Public funding of failing banks in the European Union (LBF vol. 19) 2020/2.5.3.1:2.5.3.1 Distinction between ‘resolution entities’ and ‘entities that are not resolution entities’

Public funding of failing banks in the European Union (LBF vol. 19) 2020/2.5.3.1

2.5.3.1 Distinction between ‘resolution entities’ and ‘entities that are not resolution entities’

Documentgegevens:

mr. M. Louisse-Read, datum 01-06-2020

Datum: 01-06-2020
Auteur: mr. M. Louisse-Read
JCDI: JCDI:ADS214054:1
Vakgebied(en): Financieel recht / Europees financieel recht
Staatssteun (V)

The Banking Package makes a distinction between ‘resolution entities’ and ‘entities that are not resolution entities’ in respect of the applicable MREL provisions.

A ‘resolution entity’ is defined under BRRD II as (a) a legal person established in the EU, which, in accordance with Article 12 BRRD II, is identified by the resolution authority as an entity in respect of which the resolution plan provides for resolution action; or (b) an institution that is not part of a group that is subject to consolidated supervision pursuant to Articles 111 and 112 CRD IV, in respect of which the resolution plan drawn up pursuant to Article 10 CRD IV provides for resolution action.1 Under SRMR II, a ‘resolution entity’ is defined as a legal person established in a participating Member State, which, in accordance with Article 8 SRMR II, is identified by the SRB as an entity in respect of which the resolution plan provides for resolution action.2 Resolution entities will be obliged to issue eligible (debt) instruments to external third party creditors that would be bailed-in should the resolution entity enter into resolution.

Entities which themselves are not resolution entities should issue eligible (debt) instrument internally within the ‘resolution group’. The resolution group is defined as (a) the resolution entity and its subsidiaries that are not themselves resolution entities, that are not subsidiaries of another resolution entity and that are not entities established in a third country that are not included in the resolution group in accordance with the resolution plan and their subsidiaries or (b) credit institutions permanently affiliated to a central body and the central body itself when at least one of those credit institutions or the central body is a resolution entity, and their respective subsidiaries.3

In other words, eligible (debt) instruments issued by entities which are not resolution entities should be bought by the resolution entities. Where a resolution group entity which itself is not a resolution entity reaches the point of non-viability, these instruments are written down or converted into equity and losses of that entity are then up-streamed to the resolution entity. This is also called an ‘internal MREL’. Under certain circumstances, the internal MREL could be replaced with collateralised guarantees between the resolution entity and other resolution group entities that could be triggered under the equivalent timing conditions of the instruments eligible for the internal MREL.4

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BRRD II, Article 2(1)(83a).

SRMR II, Article 3(1)(24a). An interesting question is whether a bank can object against the qualification as resolution entity within a resolution plan. If one takes a closer look at the SRMR II, it can be derived from Article 8(6) SRMR II that only the information listed in Article 8(9)(a) SRMR II is disclosed to a bank. This is a summary of the key elements of the plan. It is unclear whether such summary shows which entities qualify as resolution entities, although this may be assumed, since this qualification determines against which entities resolution actions can be taken. But, even if a bank can derive from this summary which entities the resolution entities are, the SRMR (II) does not include any indication that the adoption of a resolution plan by the SRB qualifies as a decision of the SRB. An evaluation by the European Court of Auditors seems to indicate that these resolution plans are adopted by the SRB’s internal resolution teams (European Court of Auditors, Special Report No 23/2017, par. 30). If the adoption of a resolution plan is not considered a decision by the SRB, this would not be a contestable act. It would in the author’s view however still be possible to object against the qualification as resolution entity in relation to decisions by the SRB, e.g., on the determination of the MREL or on removal of impediments to resolvability. See also Article 85(2) BRRD.

BRRD II, Article 2(1)(83b). SRMR II, Article 3(1)(24b).

SRMR II Proposal, p. 9. SRMR II, Article 12g(3). BRRD II, Article 45f(5).