4.5.5 The principles and safeguards governing the resolution process

Based on the text of the BRRD, the NCWO principle does not apply to the exercise of the PONV conversion power. This has also been recognised by the EBA.4 However, in practice, the exercise of the PONV conversion power will (often) take place in combination with the application of a resolution tool as a result of which the safeguards, including the NCWO principle, apply. In addition, the EBA considers that resolution authorities must in all circumstances consider their duty to act in accordance with the protection of property rights under the EU Charter of Fundamental Rights, also if the NCWO principle under the BRRD does not apply.5

Van der Houwen and De Serière conclude that the NCWO principle is an element that authorities must take into account, when calculating the write-down of capital instruments. In respect of conversion, they differ between instruments that contractually provide for conversion (e.g. contingent convertibles) and instruments that do not. In respect of the latter, they conclude that the NCWO principle would apply, while in respect of the former application of the principle is irrelevant.6

It is the author’s view that the NCWO principle should be complied with when exercising the PONV conversion power, both in and outside resolution, taken into account the protection of property rights under the EU Charter of Fundamental Rights. When the instrument contractually provides for write-down or conversion, this can be taken into account in applying the NCWO principle.

In the case of Banco Popular, Deloitte provided the Valuation 3 report following the application by the SRB of the sale of business tool in combination with the PONV conversion power. In its Valuation 3 report, Deloitte estimated that for shareholders and subordinated creditors no recoveries would have been expected in normal insolvency proceedings. It further estimated that recoveries for other classes of creditors, unaffected by the resolution and including at other group entities, would have been lower in an insolvency proceeding.10 Following this report, the SRB concluded on a preliminary basis that it is not required to pay compensation to the shareholders and creditors affected by the resolution (i.e. holders of CET 1, AT 1 and Tier 2 capital).11 Affected shareholders and creditors have the right to be heard before the SRB adopts its final decision. At the time of writing this dissertation, this final decision had not yet been adopted.12

The resolution framework does provide for a specific application of the proportionality principle in relation to the contents and details of recovery and resolution plans, the date by which the first recovery and resolution plans are to be drawn up, the frequency for updating these plans, the contents and details of the information required, and the level of detail for the assessment of resolvability.15 The requirements regarding recovery planning, resolution planning and resolvability assessments are applied proportionately, reflecting, inter alia, the systemic importance of the bank concerned.16 For the assessment whether a bank is eligible for ‘simplified obligations’ quantitative and qualitative indicators are used. G-SIIs, O-SIIs and other SREP Category 1 institutions always have to comply with the full obligations in relation to recovery and resolution plans. 17

In addition, the proportionality principle also applies in respect of the contributions to be paid by banks to national resolution financing arrangements and the SRF.18 The resolution authorities determine the annual contributions to be paid by each bank in proportion to its risk profile.19 The annual contributions for small banks are set as lump-sum amounts, unless the bank has a risk profile that is disproportionate to its small size.20