In the recent crisis the authorities had to deal with the failure of systemically important banks without adequate tools to deal with them. They were faced with the choice between disorderly liquidation causing financial instability and bailing them out.
Extensive progress has been made to address this problem. Europe now has the framework and tools to deal with the failure of banks without resorting to bail-outs or threatening financial stability through disorderly liquidation. The Bank Recovery and Resolution Directive (BRRD) implements the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for Financial Institutions.
Key Elements of BRRD Framework
- Establishing resolution authorities.
- Detailed planning: recovery plans for recovering from stressed situations and resolution plans to address failure without causing financial instability or requiring the use of taxpayer funds.
- Loss absorbing capacity: requiring banks to hold significant loss absorbing resources which facilitate the resolution strategy.
- Resolvability assessments: to ensure that banks are capable of being resolved smoothly, supported by strong powers for the authorities to require changes to be made to remove any obstacles to resolution.
- Early intervention powers: extensive powers to intervene prior to failure.
- Resolution powers: including imposing losses on shareholders and creditors (bail-in) and transferring all or part of the business to a purchaser, new company or asset management vehicle.
- Resolution funds paid for by the industry as a further source of funding to aid resolution.
AFME's role in developing Recovery and Resolution Framework
AFME has been, and continues to be, extensively engaged in the development of the Recovery and Resolution framework, the Single Resolution Mechanism and efforts to strengthen deposit insurance.
AFME Model Clauses on Contractual Recognition of Bail-in
AFME has also developed model clauses for the contractual recognition of bail-in for the purposes of satisfying the requirements of article 55 Bank Recovery & Resolution Directive.