On 25 October 2013, the Financial Markets Law Committee (FMLC) published a second discussion document on the EU Commission’s General Approach to the proposed Recovery and Resolution Directive (RRD).
The document is generally supportive of the changes made within the General Approach, but highlights a few remaining areas of concern with respect to legal uncertainty, including those set out below:
Bail-in: The RRD does not provide a set of principles to guide a resolution authority’s choice as to whether to convert debt to equity or whether to write-down debt. In addition, contractual bail-in provisions may not operate in the same way as statutory bail-in provisions;
Valuation: It is unclear on what basis the valuation (which must be independent) is to be carried out, notwithstanding that Article 30 of the RRD provides that the valuation should be fair and realistic. This drafting ambiguity gives rise to legal uncertainty as to the status of a resolution action which is taken when a valuation at the proscribed standard has not been carried out, owing to practical difficulty or impossibility; and
General Resolution Powers: Articles 56(1)(h) and 56(1)(l) of the RRD give a resolution authority the power to cancel or amend the terms of “debt instruments”. However, this definition is wider than that of “capital instruments” – the term used to describe the instruments that are eligible to be ‘bailed-in’.
On 13 November 2012, the Financial Markets Law Committee (“FMLC”) published a response to the Liikanen Report on structural reform of the EU banking sector (see blogpost dated 4 October 2012 for more detail on the report itself). The response focuses on two aspects of the Liikanen Report:
On the subject of bail-in, the FMLC supports the Liikanen group’s recommendation that the set of instruments to which the bail-in tool would apply needs to be more clearly defined. It also reiterated its previous concern that over-reliance on exemptions from the scope of the bail-in tool risks undermining one of the key principles of insolvency law, being the pari passu distribution of assets to creditors of the same class.
On the subject of ring-fencing, the FMLC made clear its belief that any structural reforms implemented at an EU level must take account of existing and proposed Member State ring-fencing regimes, or risk a situation where certain institutions would, in effect, have to be split into three parts.