On 20 June 2013, the Presidency of the Council of the EU published a note on the current “state of play” with respect to the Recovery and Resolution Directive (RRD), together with a compromise RRD proposal. It also invited the EU Council to agree the compromise and mandate the Presidency to undertake negotiations with the EU Parliament with a view to reaching an agreement on the RRD as soon as possible.
The “state of play” summary focuses on the need to achieve an optimal balance between three interlinked elements of the RRD, dubbed the “Resolution Triangle”:
- the design of the bail in tool;
- minimum requirements for own funds and eligible liabilities (MREL); and
- financing arrangements.
The Design of the Bail-in Tool (Article 38)The Presidency is seeking to strike a balance between harmonisation and flexibility with respect to bail-in, proposing:
- a limited discretionary exclusion for derivatives – this would only apply in particular circumstances and only where necessary to achieve the continuity of critical functions and avoid widespread contagion; and
- a power for resolution authorities, available in extraordinary circumstances and limited to an amount equal to 2.5% of the total liabilities of the institution in question, to exclude certain other liabilities from bail-in where it is not possible to bail them in within a reasonable time, or for financial stability reasons.
Minimum Requirements for Own Funds and Eligible Liabilities (Article 39)In recognition of the general consensus around the need for adequate MREL, but in an effort to marry the need for harmonisation in this area with the practical difficulty of defining an appropriate level of MREL (particularly with respect to different banking activities and different business models), the Presidency proposes that the MREL of each institution should be determined by the appropriate resolution authority on the basis of specific criteria, including:
- its business model;
- level of risk; and
- loss absorbing capacity.
Financing Arrangements (Articles 92 and 93)The key features of the Presidency proposal in this area are that:
- Member States should be free to keep Deposit Guarantee Schemes (DGS) and resolution funds separate or to merge them; and
- a resolution fund should have a minimum target level of:
- 0.8% of covered deposits (and not ‘total liabilities’ of a Member State’s banking sector as suggested by some Member States) where kept separate from the DGS, or
- 1.3% where combined with the DGS.
Michael Beaton is a lawyer and managing partner of Derivatives Risk Solutions LLP. He can be contacted at email@example.com