The Bank Recovery and Resolution Directive (BRRD) specifies the sequence in which the power to write down or convert liabilities in resolution should be applied. This sequence provides that capital instruments as defined in the Capital Requirements Regulation (CRR) should bear losses first, before other liabilities. The BRRD also makes a similar provision about the power to write down or convert capital instruments at the point of non-viability (the PONV conversion power).

To ensure that the absorption of losses by capital instruments is effective, and that resolution authorities and other stakeholders have a clear understanding of how this sequence should be applied, the BRRD mandates the European Banking Authority (EBA) to issue guidelines clarifying the interrelationship between the provisions of the BRRD and the provisions of the CRR and the CRD IV Directive, as far as this affects the write-down sequence.

The EBA has now published a consultation paper on draft guidelines concerning the interrelationship between the BRRD sequence of write-down and conversion and CRR/CRD IV Directive.

The two guiding rules are that:

  • when applying the bail-in tool or the PONV conversion power, except where exclusions according to the BRRD are made, the resolution authority should treat capital instruments which rank equally in insolvency equally, whatever their other qualities; and
  • the resolution authority should apply the same treatment to instruments which are partially included in the calculation of own funds as to instruments which are fully included.

The two guiding rules are applied to the particular cases of grandfathered Additional Tier 1 instruments and Tier 2 instruments which are only partially included in the calculation of own funds because they are subject to the amortisation regime of the CRR.

The deadline for comments on the consultation paper is 3 January 2015.

View EBA consults on treatment of liabilities in bail-in, 1 October 2014