On 28 February 2013, the Presidency of the EU Council published a compromise proposal (dated 15 January 2013) relating to the proposed directive establishing a framework for the recovery and resolution of credit institutions and investment firms (the “RRD”).
The compromise proposal makes a large number of suggested changes to the text of the RRD, most of which are relatively small and insignificant in nature. However, several of the proposed amendments are worthy of note, as detailed below.
Simplified obligations and waivers for certain institutions
A new Article 4(1a) to the RRD has been proposed. Under this new article, where competent authorities and resolution authorities consider that, based on factors such as size, business model or interconnectedness, the failure of a specific institution would not have a negative effect on:
- financial markets;
- other institutions; or
- funding conditions
a waiver may be granted in relation to the requirements:
- for an institution or group to maintain a recovery or resolution plan (“RRP”), or
- to update/review an RRP.
Whilst this does not go as far as the guidance recently published by the FSA (see this blogpost for a more detailed discussion) and would presumably not apply to the largest market participants in any event, the degree to which this is strictly compatible with the FSB’s “Key Attributes” document remains questionable.
Scope of bail-in tool
Article 38 of the original RRD excluded liabilities with an original maturity of less than one month from the list of liabilities which would be subject to write-down and conversion powers contained within the RRD. The compromise proposal has deleted this section, with the result that liabilities with an original maturity of less than one month would now be included (if the proposals are ultimately approved). Whilst this would undoubtedly limit arbitrage opportunities relating to the design of bail-inable liabilities and so would be welcome in this respect, the adverse effects on current bank funding practices remains unknown.
Minimum requirement for liabilities subject to the write-down and conversion powers
Article 39 of the original RRD required firms to maintain a minimum aggregate amount of own funds and eligible liabilities expressed as a percentage of “total liabilities”. However, under the compromise proposal, this requirement has been amended so as to refer to “risk weighted assets”, a metric that some commentators feel materially underestimates the risk associated with financial institutions.
Assessment of required amount of bail-in
Article 39(3) of the original RRD specifies that the minimum amount of own funds and eligible liabilities a firm is required to maintain shall be determined, inter alia, on the amount that would be necessary to restore a firm to such as level as would “sustain sufficient market confidence in the institution”. Similarly, under Article 41(2) or the original draft RRD, the bail-in tool would be applied to such an extent as would, inter alia, “sustain sufficient market confidence in the institution”. Under the compromise proposal, both of these references have been removed. This is a welcome amendment in that it removes a very subject standard. However, on the flip side, it restricts a regulator’s flexibility to apply bail-in above the level that is necessary to make sure that the institution complies with its conditions for authorisation. In doing so it also raises the prospect that a regulator might be required to effect a bail-in on more than one occasion, thus creating an additional layer of uncertainty which works to the detriment of the entire market.