The European Banking Authority (EBA) has published 3 sets of final guidelines on bail-in under the Bank Recovery and Resolution Directive (BRRD).

The first set of guidelines focus on conversion rates in bail-in. It highlights guiding principles resolution authorities are to apply when setting debt-to-equity conversion rates both in a bail-in context, or when the power to write down and convert capital instruments is not applied in conjunction with any resolution tool. The guidelines set out two guiding principles to which authorities should refer when setting conversion rates:

  • when setting conversion rates resolution authorities should seek to ensure that no shareholder or creditor is expected to receive worse treatment than in insolvency (the ‘no creditor worse off’ principle), when applying both the bail-in tool and, to the extent necessary to uphold fundamental property rights, the power to write down or convert relevant capital instruments. This determination should be made on the basis of the valuation carried pursuant to Article 36(4)(b) to (g) of the BRRD; and
  • subject to achieving the above, resolution authorities should set differential conversion rates only in order to respect the other principles in Article 34 of the BRRD.

The second set of guidelines deal with the treatment of shareholders. It seeks to clarify the circumstances under which it is appropriate to cancel, transfer or severely dilute shares or other instruments of ownership.

The third set of guidelines deal with the inter-relationship between the BRRD and the Capital Requirements Directive IV / Capital Requirements Regulation (CRR) clarifying the treatment of instruments which meet the criteria for recognition as Additional Tier 1 as per Article 52 of the CRR but are progressively grandfathered as per Article 484 of that Regulation due to the fact that they do not contain a point of non-viability (PONV) clause. The guidelines note the following two guiding rules:

  • when applying the bail-in tool or the point of non-viability conversion power, the resolution authority should treat capital instruments which belong to the same category of the sequence established by Article 48 or Article 60 of the BRRD and which rank equally in insolvency in the same way, 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 guidelines apply six months after their publication in all EU official languages. Member State national competent authorities will confirm to the EBA their compliance status, which will be disclosed on the EBA website.

View EBA final guidelines concerning the interrelationship between the BRRD sequence of writedown and conversion and CRR/CRD, 5 April 2017

View EBA final guidelines on the rate of conversion of debt to equity in bail-in, 5 April 2017

View EBA final guidelines on the treatment of shareholders in bail-in or the write-down and conversion of capital instruments, 5 April 2017

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