Public funding of failing banks in the European Union (LBF vol. 19) 2020/2.5.2.2:2.5.2.2 Eligible liabilities

Public funding of failing banks in the European Union (LBF vol. 19) 2020/2.5.2.2

2.5.2.2 Eligible liabilities

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Eligible liabilities are the liabilities and capital instruments that:

1.

do not qualify as Tier 1 or Tier 2 instruments of a bank, and

2.

are not excluded from the scope of the bail-in tool by virtue of Article 44(2) BRRD (Article 27(3) SRMR).

Ad 2: Exclusion from bail-in

Liabilities that are excluded from the scope of the bail-in tool include, inter alia, deposits covered under deposit guarantee schemes, secured liabilities and liabilities that arise by virtue of the holding by the bank of client assets or client money. The exclusion of liabilities from the scope of the bail-in tool is further discussed in section 4.5.3.4.

Eligible liabilities can only be included in the MREL, if they comply with the conditions of Article 45(4) BRRD (Article 12(16) SRMR). These conditions include, inter alia, that instruments are issued and fully paid up, liabilities are not owed to or secured by or guaranteed by the bank itself, the purchase of the instrument was not funded directly or indirectly by the bank, the liability has a remaining maturity of at least one year, the liability does not arise from a derivative and the liability does not arise from a deposit which benefits from preference in the national insolvency hierarchy. Subordination is not a requirement to qualify a liability as an eligible liability. Resolution authorities may however require that the MREL is partially met by subordinated contractual bail-in instruments.1 By contractually subordinating bail-in instruments, it is possible to create different layers of bail-in, thereby protecting senior eligible liabilities.

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