The European Banking Authority (EBA) has published a Consultation Paper containing draft guidelines specifying the types of tests, review or exercises that may lead to extraordinary public support measures for institutions under the Bank Recovery and Resolution Directive (BRRD).
Under article 32 of the BRRD, the need for extraordinary public financial support for an institution should be considered as an indicator that the institution is failing or is likely to fail, and therefore triggers the need for resolution. However, the BRRD also acknowledges the existence of situations where extraordinary public financial support may not be in itself a condition that sufficiently demonstrates that an institution is failing or will fail in the near future.
In particular, extraordinary public financial support would not necessarily trigger resolution in exceptional cases where a specific list of elements and conditions set in article 32(4)(iii) of the BRRD is met. Among these elements and conditions, the BRRD refers to public injections of own funds or purchase of capital instruments to address a capital shortfall resulting from a test, review or exercise.
The draft guidelines specify the main features of the types of tests, reviews or exercises that may lead to support measures. These support measures include a timeline, a scope, a time horizon and reference date, a quality review process, a common methodology and, where relevant, a macro-economic scenario and hurdle rates, as well as a timeframe to address the shortfall. These elements are designed to assist national competent authorities when they are conducting such tests, reviews and exercises where institutions may not be able to address the capital shortfall resulting from the test, review or exercise and would, in that situation, be a potential candidate for resolution in accordance with article 32(4)(iii) of the BRRD.
