Public funding of failing banks in the European Union (LBF vol. 19) 2020/2.5.3.2:2.5.3.2 Changes in the definition of eligible liabilities

Public funding of failing banks in the European Union (LBF vol. 19) 2020/2.5.3.2

2.5.3.2 Changes in the definition of eligible liabilities

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BRRD II and SRMR II provide for a revised definition of eligible liabilities. In BRRD II and SRMR II ‘eligible liabilities’ is defined as:

a)

bail-inable liabilities that;

b)

fulfil, as applicable, the conditions of Article 45b or point (a) of Article 45f(2) BRRD II (Article 12c or point (a) of Article 12g(2) SRMR II) and Tier 2 instruments that meet the conditions of point (b) of Article 72a(1) CRR II.1

In short, this change entails that certain further eligibility criteria are introduced for liabilities in order to be able to qualify as eligible liabilities.

Bail-inable liabilities

Bail-inable liabilities are ‘the liabilities and capital instruments that do not qualify as CET 1, AT 1 or Tier 2 instruments of a bank that are not excluded from the scope of the bail-in tool by virtue of Article 44(2) BRRD’ (Article 27(3) SRMR). The new definition of ‘bail-inable liabilities’ is therefore the current definition of ‘eligible liabilities’.2

Article 45b or point (a) of Article 45f(2) BRRD II (Article 12c or point (a) of Article 12g(2) SRMR II)

Article 45b BRRD II (Article 12c SRMR II) and point (a) of Article 45f(2) BRRD II (point (a) of Article 12g(2) SRMR II) further define the scope of bail-inable liabilities:

–

Article 45b BRRD II (Article 12c SRMR II) specifies which eligible liabilities are included in the amount of own funds and eligible liabilities of ‘resolution entities’.

–

Point (a) of Article 45f(2) BRRD II (Point (a) of Article 12g(2) SRMR II) specifies which eligible liabilities are included in the amount of own funds and eligible liabilities of ‘entities other than resolution entities’.

In accordance with Article 45b BRRD II (Article 12c SRMR II) eligible liabilities are included in the amount of own funds and eligible liabilities of resolution entities where:

1.

they satisfy the conditions referred to in Article 72a CRR II, Article 72b CRR II, except for point (d) of Article 72b(2) CRR II (which contains a subordination requirement) and Article 72c CRR II; or

2.

they arise from debt instruments with derivative features, such as structured notes, to the extent that the principal amount of the liability arising from the debt instrument is known at the time of issue, is fixed or increasing, and is not affected by an embedded derivative feature, and the total amount of the liability arising from the debt instrument, including the embedded derivative, can be valued on a daily basis by reference to an active and liquid two-way market for an equivalent instrument without credit risk or the debt instrument includes a contractual term that specifies that the value of the claim in cases of the insolvency of the issuer and of the resolution of the issuer is fixed or increasing, and does not exceed the initial ly paid-up amount of the liability.

In accordance with point (a) of Article 45f(2) BRRD II (point (a) of Article 12g(2) SRMR II), eligible liabilities are included in the amount of own funds and eligible liabilities of ‘entities other than resolution entities’ where:

1.

they are issued to and bought by the resolution entity;

2.

they fulfil the eligibility criteria referred to in Article 72a CRR II, except for points (b), (c), (k), (l) and (m) of Article 72b(2) and Article 72b(3) to (5) CRR II;

3.

they are ranking in normal insolvency proceedings below liabilities other than those eligible for own funds requirements that are issued to and bought by other entities than the resolution entity;

4.

they are subject to the power of write down or conversion in accordance with Article 21 SRMR (Article 59 BRRD) that is consistent with the resolution strategy of the resolution group, notably by not affecting the control of the subsidiary by the resolution entity;3

5.

the acquisition of ownership thereof is not funded directly or indirectly by the ‘entity other than the resolution entity’;

6.

the provisions governing the eligible liabilities do not indicate explicitly or implicitly that the liabilities would be called, redeemed, repaid or repurchased early, as applicable, by the entity, other than in the case of the insolvency or liquidation of that entity, and that entity does not otherwise provide such an indication;

7.

the provisions governing the eligible liabilities do not give the holder the right to accelerate the future scheduled payment of interest or principal, other than in the case of the insolvency or liquidation of the entity;

8.

the level of interest or dividend payments, as applicable, due thereon is not amended on the basis of the credit standing of the entity or its parent undertaking.

Tier 2 instruments that meet the conditions of point (b) of Article 72a(1) CRR II

These are Tier 2 instruments with a residual maturity of at least one year, to the extent that they do not qualify as Tier 2 items in accordance with Article 64 CRR II. Pursuant to Article 64 CRR II the full amount of Tier 2 instruments with a residual maturity of more than five years shall qualify as Tier 2 items. Furthermore, these Tier 2 instruments should not fall into any of the categories of excluded liabilities laid down in Article 72a(2) CRR II and are subject to the amortisation provisions of Article 72c CRR II.

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