The EU Bank Recovery and Resolution Directive (BRRD) introduced a dual regime for dealing with failed banks: (i) a resolution regime that is harmonised across the EU and applicable to such non-viable banks where such a regime is in the public interest; and (ii), an insolvency framework where there is no public interest, which is not harmonised but, instead, based on the national insolvency procedures applicable in each EU member state.

Since the introduction of the BRRD, the use of these frameworks within EU member states in relation to failing banks has been limited. Banco Popular (the Spanish bank) remains the only case where a failed bank has been placed into resolution. The failures of other non-viable banks (for example, a number of Italian banks including Veneto Banca and Banca Popolare di Vicenza, and ABLV, the Latvian private bank) were managed according to national insolvency procedures.

The BRRD’s resolution regime

Notwithstanding this limited use, the BRRD mandates that resolution authorities prepare resolution plans and resolvability assessments for banks. In these plans, the authorities must decide whether a bank would either be resolved or liquidated: a bank will be expected to be placed into liquidation only where this is considered credible (no systemic impact of the failure of the bank) and feasible (the pay-out of deposits is regarded as possible). If the liquidation of the bank is both credible and feasible, then there is no need to engage in any additional preparations for the resolution plan. However, if it is not, the resolution authority will determine the preferred resolution strategy that it expects to apply to the bank (for example, bail-in or sale of business). Crucially, it will set the minimum requirements for own funds and eligible liabilities (MREL) that the bank will need to meet, something which is not the case when the bank is expected to be liquidated.

The Single Resolution Board (SRB), together with the national resolution authorities, for banks incorporated in the Eurozone, is in charge of preparing resolution plans and determining MREL levels consistent with the Financial Stability Board’s (FSB) total loss absorbing capacity (TLAC) standard. The SRB has published its MREL policies and defined, among other aspects, the eligibility criteria for MREL instruments or the criteria for setting MREL requirements according to the preferred resolution strategy.

The insolvency regimes

In contrast, the criteria for applying national insolvency procedures to a bank (the “liquidation thresholds”) have not been harmonised and are instead set out by each member state individually. Generally, there is little transparency regarding the criteria and thresholds that member states use to assess whether there is a “public interest” and, in particular, to define when a function is “critical” (that is one of the criteria that automatically lead an institution to resolution instead of liquidation). Italy and the UK are two of few member states which have made their criteria public and we see significant divergences in the application in practice: while some member states use asset-based value thresholds, others apply a case-by-case analysis.

While the national financial systems of individual member states are, of course, different in many ways, a degree of homogeneity and certainly transparency regarding the criteria used in this area would be desirable.

It remains to be seen whether individual member states do look to make their criteria more transparent and whether, at an EU level, steps are taken to achieve greater homogeneity, albeit within the constraints of different national insolvency regimes.