Public funding of failing banks in the European Union (LBF vol. 19) 2020/4.3.4.1:4.3.4.1 Material scope of the BRRD

Public funding of failing banks in the European Union (LBF vol. 19) 2020/4.3.4.1

4.3.4.1 Material scope of the BRRD

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The BRRD applies to:

1.

Institutions that are established in a Member State;

2.

Financial institutions that are established in a Member State and form part of the group of an institution;

3.

Parent companies that are established in a Member State; and

4.

Branches located in a Member State of third-country institutions (Union branches).1

Ad 1: Institutions

An institution within the meaning of the BRRD is a credit institution or an investment firm.2 A credit institution within the meaning of the BRRD is a credit institution within the meaning of CRR, also referred to as bank.3

EP Members Markus Ferber and Wolf Klinz have, unsuccessfully, proposed to exempt banks in public ownership and/or provided with explicit guarantee arrangements from the scope of the BRRD. Their reasoning for this exemption was that these banks would be shielded from failure.4 In addition, EP Member Peter Simon has, unsuccessfully, proposed to exempt bridging institutions and development banks from the scope of the BRRD.5

In addition to banks, it was considered that investment firms also need to be part of the resolution framework, as the GFC has showed that their failure (i.e. Lehman Brothers) could have serious systemic consequences.6 The definition of investment firm under the BRRD differs from the definition of investment firm under CRR and MiFID II. Pursuant to Article 2(1)(3) BRRD an investment firm is an investment firm as defined in Article 4(1)(1) CRR that is subject to the initial capital requirement laid down in Article 28(2) CRD IV. The investment firms that are in scope of the BRRD are therefore only these investment firms that are required to hold initial capital of EUR 730,000. These are the investment firms that conduct one of the three investment activities (dealing on own account, but not qualifying as local firm, operating a multilateral trading facility or operating an organized trading facility) or conduct underwriting activities on a firm commitment basis. In this dissertation, this category of investment firms is referred to as ‘BRRD investment firms’.

In its Report on Investment Firms of 14 December 2015, the EBA mentioned that the vast majority of investment firms, irrespective of their activity, do not present either the same type or scale of consequences as banks do, should they fail. As such, the resolution tools of the BRRD may generally be overly complex and less relevant to them; for example, being relatively small and without holding deposits, it is more difficult to envisage many situations where, bail-in or bridge bank tools would be required. Rather, in practice the ‘resolution’ tool of choice for the vast majority of investment firms is most likely to be to allow the firm to enter insolvency, or any particular national administration regime that applies to investment firms, with regulatory attention focused more on winding up and managing the impact of failure.7 The new prudential regime for investment firms that has been proposed by the Commission following the advice by the EBA8 provides that the largest, systemically important investment firms will need to obtain a license as a credit institution and stay fully subject to CRD IV/CRR.9 Other investment firms will fall under a new prudential regime and will no longer be covered by CRD IV/CRR. All investment firms will stay subject to MiFID II/MiFIR. The proposals for the new prudential regime do not set out how this will impact the coverage of investment firms under the resolution regime. It seems likely that only the largest, systemically important investment firms will stay in scope of the resolution regime. However, the text adopted at first reading by the European Parliament seems to assume that investment firms that will fall under the new prudential regime could still be in scope of the resolution framework.10 At the time of writing this dissertation, the final text was not yet available.

Ad 2: Financial institutions

Financial institutions are undertakings, other than institutions (banks and BRRD investment firms), the principal activity of which is to acquire holdings or to pursue one or more of the banking activities listed in points 2 to 12 and point 15 of Annex I to CRD IV, including a financial holding company, a mixed financial holding company, a payment institution within the meaning of the Payment Services Directive II (PSD II)11, and an asset management company (i.e. a manager of undertakings for collective investment in transferable securities (UCITS) or alternative investment funds (AIFs)), but excluding insurance holding companies and mixed-activity insurance holding companies. 12

Financial institutions are in scope of the BRRD, if they are a subsidiary of an institution or of a parent company thereof and they are covered by the supervision of the parent company on a consolidated basis in accordance with Articles 6 to 17 CRR.

Ad 3: Parent companies

Parent companies are:

1.

Financial holding companies: financial institutions the subsidiaries of which are exclusively or mainly institutions or financial institutions, at least one of these subsidiaries being an institution, and which are not mixed financial holding companies;13

2.

Mixed financial holding companies: parent undertakings14, other than regulated entities (that is, banks, insurance undertakings or investment firms), which together with their subsidiaries, at least one of which is a regulated entity which has its head office in the EU, and other entities, constitute a financial conglomerate;15

3.

Mixed-activity holding companies: parent undertakings other than financial holding companies, institutions or mixed financial holding companies, the subsidiaries of which include at least one institution.16

Ad 4: Union branches

Union branches17 are places of business located in a Member State, which form a legally dependent part of an institution (bank or BRRD investment firm) that is established outside the EU (a third-country institution), and which carry out directly all or some of the transactions inherent in the business of these institutions.18

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