Bank Recovery and Resolution Directive
The Bank Recovery and Resolution Directive (BRRD) provides a framework to deal with Banks which are in crisis and builds on the measures taken to ensure firms have a recovery plan in place that, in turn, minimises disruption to the financial system at large.
The financial crisis of 2008 brought to light several cracks in the financial regulatory process. Therefore, it was determined that there was a lack of important tools available to effectively and efficiently negate the economic and financial effects of unstable or failing credit institutions and investment firms. This regime was found necessary to provide authorities with credible tools in the hope of averting another crisis.
BRRD establishes the rules and regulations for the recovery and resolution of the following entities:
1. Institutions established in the Union; (i.e. this includes Credit Institutions and Investment Firms subject to an initial capital requirement of €730,000)
2. Financial Institutions which are subsidiaries of an EU credit institution or investment firm or of a company referred to in points 3 or 4 below and is covered by the supervision of a parent undertaking on a consolidated basis;
3. Financial holding, mixed financial holding or mixed-activity holding companies established in the Union;
4. Parent financial holding company in a Member State, Union parent financial holding company, Parent mixed financial holding company in a Member State or Union parent mixed financial holding companies; and
5. Branches of institutions established outside the Union in accordance with specific conditions of BRRD.
Each institution under BRRD shall ensure that they maintain a recovery plan detailing measures to be taken by the institution to restore its financial position following a significant deterioration of its financial situation.
The Resolution Authority (RA) reviews a copy of the recovery plan and may make its own recommendations to the Competent Authority (CA). When the CA believes there to be material deficiencies in the recovery plan, or impediments to its implementation, it shall notify the institution allowing two months for the revised plan to be submitted demonstrating that these issues have been addressed.
If the firm fails to do so, the CA is given the power to:
• reduce the risk profile of the institution;
• enable timely recapitalisation measures;
• review the institution’s strategy and structure;
• make changes to the funding strategy as as to improve resilience of the core business lines and functions; and
• make changes to the governance structure.
The RA, after consulting the CA and RAs in other jurisdictions, shall draw up a resolution plan for the institutions that do not have a parent company in the EU. These will set out the options for applying the resolution tools and powers.
An institution will be deemed to be resolvable if it is feasible and credible for the RA to either, liquidate it under normal insolvency proceedings or to resolve while avoiding any significant adverse effect on the financial system and with a view to ensuring the continuity of critical functions carried out by the institution.
Said resolution plans will be reviewed and updated annually, as well as, after material changes to legal or organisational structure of the firm or to its business or financial position.
Competent Authority Early Intervention
Where a firm's financial position is found to be, at an early stage, deteriorating rapidly, CAs will have powers to conduct the following measures, under BRRD:
• require the institution to implement arrangements or measures set out in the recovery plan;
• require the management to examine the situation, identify the problems and draw up solutions;
• require the management to convene a shareholders’ meeting to which the authority set the agenda;
• require the removal of members if that person is found unfit to perform their duties;
• require the management to restructure debt with creditors according to the recovery plan;
• require changes to the institution’s business strategy or legal or operational structures; and
• require information necessary to prepare for resolution, including valuation of assets and liabilities, perhaps through on-site inspections.
Resolution Authority Intervention
Where a firm is failing, or likely to fail, and there is no reasonable prospect of alternative private recovery measures, the RA will decide whether it should use its tools and powers. The RA may apply any resolution strategies necessary, including taking the decision that the firm should follow the normal insolvency procedures. If a firm is failing or likely to fail, the resolution aspects of the BRRD are expected to provide more robust measures to increase the likelihood that the process occurs in a more orderly manner, without the need to use public funds.
Should there be no reasonable alternative private sector measures to prevent failure within the reasonable timeframe, resolution action will be necessary in the public interest. The resolution action required by the RA may use the following tools:
• sale of business;
• bridge institution;
• bail-in; and
• asset separation.
Member States shall provide rules on administrative penalties and other applicable measures where the national provisions transposing BRRD have not been complied with. Such penalties shall be effective, proportionate and dissuasive.
The powers to impose these penalties are appointed to the RAs and CAs. Close cooperation between them should be ensured in order to produce desired results and coordinate actions when dealing with cross-border cases.
The key elements of BRRD are that:
• relevant institutions and Authorities must make adequate preparation for crises (Recovery Plans);
• National Authorities are equipped with necessary tools to intervene in troubled institutions at a sufficiently early stage to address any developing problems; and
• the tools and powers that are incorporated have been harmonised between Authorities to take rapid and effective action when the failure of an institution cannot be avoided, including firms providing cross-border services.
Financial Services (Recovery and Resolution) Regulations 2014 – Summary of Full and Simplified Obligations Requirements.