The number begins as insightful as possible, with a “Comprehensive View” that features a contribution by the Chair of the Single Resolution Board (SRB), Dr. Elke König, which weaves together the challenges of the current crisis, with the opportunities it provides for gaining the necessary momentum to advance and complete the missing (legal) pieces in the Banking Union and the harmonisation of insolvency procedures. It is a privilege for a BrieFin number on resolution to open in this fashion. Next, Prof. Christos Gortsos provides a thorough legal account of how the pandemic crisis could trigger the adoption of insolvency and crisis management policy decisions which would have been unthinkable in the aftermath of the global financial crisis and the euro area fiscal crisis. His contribution further elaborates on the less explored but nevertheless crucial role of the SRB since the outbreak of the pandemic, and delves into the intricacies and policy challenges resulting from the implementation of the resolution framework during the crisis. The practitioner’s view touches upon the practical implications of Article 55 of the BRRD, on contractual recognition of bail-in. Paloma Fierro and Antonio Cámara´s (Linklaters) contribution thoroughly explores the difficulties that the implementation of the mentioned provision entails. The recent amendment of this article, as part of BRRD-II, is very much welcome but still, Brexit has overcomplicated its application. Supervisors and supervisees need to strike a balance between certainty and flexibility, to ensure that the purpose envisaged by Article 55 BRRD is attained. Last but not least, the young researcher’s view focuses on the flow and exchange of information between the SRB and the ECB, a sensitive but highly relevant topic when it comes to institutional accountability and transparency practices. To conclude, BrieFin aspires to be a meeting point, an agora where different perspectives are exchanged, in a succinct yet reflective manner, and we believe its first three numbers have helped establish those credentials, showing how a diversity of viewpoints helps to tackle the daunting issues of new. We hope that these brief but substantive academic and policy-oriented pieces provide readers with a taste of the complexities surrounding banking resolution, and spark further interest on this fascinating topic and give you all some food for thought. Enjoy it! | | CONTRIBUTIONS | 1. The Comprehensive view | Elke König, Chair of the EU’s Single Resolution Board Bank resolution: Future challenges in Europe It is five years since the Single Resolution Board (SRB) was set up, growing from a small transition team at the European Commission, into Europe’s largest resolution authority. Our remit extends to the 19 countries that currently make up the Banking Union. Within those countries we cover all the major banking institutions to ensure that each of them is resolvable without the use of public money, thus living up to the post financial crisis promise of “no more bail-outs”. The simple aim of resolution is to ensure that where a bank gets into trouble, a resolution plan can be put into action, meaning that the damages inherent in a failing bank are limited. Resolution also ensures that European taxpayers will not be left to foot the bill for bail-outs by making sure that shareholders and bond holders are held accountable. To use another catchphrase: No bank should be deemed “too big (or too interconnected) to fail”, no matter what the economic circumstances are. In the Banking Union, we have come a long way in terms of setting up structures and procedures to ensure banks can be resolved – thanks in no small part to the cooperation of national resolution authorities and of banks themselves. We have experienced a - luckily small - number of failing banks in recent years. Normally bank resolutions take place over a weekend, however in the case of Banco Popular (the sixth largest Spanish bank at the time of its resolution) we successfully resolved the bank overnight - a challenge which proved that resolution works in practice. In some other cases[1] the SRB decided that there was no public interest in resolving the bank and the banks had to be unwound under national insolvency procedures like any other failing company in a market economy. Five months ago, few could have predicted the scale of the pandemic the world is living through today, let alone five years ago when the SRB was set-up. Resolution planning can be considered akin to good housekeeping, and the building up of resolvability over the past five years means that many banks are in better shape than they were heading into the crisis a decade ago. Should an unwelcome extraneous shock such as COVID-19 arrive on the doorstep, it is somewhat easier to manage if the house is in order, even if it is not exactly a welcome visitor. Starting from scratch with resolution planning. Much work has been done over the past five years in terms of building and elaborating on resolution plans for each and every bank that falls under the remit of the SRB. I have often said it, resolution planning is a marathon, not a sprint. Financial stability is a ‘long game’ and it is my hope that the work that has gone into resolution planning will stand us in good stead as we face the COVID-19 economic downturn. The SRB works together with the industry to ensure that every bank is resolvable and that each banks’ resolution plan is up to date and ready to be called into action should the need arise – a tool available today that was not available during the 2008 financial crash. Back then, the concept of “resolution planning” had not yet been invented. The role of the SRB is clearly set out under EU law, but we are, and will continue to be, flexible and agile where required. Within reason, we work with banks to find a solution that addresses the issues without compromising resolvability. One example of this is our current stance on MREL. We have adopted a pragmatic common-sense approach as required by the circumstances by postponing less urgent reporting and thus providing operational relief. As regards existing MREL binding targets, the SRB is taking a forward-looking approach to banks that may face difficulties meeting those targets before new decisions, as part of the 2020 resolution cycle, take effect. While being vigilant on the implementation of the current MREL decisions, our focus thus, aims at upcoming 2020 decisions with the updated targets. Therefore, we asked banks to continue to make any efforts to provide the necessary data on MREL for the upcoming cycle. I’m pleased to state that banks were able to and did comply. This approach regarding MREL binding targets is in line with decisions announced by other European authorities not to impede banks to continue supporting lending to households and firms and, therefore, the real economy in the middle of the pandemic. Fine-tuning required for Europe’s resolution framework The framework in Europe does work, but there are some areas that clearly still need to be addressed. Notwithstanding the progress made, there are many challenges ahead to ensure that every bank is resolvable and just as importantly, that every bank remains resolvable, even though an individual bank’s business model and turnover is forever evolving. One area we have long called for harmonisation are the hugely varied insolvency procedures right across Europe. Insolvency in one country does not necessarily mean the same thing, or have the same consequences as it has in another. This is a problem when the SRB, as the central resolution authority for the Banking Union, decides that a bank should be dealt with under national insolvency procedures, and also complicates our resolution procedure, which has the insolvency regime as its counterfactual. The legal requirement that no creditor should be worse off in resolution than in insolvency has different answers, depending on the bank’s country of residence. There are clearly risks of misalignment of incentives and an un-level playing-field. In the long term, a harmonised insolvency framework for the European Union might be the goal, but a first step in that process could be the creation of a centralised administrative liquidation tool for financial institutions or at least banks in the Banking Union. This would align bank resolution and bank liquidation at EU level and contribute to a fairer competitive landscape. Europe has still not completed the Banking Union. Ahead of a deepening economic crisis, now is the moment to complete it. Most notably deposit insurance still remains at the national level. The current patchwork of deposit guarantee schemes (DGSs) in the Banking Union creates difficulties. Only some allow transfers of deposits as “alternative measures” to pay-outs, posing challenges around arbitrage, level-playing field and coordination. A centralised authority dealing with bank resolution and bank liquidation could enable a more effective management of bank failures. As the US experience shows, the use of transfer tools “facilitated” by the DGS/resolution authority for smaller and mid sized banks could reduce the cost of failure and overall impact on the DGS system and further strengthen financial stability. The differences across insolvency regimes and DGS are just two examples of the inconsistencies that need to be remedied in order to improve the resolution regime in Europe. These inconsistencies also have an impact on cross-border banking within Europe. It is fair to say that the ‘European’ banking sector is still work in progress. Investors from one EU state find it less attractive to invest in another even if a good return is on offer, because the conditions around their investment can vary substantially. It is hard for an investor to be familiar with all of the legal differences in each member state and the result is capital is less likely to cross internal EU borders. The SRB is fully supportive of the development of the Capital Markets Union (CMU), but we know that in order to do that, there are important steps, not least around insolvency procedures to be dealt with, if the European Commission’s ambition of a fully integrated CMU is to become a reality for the finance sector. Capital is crucial to the stability of our banking sector and it is also crucial for the resolution process to work properly. Banking business is international, thus also our tools and responses cannot stop at the border, a unified and coordinated response is what is required: a fully-fledged Banking Union and CMU would facilitate such a response. We have taken great steps in Europe to develop the supervisory and resolution regime, in order to promote financial stability and protect the taxpayer – but there is still more to be done. Now is not the time to stop in our tracks. Instead, we should use the impending economic unrest as an incentive to build on the good foundations already in place and work to strengthen them even more. Right now, we are being asked to stay apart, but it is only by working together that we can ensure we overcome the challenges facing bank resolution today and into the future. The effects of COVID-19 are likely to be with us for some time to come. To paraphrase the author Vivien Greene, this isn’t about waiting for the storm to pass. It’s about learning how to dance in the rain. [1] For a full list of resolution cases and decisions see https://srb.europa.eu/en/content/resolution-cases | | | 2. The Professor's View | Professor Dr. Christos V. Gortsos, Law School, National and Kapodistrian University of Athens – EBI, President of the Academic Board Resolution planning and resolution action in the era of the current pandemic crisis: What is at stake? A. Taking account of the indisputable fact that the current COVID-19 pandemic crisis is an unprecedented, extraordinary challenge with severe social and economic consequences, Member States and EU institutions have taken numerous short-, medium- and long-term initiatives to deal with health emergency needs, support economic activity and employment and prepare the ground for the recovery. Inter alia[1], and in relation to (the interrelated fields of) monetary policy and banking regulation, the ECB’s liquidity-supporting monetary policy measures (within the Eurosystem) were bold in order both to preserve the smooth provision of credit to the economy and to ensure that all sectors can benefit from supportive financing conditions in order to absorb the implications of the crisis. These measures include, but are not confined to, the launch of a EUR 750 billion “Pandemic Emergency Purchase Programme” (PEPP), a temporary Asset Purchase Programme of private and public sector securities, which entered into force on 25 March 2020[2]. In addition, the ECB (within the SSM) and the EBA activated (and framed) the elements of ‘flexibility’ embedded in the framework governing banking micro- and macro-prudential regulation, in order to allow credit institutions to provide funding to firms and households exposed to financing pressures. In this respect, noteworthy is the critical importance of the capital and liquidity buffers built-up by credit institutions on the basis of the regulatory framework developed since the recent (2007-2009) global financial crisis, which are currently available to allow credit institutions to efficiently contribute to the short- and longer-term financing of economic activity and recovery in the EU. B. Less attention was given to the (important) role of the Single Resolution Board since the outbreak of the pandemic crisis. In the context of monitoring the situation related to that crisis in the euro area and its impact on the financial system, the Board made three interventions in April, which were supportive of the measures taken by the ECB in order to help credit institutions in ensuring business continuity and services to their customers. The Board also presented its approach in view of the uncertainty and disruption caused to the economy by the crisis, setting out its remit on potential operational relief measures, its actions to support efforts to mitigate the economic impact of the crisis and its dealing with minimum requirements for own funds and eligible liabilities (MREL) targets (see the letter to banks from the SRB Chair, 1 April blogpost, and 8 April blogpost). In the author’s view, this approach is based on two pillars: ‘preservation of financial stability’ and ‘flexibility in the application of the resolution framework’. In relation to the first pillar, the Board boldly states that the progress made in recent years on resolution planning in order to make credit institutions resolvable and the (related) build-up of MREL are important tools to maintain a strong banking sector supporting the economic recovery and to preserve financial stability amidst the pandemic crisis; hence the ongoing focus on these aspects should not be compromised. Under the second pillar, the Board supports credit institutions with operational relief measures, applying a pragmatic approach and considering, if necessary, to postpone less urgent information or data requests related to the upcoming 2020 resolution planning cycle, expecting nevertheless that credit institutions will identify mitigating actions in order to continue progress towards resolvability. In the same vein, and taking account of the fact that credit institutions’ build-up of MREL continues to be key to resolvability, it stated its aim to assess the potential impact on transition periods needed for this build-up and provided clarity on its flexible approach, committing to ensure that short-term MREL constraints will not prevent credit institutions’ lending activities. In particular: - as regards existing binding targets, as set out in the 2018 and 2019 resolution planning cycles, the Board expressed its intention to take a ‘forward-looking approach’ to credit institutions that may face difficulties meeting those targets before new decisions (with intermediate targets) take effect;
- on the other hand, as part of the 2020 resolution planning cycle, including the changes to MREL decisions under the new resolution framework (as set out in the BRRD II and the SRMR II), new MREL targets will be set according to the transition period in SRMR II (i.e. setting the first binding intermediate target for compliance by 2022 and the final target by 2024).
C. An additional important resolution aspect, not dealt with in the above Board’s interventions but deserving full attention and thorough analysis, is that of the implementation, during the crisis, of the framework relating to resolution action. In this respect, the following is briefly noted: First, as a consequence of the current crisis, the rate of non-performing loans (NPLs) is expected to increase (potentially significantly) in almost all euro area Member States. In view of such a development, the probability that the first condition for resolution, i.e. the failing or likely to fail criterion, may be met by a non-negligible number of credit institutions by the end of this year onwards should not be underestimated (despite the flexibility currently applied), especially if (or, in certain cases, when) the existing stock of capital buffers will have been exhausted. In that respect, the Board’s concerns on the need to continue the build-up of MREL is legitimate (taking account of the fact that the stock of bail-inable instruments under the MREL requirements is still, on average, sub-optimal), but another sensitive issue also arises for the shorter-term horizon: in which way, amidst such a generalised social and economic crisis, decisions on the resolution or, if the public interest criterion is not met, the winding-up of unviable credit institutions can, under a pragmatic approach, be taken across the board and in particular in the hardest-hit Member States and regions therein (evidently, this concern does not apply to ad hoc cases of bank mismanagement). Second (and in particular), heavy skepticism arises in respect of the potential application of the (open-bank) bail-in resolution tool, by virtue of which, inter alia, non-excluded deposits, over 100,000 euros per depositor per credit institution, would be written down or converted into capital. The author considers that such a decision, in relation (at least) to the deposits of companies (of any size), could have severe pro-cyclical effects to the detriment of financial stability, since loans of such companies would, most probably, become non-performing (and notwithstanding the political repercussions involved). Third, and as a consequence of the above concerns, resort to the provision of State aid to ailing credit institutions, which still remains, albeit conditionally, an option, may under the current circumstances become more frequent than aimed in the regulatory framework shaped after the recent global financial crisis. Very probably, this will not be the case for the ESM direct recapitalisation instrument (DRI), established in 2014 but never made use of, or the Government financial stabilisation tools (GFSTs), which are laid down in Articles 56-58 BRRD as tailor-made for systemic crises (BRRD, Article 37(10); transposition of Articles 56-58 into national law was at the discretion of Member States, some of which have not made use of), since in both these cases bail-in is a prerequisite. On the other hand, precautionary recapitalisation, as laid down in Articles 32(4) BRRD and 18(4) SRMR, is a strong candidate. It is reminded that such a recapitalisation is subject to strict conditions, upon fulfilment of which, however, the credit institution concerned would not be deemed to be failing or likely to fail (and hence the first condition for resolution would not be met). Inter alia, these conditions provide that the credit institution must be solvent; the recapitalisation must be precautionary, temporary and proportionate; and the support measures provided must be limited to injections necessary to address a capital shortfall established in stress tests, asset quality reviews or equivalent exercises conducted by the ECB, the EBA or national authorities[3]. Another condition is the recapitalisation’s approval by the Commission under EU State aid rules, and in particular under the provisions of the ‘2013 Banking Communication’ (adopted to support measures in favour of credit institutions in the context of the global financial crisis). These include the conversion of subordinated debt into equity (‘burden sharing’), unless the exception to this requirement, laid down in point 45 of the Communication, is met. In accordance with the recent (20 March) Commission’s Communication on the “Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak”, this exception is deemed to be applicable if a credit institution would need direct support in the form of liquidity recapitalisation or impaired asset measures due to this outbreak, and it would have been assessed that the above-mentioned conditions for precautionary recapitalisation are met and that such measures address problems linked to the outbreak (point 7 of the 2020 Communication). Consequently, the pandemic crisis may trigger the adoption of policy decisions relating to banking solvency crisis management, which in the aftermath of the global financial crisis and the euro area fiscal crisis would, in principle, not have been acceptable. It is evidently premature to judge whether, at least temporarily and on a generalised basis, the bail-in resolution tool will become ‘non preferable’ as an instrument within the resolution authorities’ arsenal when taking resolution action, and/or whether the conditions for resorting to precautionary recapitalisations will be interpreted in a lax and flexible way in order to accommodate to the needs which will result as another negative by-product of the crisis. Nevertheless, it is quite reasonable to consider that this crisis, which – undoubtedly – was not triggered by the banking system, may (at least in the medium-term) have a heavy negative impact on it and lead to extensive corporate restructurings. | [1] For an overview of the measures taken and the initiatives undertaken as of 14 April, see Gortsos, Ch.V. (2020): The EU policy response to the current pandemic crisis through the lens of the Eurogroup Report of 9 April 2020: overview and assessment, available here. [2] On this program, see Grund, S. (2020): The Legality of the European Central Bank’s Pandemic Emergency Purchase Programme, available here, and Smits, R. (2020): The European Central Bank’s pandemic bazooka: mandate fulfilment in extraordinary times, EU Law Live, Banking & Finance, COVID-19, Op-Ed, 23 March, available here. [3] It is noted, however, that on 12 March the EBA decided to postpone the 2020 EU-wide stress test exercise to 2021, see here. Hence, such stress tests may not be available. | | | 3. The Practice View | Paloma FIERRO (partner at Linklaters) and Antonio CÁMARA (managing knowledge lawyer at Linklaters) BRRD in everyday life of banks: Practical considerations on article 55 The harmonisation of the recovery and resolution regime under Directive 2014/59/EU (BRRD) has entailed a major shift in banking regulation. On top of a reinforced regime of supervision of every aspect of a bank’s life, we now also have detailed legal guidelines on the handling of their hypothetical death. Nevertheless, BRRD is much more than a mere roadmap for a bank’s insolvency—if and when it happens. Banks are required to prepare for their own crises and be ready to make a potential resolution fast and efficient. This has immediate consequences over a bank’s business-as-usual operations, even if it never arrives to be put under a resolution proceeding. These pre-emptive rules condition their legal and business decisions in many ways. As we know first-hand, an executive resolution proceeding is an extremely challenging issue for a legal practitioner. Fortunately, these have only happened, so far, very rarely under BRRD. Pre-emptive resolution rules, however, create legal issues for all banks and have been keeping lawyers occupied. Out of the many angles in this area, we have encountered that the application of article 55 BRRD (contractual recognition of bail-in) is one of the most recurring problems in practice. We will describe some of the ones that have caused more concern in the past few years: Article 55 BRRD in a nutshell Article 55: - relates to the removal of obstacles for the operation of the bail-in tool. As regards the write-down or conversion of liabilities (bail-in), BRRD implies an automatic recognition of this possibility when the affected liability is governed by the laws of an EU Member State, even if it is not the one where the bank under resolution is located. For instance, if a Spanish bank is being bailed-in under Spain’s BRRD implementation, the Spanish resolution authority will have no obstacle to write down its French-law-governed liabilities. This effect is possible because both France and Spain are bound by BRRD and therefore under the mutual recognition principle, French authorities will recognise the bail-in measures taken by the Spanish resolution authority. But the same does not apply to third countries. In principle, third-countries would not have any legal obligation to recognise such measures.
- aims at overcoming this problem by mandating the bank to include the potential bail-in as a contractual clause in all its third-country-law governed contracts. Even if such country has no automatic recognition of BRRD, the counterparty will be bound by this clause as a matter of contract.
- extends to any liability that is not legally excluded from bail-in. Since the list of excluded liabilities is closed, this means that a wide range of contractual relationships can fall within its reach. This is especially true for large multinational groups, usually having significant business outside the European Union.
The reform operated by BRRD-II has included some new elements in Article 55 that are mentioned below. However, the initial wording of the article was not particularly helpful, as other than the express exclusions, all terms were widely drafted. Take, for instance, the concept of “liability”. It did not include any limiting adjective or quantifier. There is no de minimis provision excluding contracts for trivial amounts, nor any guidance for fringe cases, such as liabilities that are merely contingent. Practitioners and authorities have been dealing with questions the like of: Is a penalty clause a liability? Are membership terms of a third-country trading venue an agreement creating liabilities? What if the third-country laws prevent or restrict such type of clause? The subjects of the obligation were also widely drafted. Article 55 refers to the creditor or party to the agreement. These broad terms imply that a BRRD-subject entity that is not in the debtor position is also under the regulatory obligation to include the clause. Again, there are many situations raising doubts that can only be assessed on a case-by-case basis. What if the entity becomes a party by subrogation into an already negotiated agreement? What if it is a multi-party agreement where it holds no bargaining power to demand adjustment to the pre-agreed terms? Those are all real cases where flexible or strict interpretations are both possible and can change business decisions. A much-welcomed flexibility The difficulties arising from the practical application of Article 55 have been partly addressed by supervisory criteria and market standards. Market players demand certainty and a flexible approach for the many different cases that can arise. After all, regulatory uncertainty can create competitive burden for EU banks in comparison with their non-EU counterparts, who do not have this issue when operating in international markets. Regulators have been helpful in resolving practical problems on reasonable grounds. However, the rather vague drafting of Article 55 still created some issues. Calls for its reform have been heard from the very beginning of its life. One of the first to take action was the UK’s Prudential Regulatory Authority (PRA). As a matter of supervisory policy, the PRA issued criteria regarding the impracticability of the bail-in recognition clause for certain types of unsecured non-debt liabilities. In sum, it acknowledged that under certain circumstances the inclusion of the clause was nearly impossible in practice and provided guidelines to assess them. Just to mention some examples, impracticability may arise for illegality of the clause in the third country, or for liabilities governed by international protocols that the company has no form of amending. A mere loss of competitiveness or profitability was not considered, per se, grounds for impracticability. There was still some uncertainty under the PRA rules on whether certain cases would fall into the criteria, but the supervisory framework did prove useful to solve many potential conflicts in a flexible way. Against this backdrop, discussions started for the wider reform of BRRD. There was a clear political will in the EU legislator to include some additional flexibility in Article 55 of the new BRRD-II, even though the specific proposals to achieve it differed notably. Banks and legal practitioners followed these discussions with great interest. The version finally agreed upon and included in BRRD-II also relies on the concept of impracticability. Banks are supposed to reach their own conclusions on whether it is legally or otherwise impracticable to include the recognition clause in a certain liability or class of liabilities and inform their resolution authority immediately. The obligation is suspended during the period when the authority is assessing the institution’s claim. It may result in a favourable opinion, thus liberating the liability from the need of a recognition clause, or a negative opinion, which would entail the obligation to try to amend the contract if possible, and/or change its policies for future cases. However, a problem may arise if a bank uses the impracticability exception very often, leaving a large part of its liabilities with no contractual recognition. While there is no hard limit to the amount of liabilities excluded from Article 55 on impracticability grounds, it does set a warning threshold of 10% of each debt class. When the limit is exceeded, resolution authorities will open an investigation and determine if this creates an impediment to resolvability. This may trigger the use of their powers to remove resolvability obstacles, which may include obligations to divest, limit exposures, revise financing arrangements, etc. This new provision is welcomed by most of the sector. However, it still needs to be implemented into national laws, and maybe more importantly, to be developed in level 2 legislation. The EBA is mandated to prepare RTS defining what exactly is to be understood as impracticable. The real effect of the exemption depends heavily on this definition, and a flexible and reasonable approach is critical for the sector. The Brexit conundrum When the drafters of BRRD were considering Article 55, they most likely did not think about the possibility of Member State withdrawing from the EU. One of the effects of a hard Brexit is precisely that agreements previously considered under EU law, and therefore not requiring a recognition clause, suddenly are bound to become subject to third-country law. Furthermore, banks also needed to consider their options in all new liabilities created during these last few years of uncertainty over the outcome of the Brexit negotiations. The issue has been especially relevant for the legal practice, considering that English law is a very popular standard in international capital markets. Many institutions have large sections of liabilities in their balance sheets governed by English law, even if they have no particular connection with the UK market. A possible solution would have been an ad-hoc recognition agreement between the UK and the EU. Article 55 allows for this possibility, although it would have been the first use case. With such an agreement in place, the issue would have disappeared: old liabilities would stay as originally drafted, new liabilities would not need to include any specific clause to comply with Article 55. However, as of the date of writing this article, no such agreement has been reached, and it still remains an uncertain idea. Legal professionals have been working to find alternative ways to tackle this problem. Some market standard clauses have been used to cater for the uncertainty. They typically include similar wording to that of a regular bail-in clause, but have their effect conditioned to the consummation of Brexit without a deal covering this point. These have been very useful to mitigate risks in new transactions during the past few years. Both the SRB and the EBA have requested institutions to include these types of clauses, at least for their MREL instruments. However, the stock of pre-existing liabilities under UK law also needs attention. An amendment to the contractual terms would be an ideal solution, although this is not feasible in many cases. The SRB proposed a case-by-case approach to identify any banks that would face issues because parts of their MREL become ineligible for lacking an Article 55 clause. Depending on the situation, flexible adaptation calendars and transitional periods have been used. While it is logical that MREL is the main source of concern for authorities, there are many other non-MREL liabilities that still may have a new need for a recognition clause. A reasonable understanding is that existing UK-law contracts, where banks relied on the UK being a Member State before Brexit started, should be approached in a flexible way by supervisors. Conclusion From a practitioner’s perspective, a good mixture of certainty and flexibility is the most important trait in a legal provision. As explained, Article 55 BRRD has been one of the most difficult to implement in practice, with Brexit complicating things even further. Therefore, its recent amendment as part of BRRD-II is very much welcome. Still, a careful development and implementation of this new provision is key to ensure it will be useful and safe, both for supervisors and supervisees. | | 4. Young Researchers’ Reflections | Pier Mario Lupinu, EBI YRG Member PhD Candidate in Banking and Finance Law at the University of Luxembourg and Roma Tre University | The flow of information among authorities involved in the banking union’s resolution procedure: The case of the SRB and the ECB The flow of information is vital for the smooth functioning and certainty of the successful outcome of a resolution procedure during resolution planning and execution. As a result, the exchange of relevant information has become highly influential in current debates. This article will focus on the exchange of information between the Single Resolution Board (SRB) and the European Central Bank (ECB). Firstly, the Authorities decided to arrange the rules for sharing information bilaterally in the form of a Memorandum of Understanding (MoU). While this framework of cooperation and exchange of information between the SRB and the ECB constitutes an obligation under Article 30(7) of the Single Resolution Mechanism Regulation (SRMR), it was drafted in the non-binding form of an MoU[1]. The general purpose of an MoU is to establish the basis for cooperation and convergence of intentions. Such foundations aim to strengthen the resolution procedure by joining forces to obtain more accurate and complete data with better coordination of tasks and resources in order to achieve the most solid result possible within a tighter timeframe. 1. The SRB-ECB Memorandum of Understanding The first MoU between the SRB and the ECB was signed on 22 December 2015. This date highlights the fact that the MoU was negotiated and concluded at a time when the SRB was newly established as it “began work on 1 January 2015 and became operational […] on 1 January 2016.”[2] Therefore, the general framework of cooperation was drafted even before the SRB could manage its first resolution case, which was the resolution of Banco Popular Español in June 2017. While it is appreciable that the Authorities were eager to cooperate from the very beginning, this timing could have negatively influenced the scope and type of information deemed essential or appropriate by the Resolution Authority for the Banking Union, as it could have been more limited compared to the current MoU revised on 30 May 2018. Accordingly, the European Court of Auditors (ECA) underlined the weaker position of the SRB in the MoU[3]. In the present MoU, the SRB and the ECB engage to share all the information expected to be useful for the achievement of such tasks[4]. Although they openly state the non-enforceable nature of the MoU[5], the Authorities commit to providing access to all the information needed to perform their activities. In making available relevant information, the Authorities need to make sure that information needed by the SRB might be “already available at the ECB”[6] as it uses the same information for supervisory purposes. This can frequently occur not only because the information may have been previously needed for supervisory tasks, but also because the ECB – being an older and more established institution – can more easily access pertinent information. After analysing the aims which brought this informal agreement to life, it is important to discuss the scope. The SRB and the ECB have clear responsibilities towards Entities referred to in the MoU in Paragraph 3(3.2)(b) and, respectively, in Article 7(2)(a) SRMR and Article 4(1) SSMR. However, the boundaries fixed by EU Regulations do not limit the scope of the exchange of information between the Authorities, as they explicitly include the possibility to broaden the area if required in a specific occasion – Paragraph 2 (2.2). Nevertheless, both Authorities remain free to act according to EU law in order to obtain substantial information outside the provisions of the MoU[7]. 2. Transfer of information Information is not only composed of data shared between the Authorities, but it is also acquired because of the participation of the board and staff in specific meetings of the counterparts. Indeed, the Authorities opened up the possibility for each other’s representatives to take part in key meetings held by the respective Authority with regards to their mandate or responsibilities. The MoU facilitates the participation of the Chair of the SRB (as an observer) to the ECB’s Supervisory Board meetings. Such participation is granted if topics as deliberations on recovery plans or group financial support – listed in Paragraph 5(5.1) – are under discussion[8]. Despite their observer status, it is crucial to mention that the Chair will receive the minutes of the meetings and the relevant information shared or discussed, equally to what the Supervisory Board itself receives. Moreover, representatives from the SRB have the possibility to be invited to sub structures of the ECB. The last element which can be included in the area of the transfer of information is the knowledge exchange laid down in Paragraph 15 of the MoU. This component plays a far-reaching role for the development of the performance of the Authorities, but especially of the SRB due to its more recent establishment. Indeed, depending of the specific area of competence, such exchange is expressed through trainings, conferences and workshops. Exchange of knowledge definitely increases the value of human resources, their capabilities and effectiveness, particularly in the occurrence of a future resolution scenario[9]. 3. Modalities In order to facilitate the completion of each other’s tasks, sharing and exchanging all relevant information between the Authorities is supposed to operate in a timely manner. Annex I of the MoU contains a relatively specific set of data categories, which is presumed to be automatically and continuously provided in the absence of specific requests or justifications. In parallel, according to Paragraph 7 of the MoU, the Authorities engage to follow specific modalities for requesting information to the counterpart, which concern formal and informal requests. The requesting Authority is expected to send a simple written request mentioning the category or categories of data from an extensive list contained in letters from (a) to (m) of Paragraph 7.2.2. On the other hand, a formal written request is prescribed for all cases not considered in Paragraph 7.2. While such request should take confidentiality and internal procedures into account, its key elements are urgency and specificity in terms of purpose and type of data. The situation is quite different when it comes to data related to a resolution plan of a Priority Entity as stated in Paragraph 3(3.2)(g). According to the MoU, the ECB engages to provide to the SRB all pertinent data if the latter decides to prepare for a resolution scenario. 4. Final considerations Against this backdrop it is possible to assume that a well-established framework for the exchange of information represents the cardinal point, which connects the various phases of the resolution procedure, by providing key elements and facilitating its exercise. As highlighted by the International Monetary Fund (IMF 2018), the flow of information between the ECB and the SRB functioned smoothly away from times of crisis. However, a few issues still remain, not only within the flow of information itself, but also connected to the quality and sensitivity of data, including who should take the responsibility for data integrity and outflows. Undeniably, a resolution procedure would be eased if the quality of the data provided by the banks to the Authorities is satisfactory or complete. At the same time, a good level of accountability for the quality and integrity of the data provided would definitely make the flow of information more transparent. Nevertheless, to safeguard the continuity of such flow and to avoid a future downgrade of the current level of cooperation the willingness of both Authorities to join forces towards the common goal of ensuring coordination and preventing duplication of data is remarkable. Indeed, as stated in Paragraph 17, the Authorities undertake to review their understanding on a biennial basis, with a view to overcoming or adjusting issues that could emerge in the future. | [1] On this point, see Gortsos, Ch.V. (2020), European Central Banking Law: The Role of the European Central Bank and National Central Banks under European Law, Palgrave Macmillan Studies in Banking and Financial Institutions, pp. 213-215. [2] See Chang, M. (2016) Economic and Monetary Union, Macmillan International Higher Education, July, p. 112. [3] For the ECA (2017), the MoU was “not comprehensive enough to ensure that the SRB has all the information it requires from the ECB to perform its tasks in a timely and efficient manner. In the context of resolution preparation, certain information on liquidity and capital that would be useful for the SRB is not automatically shared by the ECB.” [4] Véron (2019) labelled the revision of this MoU as a “symbolic moment”. [5] The language used in the MoU shows the willingness to cooperate and exchange information, while making a commitment on a “best-effort basis” only. Cfr. Paragraph 4(4.1). [6] See Paragraph 1(1.3). In addition, only the ECB has access to information acquired during on-site inspections, even though the SRB has the authority to conduct such inspections but not the related capabilities. [7] For example, Article 11 BRRD allows resolution Authorities (including the SRB) to request relevant information for the drafting and implementation of resolution plans. Moreover, in case that the SRB would assess that an entity is failing or likely to fail (FOLTF), Article 18(1) SRMR mandates the ECB to provide the SRB with all relevant information. [8] The legal base of the SRB’s Chair participation is Article 3(5) of the Rules of Procedure of the Supervisory Board and Article 30(4) SRMR. [9] This procedure, which includes the valuation phase, follows Article 20(1)-(15) SRMR. | | EDITORIAL BOARD D. Ramos Muñoz (coordinator), E. Leone, T. Gstaedtner, E. Wymeersch, B. Joosen, B. Clarke, M. Lamandini, T. Tröger | EDITORIAL TEAM M. Cecilia del Barrio Arleo and Carlos Bosque Argachal | | Supervisory Board of the European Banking Institute: Dr. Thomas Gstaedtner, President Enrico Leone, Chancellor | | THE EUROPEAN BANKING INSTITUTE The European Banking Institute based in Frankfurt is an international centre for banking studies resulting from the joint venture of Europe’s preeminent academic institutions which have decided to share and coordinate their commitments and structure their research activities in order to provide the highest quality legal, economic and accounting studies in the field of banking regulation, banking supervision and banking resolution in Europe. The European Banking Institute is structured to promote the dialogue between scholars, regulators, supervisors, industry representatives and advisors in relation to issues concerning the regulation and supervision of financial institutions and financial markets from a legal, economic and any other related viewpoint. Academic Members: Universiteit van Amsterdam, University of Antwerp, University of Piraeus, Athens, Greece, Alma Mater Studiorum – Università di Bologna, Universität Bonn, Academia de Studii Economice din București (ASE), Universidad Complutense, Madrid, Spain, Trinity College, Goethe-Universität, Universiteit Gent, University of Helsinki, Universiteit Leiden, Leiden, KU Leuven Universtiy, Universidade Católica Portuguesa, Universidade de Lisboa, University of Ljubljana, Queen Mary University of London, Université du Luxembourg, Universidad Autónoma Madrid, Johannes Gutenberg University Mainz, University of Malta, Università Cattolica del Sacro Cuore, University of Cyprus, Radboud Universiteit, BI Norwegian Business School, Université Panthéon - Sorbonne (Paris 1), Université Panthéon-Assas (Paris 2), University of Stockholm, University of Tartu, University of Wrocław, Universität Zürich. Supporting Members: European Banking Federation (EBF), European Savings and Retail Banking Group (ESBG), Bundesverband deutscher Banken / Association of German Banks, Ελληνική Ένωση Τραπεζών / Hellenic Bank Association, Associazione Bancaria Italiana / Italian Banking Association, Asociaţia Română a Băncilor / Romanian Banking Association, Asociación Española de Banca / Spanish Banking Association, Nederlandse Vereniging van Banken / Dutch Banking Association, Fédération Nationale des Caisses d’Epargne / French association of savings banks, Deutscher Sparkassen- und Giroverband / German association of savings banks, Confederación Española de Cajas de Ahorros / Spanish confederation of savings banks, Sparbankernas Riksförbund / Swedish association of savings banks, Cleary Gottlieb Steen & Hamilton LLP. | |
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