- Regulation
- Directive 2014/59/EU (BRRD)
- Article
- 44, 101, para. 2
- Topic
- Resolution tools and powers
- Submitted by
- Competent authority
- Submitted
- 2018-02-07
- Answered
- 2018-03-02
- Answer provided by
- ESAs (EBA, ESMA, EIOPA)
Background
Article 101(2) of Directive 2014/59/EU (BRRD) states that “ The resolution financing arrangement shall not be used directly to absorb the losses of an institution or an entity referred to in point (b), (c) or (d) of Article 1(1) or to recapitalise such an institution or an entity. In the event that the use of the resolution financing arrangement for the purposes in paragraph 1 of this Article indirectly results in part of the losses of an institution or an entity referred to in point (b), (c) or (d) of Article 1(1) being passed on to the resolution financing arrangement, the principles governing the use of the resolution financing arrangement set out in Article 44 shall apply. ” The practical implications of this paragraph are unclear. The resolution fund (RF) may only intervene to cover for losses due to creditors/liabilities excluded from bail-in, which would mean that even if all bail-inable creditors have been subjected to bail-in and losses are still not covered, a bridge bank would not be allowed to take on the remaining losses and thus resolution would not be possible. Would this also exclude guarantees by the RF (with the aim of creating liquidity, but that might result in the RF taking on indirect losses)?
Answer
As a general principle, according to Article 101(2) of Directive 2014/59/EU (BRRD), the resolution financing arrangements could indirectly absorb part of the losses of the institution under resolution, subject to application of the principles set out in Article 44 BRRD. Even if not all losses are absorbed by the creditors of the institution under resolution but the absorbed losses amount to at least 8% of the total liabilities of the institution under resolution, the Resolution Fund may be used for the purposes listed in Article 101(1) BRRD, for example, to fund the difference between assets and liabilities transferred to a bridge bank. With respect to the scenario proposed in the question it should also be specified that a bridge bank cannot receive liabilities that exceed the value of assets transferred from the institution under resolution. Therefore, assets and liabilities can only be transferred provided that the bridge bank can receive additional funds from other sources, including the resolution financing arrangements, as laid down in Article 40(3), so as to fill the gap between the value of its assets and the value of its liabilities. Disclaimer: This question goes beyond matters of consistent and effective application of the regulatory framework. A Directorate General of the Commission (Directorate General Financial Stability, Financial Services and Capital Markets Union) has prepared the answer, albeit that only the Court of Justice of the European Union can provide definitive interpretations of EU legislation. This is an unofficial opinion of that Directorate General, which the European Banking Authority publishes on its behalf. The answers are not binding on the European Commission as an institution. You should be aware that the European Commission could adopt a position different from the one expressed in such Q&As, for instance in infringement proceedings or after a detailed examination of a specific case or on the basis of any new legal or factual elements that may have been brought to its attention.
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