- Bail-ins, which have been applicable in the European Union since 1 January 2016 under the Bank Recovery and Resolution Directive (BRRD), are designed so that shareholders and certain categories of creditors are the first to bear the losses of a troubled bank rather than member states.
- The 19 July 2016 ruling by the Court of Justice of the European Union (CJEU) concurs that exemptions are possible "when implementing such measures would risk endangering financial stability or lead to disproportionate results”.
- It is worth keeping the scope of this ruling in perspective. The upcoming finalisation of MREL (Minimum Requirement for own funds and eligible liabilities) and the adjustment of bank liabilities to comply with this new requirement should gradually limit the impact of bail-ins on financial stability and make any exemptions extremely rare.
The purpose of bail-ins
The bail-in is one of four resolution tools – along with selling or merging business with another bank, setting up a temporary bridge bank, and separating good assets from bad ones – which were introduced by directive 2014/50, the so-called Bank Recovery and Resolution Directive (BRRD) adopted in 2014. National laws transposing the bail-in measures have been in effect since 1 January 2016. They are designed to limit the impact of bankruptcies on public finances while ensuring the preservation of the critical functions of the ailing bank, the failure of which could endanger financial stability, notably in the case of systemically important banks.
When the resolution authority activates a bail-in procedure, bank losses are first absorbed by equity capital. At the discretion of the resolution authorities, junior and senior liabilities – known as bail-inables – will then be converted into equity capital or written off. These liabilities can be ranked by order of loss absorption as follows: core equity tier 1 (CET1), additional Tier 1 equity capital, Tier 2 equity, other subordinated debt, and lastly, other liabilities eligible for bail-ins. This is the order that would prevail in normal insolvency procedures, except for exemptions. Certain liabilities are excluded from the bail-in’s scope of application. These include the share of customer deposits covered by deposit insurance schemes (i.e. up to EUR100,000 in the European Union), covered bonds, and interbank loans with an initial maturity of less than 7 days. Lastly, the non -guaranteed share of individual and SME deposits (above EUR100,000) is given preferential status and is ranked higher than ordinary, non-guaranteed, non-preferential debt (such as bonds).
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by Laurent QUIGNON