalf of protected clients, liabilities to other credit institution and investment firms and liabilities vis-à-vis employees, providers of day-to-day goods and services and the tax and social security authorities. In addition, the BoG may exclude from coverage other categories of liabilities in extraordinary circumstances.
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.
US law does not provide for a ‘bail-in tool’ with respect to bank resolution.
Colombian jurisdiction has no bail- in tool in bank resolution; the only measures included in our resolution regime are those stated in question 20 above.
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 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.
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.