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2016-11-doc13 Crisis management in the banking sector: act 2

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This week was a productive one for insolvency lovers. In Strassbourg/Brussels, the European Commission launched new proposals. One for restructuring distressed but in principle viable businesses, see blog/2016-11-11-restructuring-directive-published.

The other one is a rather voluminous proposal for a reform package intended to further strengthen the resilience of credit institutions in the EU. It is only a year ago that Matthias Haentjens and I (editors) published our Research Handbook on Crisis Management in the Banking Sector (Edward Elgar publishers). The package published this week consists of proposed amendments to CRR, CRD IV, BRRD and the SRM. You understand that you have to be a specialist in financial law to understand the ramifications of these proposals (and I wish them an enjoyable weekend). See for press releases, Q&As and texts ec.europa.eu/finance/bank/regcapital/crr-crd-review and /ec.europa.eu/finance/bank/crisis_management

As an interested observer I noticed the proposal related to the MREL (Minimum Requirement for own funds and Eligible Liabilities) system to create a new category of senior class instruments that are eligible for MREL purposes (‘non-preferred senior’). The existing MREL rules of the BRRD, which apply to all credit institutions and not only large ones, do not generally require that a liability eligible for MREL is subordinated. It would therefore be possible that these liabilities rank in insolvency pari passu with non-eligible liabilities. A pillar under the BRRD is that creditors may not be treated in a manner which leaves them worse-off than would be the case in ‘normal insolvency proceedings’. As a consequence present MREL rules provide that creditors of MREL eligible liabilities potentially can have a compensation claim against the resolution fund, thereby circumventing the goal of bail-in.

Now, in the waterfall, these non-preferred senior liabilities are suggested to rank between senior unsecured liabilities and capital instruments (CET1, AT1, Tier 2, Subordinated debt) of an institution. Consequently, they will be subject to bail-in after capital instruments but before senior unsecured liabilities. National laws (such as specific financial of banking acts or insolvency legislation) should be amended accordingly. The question whether a second edition of the book mentioned above is justified remains, for this moment, unanswered.