The SRB publishes information on the Bail-in approach 2024

The Single Resolution Board (SRB) provides a comprehensive overview of the Bail-in tool as part of the Single Resolution Mechanism (SRM), detailing the preparation, execution and post resolution processes involved in stabilizing failing banks within the Banking Union.

We have looked at the most important aspects of the SRB’s publication on the Bail-in approach in the Banking Union and summarized them.

The SRB and National Resolution Authorities (NRAs) collaborate to develop resolution plans, determine the Minimum Requirement for own funds and Eligible Liabilities (MREL), and evaluate banks' resolvability. Banks are required to prepare Bail-in playbooks, which detail how they would operationalize the Bail-in internally and ensure it is accurately reflected in the systems of key stakeholders, such as Central Securities Depositories (CSDs).

When a bank is under severe stress, a Crisis Management Team (CMT) is formed, consisting of staff from the Single Resolution Board and the relevant National Resolution Authorities to prepare for potential resolution. Following Article 20 of the Single Resolution Mechanism Regulation (SRMR) an independent valuer is then appointed by the SRB to perform the following resolution valuations as needed:

• Valuation 1: Evaluate if conditions for resolution, or the write-down or conversion of capital instruments and eligible liabilities are met.
• Valuation 2: Evaluate the appropriate resolution action, including the extend of write-downs or conversions.
• Valuation 3: Evaluate whether shareholders and creditors would have received better treatment under normal solvency proceedings.

If the conditions for resolution laid down in Article 18(1) SRMR are met, the SRB adopts a resolution scheme, which includes the application of resolution tools. From a Bail-in perspective, this scheme would include, but not be limited to:

• Conclusions of Valuation 1 and Valuation 2
• The amount of CET1 items to be written down
• The amount of AT1 and T2 instruments, as well as bail-inable liabilities to be written down or converted into CET1
• The type of liabilities/instruments concerned
• The shares or other instruments of ownership to be issued in the context of the conversion
• A list of liabilities subject to a discretionary exclusion (if any), with a reasoning explaining the exclusion
• The sequence of the liabilities that will be written down and/or converted into CET1

Considering the SRB’s resolution schemes within a specific national jurisdiction the National Implementing Acts allow for an effective resolution by incorporating national specificities and other necessary elements. Key elements of the implementing act are published on the NRA’s website.

The external execution of Bail-in can be split into 5 steps.

• Trading of securities that are affected from bail-in may be suspended to prevent market disruption, with NRAs in the EU having the authority to delist or suspend trading across various venues.
• Suspension of settlement by CSDs helps facilitate the Bail-in by preventing the transfer of instruments.
• NRAs inform CSDs about the resolution, triggering preparations for the write-down and conversion of securities, which are then executed and participants notified. Further, interim instruments may be issued for potential adjustments and later converted into definitive instruments.
• New instruments are designed for trading and settlement, with NRAs ensuring their listing without requiring a prospectus.
• A final Valuation 2, performed ex-post, informs the extent of write-downs and conversions, with adjustments made if the provisional valuation was too low.

Local regulation and investor protection laws in foreign countries must be adhered to. For instruments issued under third-country laws specifically, resolution authorities must ensure the Bail-in actions are effectively applied and may stop actions if their effectiveness is highly unlikely.

Following a Bail-in, several final steps must be taken by the bank and resolution authorities. These include amending company by-laws and notifying the commercial register. Banks undergoing an Open Bank Bail-in must draft a Business Reorganisation Plan (BRP) within one month after resolution, detailing the bank's post-bail-in capabilities and plan to return to the financial market as a viable bank. Lastly, in order with the No Creditor Worse Off (NCWO) principles, Valuation 3 is performed to determine if shareholders and creditors received less favorable treatment in resolution compared to normal insolvency proceedings. If a breach of the principle is identified, the Single Resolution Fund (SRF) shall be utilized to compensate shareholders and creditors found to be worse off.

For further details, please refer to SRB’s press release.

If you have any questions, please contact our experts.

Tim Schabert

Alexander Schiller