An overview of the proposed global measures for bank crisis management and resolution.
During the 2008/2009 financial crisis a number of governments were obliged to take emergency action to stabilise banks. They did so either under existing national regimes or were obliged to enact ad hoc legislation. In either case, there was no international regime which coordinated and facilitated such intervention.
After the financial crisis a number of initiatives were set in train to promote a more globally integrated system for the stabilisation of failed or failing banks. Such initiatives included proposals for the implementation of resolution regimes and for regimes which required banks and systemically important financial institutions to implement and maintain recovery and resolution plans.
Financial Stability Board
The mandate of the Financial Stability Board (FSB) is to promote international financial stability. It does so by coordinating national financial authorities and international standard-setting bodies in the development of regulatory and supervisory policies.
The FSB has played a leading role in recommending changes to regulatory and supervisory policies following the financial crisis. In the context of bank crisis management and resolution, the leading publication remains the Key Attributes of Effective Resolution Regimes for Financial Institutions which was originally issued in October 2011 but which was subsequently updated in October 2014. The FSB has also published a webpage which provides guidance on the implementation of the Key Attributes.
The Key Attributes are the international standard for resolution regimes. They are part of a set of policy measures, endorsed by the G20 in November 2011, designed to address the problem of firms that are "too big to fail".
The aim of the Key Attributes is to make it possible to resolve any financial institution in an orderly manner without severe systemic disruption or exposing taxpayers to the risk of loss, while protecting the firm’s functions that are critical to the financial market or the real economy and ensuring that losses are borne by shareholders and creditors of the failing firm, as they would be in insolvency.
The FSB has issued a series of subsequent reports to supplement the Key Attributes. These include a series of peer reviews which are intended to measure the timely and consistent implementation of the Key Attributes across the FSB jurisdictions. On 18 March 2016, the FSB published its Second Thematic Review on Resolution Regimes whose main findings were that:
- only a subset of jurisdictions currently have a bank resolution regime with a comprehensive set of power broadly in line with the Key Attributes. Those most often lacking are explicit continuity powers, bail-in powers and powers to impose a temporary stay on the exercise of early termination rights
- while resolution regimes generally apply to all types of commercial banks, the coverage of holding companies of banks, branches of foreign banks and material non-regulated operational entities within a financial group is more variable across jurisdictions
- there is significant variation across jurisdictions in the conditions for the use of resolution powers and their level of detail, and
- more progress has been made in terms of putting in place processes for recovery planning, compared to resolution planning or resolvability assessments.
The peer review makes a number of recommendations to address the gaps it identified. It notes that, by December 2016, jurisdictions will report to the FSB on what actions they have taken, or plan to take, in order to address the identified gaps.
On 19 October 2016, the FSB published a methodology for assessing the implementation of the Key Attributes. The Key Attributes Assessment Methodology for the Banking Sector sets out essential criteria to guide the assessment of the compliance of a jurisdiction’s bank resolution framework with the FSB’s Key Attributes. It is designed to promote consistent assessments across jurisdictions and provide guidance to jurisdictions when adopting or reforming bank resolution regimes to implement the Key Attributes.
On 18 August 2016, the FSB published two final guidance papers entitled Guiding Principles on the Temporary Funding Needed to Support the Orderly Resolution of a Global Systemically Important Bank and Guidance on Arrangements to Support Operational Continuity in Resolution. The guidance papers should assist authorities in meeting the resolution planning requirement under the Key Attributes and contribute to the removal of impediments to the orderly and effective resolution of firms. Alongside the guidance papers, the FSB also published its fifth progress report to the G20 entitled Resilience through resolvability – moving from policy design to implementation. The report reviews what has been achieved so far and sets out further actions to fully implement the Key Attributes and ensure that all global systemically important financial institutions (G-SIFIs) are resolvable. It also reports the findings from the second round of the Resolvability Assessment Process (RAP) for global systemically important banks and the initial results from the first RAP for global systemically important insurers. The FSB identified the following priorities for the remainder of 2016 and 2017 to help further advance progress:
- develop further guidance on central counterparty (CCP) resolution, building on the recently published discussion paper on Essential Aspects of CCP Resolution Planning which identifies elements that are considered to be core to the development of effective resolution strategies and plans for CCPs
- finalise the remaining elements of the Total Loss-absorbing Capacity (TLAC) standard, including guidance on the implementation of internal TLAC and final proposals on TLAC holdings and TLAC disclosures
- develop further guidance to support the resolution planning work of authorities and firms, including on ways in which access to financial market infrastructures can be maintained in resolution and on the operational execution of bail-in, and
- develop a Key Attributes assessment methodology for insurers and monitor implementation of the guidance on Developing Effective Resolution Strategies and Plans for Systemically Important Insurers.
On 01 February 2017, the FSB published for consultation draft Guidance on CCP Resolution and Resolution Planning. The draft guidance sets out a framework for resolution of financial market infrastructures and, when finalised, will assist authorities and jurisdictions with implementing effective resolution regimes and developing credible resolution strategies and plans for CCPs. The consultation closed on 13 March 2017.
On 04 June 2018, the FSB published its Thematic peer review on bank resolution planning: Summary Terms of Reference. The objective of the review is to evaluate implementation by FSB jurisdictions of the resolution planning standard set out in the FSB Key Attributes and in associated guidance in relation to banks. The peer review will cover resolution planning for all domestically incorporated banks in FSB member jurisdictions that could be systemically significant or critical if they fail, i.e. global systemically important banks (G-SIBs), domestic systemically important banks (D-SIBs) and any other banks that could be systemic in failure and which are included in resolution planning at a jurisdictional level. The review closed for feedback on 04 July 2018.
On 06 June 2018, the FSB requested a call for feedback entitled Monitoring the Technical Implementation of the FSB Total Loss-Absorbing Capacity (TLAC) Standard. The review will monitor implementation and identify any technical issues or operational challenges in the implementation of the bail-in standard. Responses to the public call for information were required to be submitted by 20 August 2018.
On 21 June 2018, the FSB published guidance entitled Principles on Bail-in Execution. The guidance sets out principles to assist authorities as they make bail-in resolution strategies operational. The principles cover:
- disclosures on the instruments and liabilities within the scope of bail-in
- valuations to inform and support the application of bail-in
- processes to suspend or cancel the listing of securities, to notify creditors, and to deliver new securities or tradeable certificates following entry into resolution
- securities law and securities exchange requirements during the bail-in
- processes for transferring governance and control rights to a new board and management for the firm emerging from resolution, and
- communications to creditors and the market at large.
On 21 June 2018, the FSB published guidance entitled Funding Strategy Elements of an Implementable Resolution Plan. This guidance covers the development of a resolution funding plan for G-SIBs and covers:
- firms’ capabilities to support monitoring, reporting and estimating funding needs in resolution and executing the funding strategy
- the development of resolution funding plans by the authorities
- reliance on firm assets and private funding as preferred sources of funding in resolution
- access to temporary public sector backstop funding mechanisms and ordinary central bank facilities, and
- information sharing and coordination between authorities.
The Basel Committee is, like the FSB, an international body. It makes recommendations and sets standards for the supervision of banks. It does so primarily in the area of capital standards. Its guidelines have no legal effect in themselves unless and until adopted by national legislatures.
In the context of bank crisis management and resolution, the Basel Committee’s primary emphasis has been to improve the quality of capital held by banks. This is done through the Basel III framework which has two complementary objectives:
- to ensure minimum standards of resilience so that financial firms are less likely to fail, and
- to reduce the impact on the financial system and the economy in case they do. It sets significantly higher requirements for loss absorption and places greater emphasis on higher-quality capital (increasing the quality and level of capital), while better capturing the full scope of risks that banks face (enhancing risk capture).
Key aspects of the framework include a leverage ratio requirement (constraining leverage), capital buffers to mitigate various sources of systemic risk (adding a macroprudential dimension) and a set of standards limiting liquidity and maturity transformation (mitigating liquidity risk).
Like the FSB, the Basel Committee issues updates on the achievement of its objectives. In November 2015, the Basel Committee published a report entitled Finalising post-crisis reforms: an update - A report to G20 Leaders which reviewed the Basel Committee’s work since the global financial crisis in strengthening the international regulatory framework for banks. On 07 December, the Basel Committee published a further report entitled Basel III: Finalising post-crisis reforms setting out the finalisation of the Basel III framework. A key objective of the revisions in this report was to reduce excessive variability of risk-weighted assets (RWAs).
The most important legislation in the context of bank crisis management and resolution is The Directive establishing a framework for recovery and resolution of credit institutions and investment firms 2014/59/EU (the BRRD).
The BRRD was published in the Official Journal of the EU on 12 June 2014 and came into force on 02 July 2014. It required member states to adopt and publish implementing legislation and regulations by 31 December 2014. The legislation was required to become effective from 01 January 2015 (with legislation implementing the bail-in tool becoming effective from 01 January 2016 at the latest).
The BRRD provides authorities with a common set of tools and powers for dealing with failing banks, and requires banks to facilitate this process by providing information for recovery and resolution planning purposes as well as meeting resolvability requirements. It contains provisions relating to recovery and resolution planning, intragroup financial support, early intervention, resolution tools and powers, cross-border group resolution, relations with third countries and financing arrangements.
On 02 December 2016, ISDA published the 5th version of its BRRD implementation monitor. The monitor is a useful table showing, on an country by country basis, the implementation of the BRRD throughout the EU.
Powers conferred by the BRRD include the ability for a regulator to write-down and/or convert into equity a failing institution's liabilities (the "bail-in" tool).
On 25 February 2016, the LMA made a submission to the European Commission in which it expressed its concerns about the width of the expression "liabilities" when used in Article 55. The LMA argued that there was little consistency amongst EU regulators as to what the word meant and that the widest interpretation applied by some regulators imposed a disproportionate burden on banks. It also argued that the requirement placed EU firms at a significant competitive disadvantage when compared to non-EU firms. The LMA recommended either:
- amending Article 55 to give resolution authorities the power to exclude certain liabilities, or classes of liabilities, from Article 55, or
- that the European Commission or European Banking Authority should give further guidance on the liabilities covered by Article 55.
European Commission's BRRD proposed moratoria and amendments to Article 55 could trigger opt-out rights for entities that have adhered to ISDA 2015 Universal Resolution Stay Protocol. The ISDA published a paper in September 2017 which elaborates on the issues that could arise.
On 07 June 2019, the text of Directive (EU) 2019/879 of 20 May 2019 (BRRD II) was published in the Official Journal and entered into force on 27 June 2019 (being the date which is 20 days after publication). The Directive amends previous Directives and Regulations which comprise integral parts of the Single Rulebook which regulates banks in the EU and the Eurozone. Very broadly, BRRD II amends the Bank Recovery and Resolution Directive 2014/59/EU (BRRD) and the Single Resolution Mechanism Regulation (EU) No. 804/2014. It introduces provisions which require Global Systemically Important Banks (G-SIBs) to maintain a prescribed amount of Total Loss Absorbing Capacity. More specifically, BRRD II amends provisions of the BRRD. Member States must transpose the new Directive into national law by 28 December 2020.
For an overview of bail-in, please see our more detailed article entitled Contractual recognition of bail-in: Brexit and other recent developments.
On 06 June 2017, the European Parliament published a briefing entitled Amending the bank resolution framework – BRRD and SRMR. The briefing provides an analysis of the proposals so far.
On 05 September 2017, the EBA published its final draft implementing technical standards (ITS) on specifying templates and procedures resolution authorities should follow when informing the EBA of the minimum requirement for own funds and eligible liabilities (MREL) that have been set for institutions under their jurisdiction. These standards will enable the EBA to monitor the consistency of MREL implementation across the EU. The final ITS has been submitted to the European Commission for endorsement.
On 01 November 2017, the EBA published its final Recommendation on the coverage of entities in banking group recovery plans. This recommendation, addressed to both Competent Authorities and institutions, aims at defining common criteria to identify entities that need to be covered in group recovery plans, as well as the extent of such coverage. These criteria will help institutions avoid a fragmented approach in providing information in recovery plans and gain a better understanding of the relevant supervisory expectations.
On 19 December 2017, the EBA published a report on the application of simplified obligations and waivers in recovery and resolution planning and its final draft Regulatory Technical Standards (RTS) specifying the eligibility criteria to determine whether institutions could be subject to simplified obligations when drafting such plans. The Report shows that across the EU, significantly divergent practices apply. Differences have been identified both in the assessment of institutions' eligibility for simplified obligations, as well as in determining the reduced scope of the recovery and resolution planning requirements laid down in the BRRD. The RTS should help reduce some of the observed divergent practices by increasing harmonisation in simplified obligations eligibility assessment methodologies applied by national authorities. The final RTS has been submitted to the European Commission for endorsement.
Finally, there is an evolving body of case law on the recognition by member states of actions taken by resolution authorities in other member states. The guiding principle is that a member state is not bound to recognise resolution actions taken by the resolution authority of another member state if they go beyond the provisions of the BRRD. These issues are considered in our elexica article entitled The Three “Rs” - Recovery, Resolution & Recognition.
On 03 July 2018, the European Parliament published a briefing entitled Banking Union: Towards new arrangements to finance banks under resolution? The briefing (i) describes the existing arrangements in the Banking Union, (ii) compares those arrangements with the US and the UK regimes and (iii) echoes ongoing reflections on possible new arrangements along the lines of the US and UK regimes, with a view to completing the Banking Union.
The resolution authority for the United Kingdom is the Bank of England and the competent authorities are the PRA and the Financial Conduct Authority.
The overarching legislative framework is created by the Banking Act 2009 (as amended). The Act makes provision for a special resolution regime pursuant to which the Bank of England is granted tools to deal with the failure, or likely failure, of a UK bank or building society.
The special resolution regime created by the Banking Act 2009 has been amended to reflect the requirements of the BRRD (including the requirements of the bail-in tool).
Provision has also been made for certain of those tools to be extended to a wider range of entities including investment firms, recognised central counterparties and certain banking group companies.
On 19 December 2016, the Treasury Select Committee launched an inquiry into recovery and resolution in the first stage of its capital inquiry. Interested parties are invited to submit written evidence to address any or all of the following questions:
- What progress have the major UK banking groups made in developing realistic and effective resolution and recovery plans, including ring-fence arrangements?
- What progress has been made by major foreign economies in developing realistic and effective resolution and recovery plans?
- What impact might Brexit have on the likely effectiveness of the UK’s recovery and resolution regime?
- What assumptions has the FPC made as to the efficacy and feasibility of resolution plans? What are the risks to effective implementation, and how is the probability of non-implementation, non-effectiveness or contagion effects factored in?
- How serious is the risk that falls in the prices of particular bail-inable securities will cause contagious uncertainty about the solvency of banks in general? If there are contagion risks, how could these be reduced?
- Would it be desirable to have more transparency about the resolution and recovery plans of the major UK banks and about the PRA’s and Bank of England’s assessment of them?
The inquiry closed for written submissions on Sunday 05 March 2017. Due to the general election held in the UK on 08 June 2017 the Committee closed this inquiry. Following the dissolution of Parliament on 03 May 2017, all Select Committees cease to exist until after the general election. If an inquiry on this subject is held in the future, the Committee may refer to the evidence already gathered as part of this inquiry.
On 06 April 2017, The Investment Bank (Amendment of Definition) and Special Administration (Amendment) Regulations 2017 will enter into force. These regulations follow an independent review of the special administration regime, undertaken by Peter Bloxham and commissioned by HM Treasury. The Bloxham Final Report was published in January 2014.
On 11 December 2017, the PRA published a policy statement on recovery planning (PS29/17), together with a supervisory statement on recovery planning (SS9/17) and an updated supervisory statement on ring-fenced bodies (RFBs) (SS8/16). PS29/17 is relevant to UK banks, building societies, PRA-designated investment firms and qualifying parent undertakings to which the Recovery Planning Part of the PRA Rulebook applies. In PS29/17, the PRA provided feedback on responses to its June consultation paper on recovery planning (CP9/17) and also sets out its final expectations on the content of recovery plans (meaning both recovery plans and group recovery plans) and the approach to recovery planning for groups containing an RFB.
On 13 June 2018, the PRA published a policy statement on resolution planning for reporting minimum requirement for own funds and eligible liabilities (MREL) (PS11/18), together with an updated supervisory statement SS19/13 on ‘Resolution planning’ which sets out the PRA's expectations for the information that firms should provide to the regulator to aid resolution planning. The reporting requirements will take effect from 01 January 2019.
On 04 July 2018, HM Treasury published two letters from the Economic Secretary to the Treasury, John Glen MP, dated 28 June 2018 to the chair of the European Scrutiny Committee, Sir William Cash MP and Lord Boswell of Aynho, Chair of the European Union Committee. Both letters are essentially the same and provide an update on the proposed amendments to the BRRD, the Capital Requirements Directive IV (CRD IV) and the Capital Requirements Regulation (CRR) following a general approach that was agreed at the May ECOFIN meeting.
The Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 (SI 2018/1394) will enter into force on exit day. The purpose of the Regulations is to ensure that the regime established by the BRRD and, in particular, the special resolution regime (SRR), functions effectively after Brexit.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.