ECB Questions the Point of Non-Viability Under the RRD

The opinion of the European Central Bank (“ECB”) (dated 29 November 2012) on the proposed directive establishing a framework for recovery and resolution of credit institutions and investment firms (the “RRD”) was recently published in the Official Journal of the EU.  The opinion addressed a number of issues under the RRD and suggested various amendments to the text of the directive.  The extent to which the ECB’s suggestions will ultimately be adopted is as yet unknown.  However, a number of elements are worthy of note.

The ECB proposals included amending the resolution objectives so as to require the protection of all deposits and not only those which benefit from the statutory EUR 100,000 protection limit.  CCPs in particular will also welcome the ECB’s suggested amendments to Articles 32 and 34 of the RRD such that any bridge institution or purchaser of a failed firm must continue to meet regulatory membership criteria of relevant payment, clearing and settlement systems – an amendment which the ECB specifically notes is designed to enable the operators of such systems to assess whether the bridge institution/purchaser continues to meet relevant membership criteria.  However, of most interest, were the ECB’s comments regarding the point of non-viability under the RRD.

At a principal level, the ECB believes that institutions that are failing or likely to fail should be liquidated under national insolvency proceedings if there is no public interest concern in their resolution.  Bail-in powers should only be used to maintain an institution that has reached the point of non-viability as a “last resort”.  Accordingly, the ECB proposes to amend the definition of “resolution” under the RRD so as only to allow restructuring of an entire institution in ‘exceptional and justified’ circumstances.

At a more practical level, the RRD currently entitles resolution authorities to take a resolution action if either the resolution authority or the competent authority determines that an institution is failing or likely to fail.  However, in the opinion of the ECB, the role of the competent authority as prudential supervisor and regulator makes it best placed to determine, for example, whether an institution is in breach of its capital requirements for continuing authorisation.  As such, the ECB considers that the “competent authority” alone should make the determination as to whether an institution has reached the point of non-viability and suggests amending Article 27(1)(a) of the RRD accordingly.  Moreover, the decision of any competent authority as to whether an institution is actually failing or likely to fail, should be based solely on an assessment of the prudential situation of the institution in question.  As such, a need for state aid should not, in itself, represent conclusive evidence that an institution is failing or likely to fail, although it would be taken into account in assessing the institution’s prudential situation.

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