On May 6th, 2014 the Council adopted a Directive harmonizing national rules on bank recovery and resolution within Europe: the Bank Recovery and Resolution Directive (“BRRD”). Adoption of the BRRD follows an agreement reached with the European Parliament in December 2013. Member states have until 31 December 2014 to transpose it into national law.
The BRRD provides supervisors with new powers and instruments to prevent bank crises and resolve banks in an orderly manner in the event of failure. EU financial markets have become increasingly integrated, to the extent that major risks in one EU Member State can rapidly spread to other EU Member States, while normal insolvency proceedings may not be appropriate.
“The E.U. has lived up to its commitments,” said Michel Barnier, the commissioner for financial affairs, in a statement. “Not only does the banking union help to restore confidence in the banking sector, but it also ensures a truly European system of supervision and resolution of banks when they fail.”
The BRRD establishes a range of instruments to tackle potential bank crises at three stages: preparatory and preventative, early intervention, and resolution.
Banks will have to draw up recovery plans, and update them annually, setting out the measures they would take to restore their financial position in the event of significant deterioration. Resolution authorities will have to prepare resolution plans for each bank, laying out the actions they might take necessary and also have the power to appoint “temporary administrators” to a bank.
The main resolution measures include:
- the sale of (part of a) business;
- establishment of a bridge institution (the temporary transfer of good bank assets to a publicly controlled entity);
- asset separation (the transfer of impaired assets to an asset management vehicle);
- bail-in measures (the imposition of losses, with an order of seniority, on shareholders and unsecured creditors).
The BRRD requires each EU Member State to set up resolution funds to ensure that the resolution tools can be applied effectively. By 2025, such national funds will have to reach a target level of at least 1% of covered deposits of all the banks authorized in the respective country. To reach the target level, banks will have to make annual contributions.
The approval of the BRRD comes with an approved update to the Deposit Guarantee Directive, insuring bank deposits up to EUR 100,000. Payment times have been reduced from 20 to 7 days and the funding structure of the guarantee scheme has been strengthened. These approvals are an important pillar of the EU banking union, complementing the Single Supervisory Mechanism which came into force in late 2013.
For more information, contact:
Martin Eleveld, Partner Banking & Finance, HEUSSEN Lawyers & Civil law Notaries in Amsterdam
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