Considered the preferred resolution strategy by several banking groups, the bail-in instrument is often presented as the most effective method of maintaining banks’ critical functions and containing systemic risk.

While it has been a regulated tool since the introduction of the Banking Recovery and Resolution Directive (BRRD)[1], the revision of the “banking package” in 2019 has had numerous impacts on the scope and regime of the bail-in instrument, mainly governed by Regulation (EU) 2019/876 amending the Capital Requirements Resolution (CRR2)[2] and Directive (EU) 2019/879 amending the BRRD (BRRD2)[3]. 

In the wake of this revision, the French banking authority (Autorité de Contrôle Prudentiel et de Résolution or ACPR) has published a document [DL1] [BM2] available to all stakeholders[4] setting out its approach to the operational implementation of the bail-in instrument[5], in line with the European Banking Authority’s (EBA) guidelines[6] published on March 5, 2023.

Pour mémoire, within a resolution banking group, the bail-in instrument applies only to the entity defined as the resolution entity. In the context of a single point of entry resolution strategy, this corresponds to the head of the banking group or, in mutual groups, to the central body and other institutions permanently affiliated with it.

Preparatory steps ahead of bail-in

The ACPR has clarified the key steps for the various stakeholders. These include:

• for the Single Resolution Board (SRB), setting up a crisis management team, determining the appropriate reduction and/or conversion rates[7] and incorporating them into the SRB resolution plan communicated to the ACPR; and
• for the banking institution, identifying eligible instruments subject to bail-in, conducting a joint analysis with the resolution authorities as regards the impact of the bail-in instrument on its accounting and prudential balance sheet[8] [DL3] [BM4] and initiating the valuation process (it being specified that the document deals in an innovative way with the issue of a difference between this valuation and the ex-post valuation, through the ACPR’s power to grant the issuance of interim instruments (‘bons’) to that effect)[9]. 

Once the formal decision to implement the plan has been communicated to the relevant bodies[10], it is up to them (if necessary, via the paying agents) to anticipate the securities transactions induced by the write-down/conversion measures. 

Reference scenarios 

The ACPR has focused on three reference scenarios to illustrate the combinations of elementary bail-in operations: 

• Scenario 1 - full write-down of Common Equity Tier 1 (CET1), Additional Tier 1 (AT1) and Tier 2 instruments and full conversion of non-preferred senior debt instruments (SNP) into equity securities. 
• Scenario 2 - full write-down of CET1 instruments, partial write-down of AT1 and Tier 2 instruments followed by a full conversion of the remaining claim and full conversion of SNP debt instruments. 
• Scenario 3 - full write-down of CET1 instruments followed by a full write-down of AT1 and Tier 2 instruments and full conversion of SNP debt instruments. 

From a very practical point of view, it should be noted that the treatment of all categories of eligible instruments would be differentiated in the bail-in implementation process by respecting the rank of each category in the creditor hierarchy and the pari passu principle.

Operational procedures relating to the implementation of the bail-in tool

In the publication, the ACPR presents detailed day-by-day steps for implementing the above-mentioned reference scenarios from the moment the decision of the ACPR's Resolution College is adopted by the SRB (i.e. during the weekend between Friday evening and Sunday). In this respect, the ACPR specifies the intervention of each stakeholder in the bail-in implementation process, in particular: 

• the respective roles of the market operator and the CSD in relation to the trading suspension process and the settlement-delivery freeze of securities affected by bail-in; and
• the process applicable to the various securities transactions carried out by the CSD and the paying agents appointed by the authority. 

Coordinated bail-in for mutual groups

In line with the BRRD2 changes in this matter, the ACPR also synthesizes the special features of the bail-in tool for mutual groups. For most French cooperative banking groups, the resolution authorities favour an “extended single point of entry” (extended SPE) resolution strategy. If the conditions for triggering a resolution procedure are met for the whole cooperative network, the resolution authority essentially takes coordinated resolution measures for the central body and all its affiliates.

In terms of bail-in implementation, the ACPR explains that certain features of mutual groups sometimes trigger specificities relating to the allocation of tasks between the defaulting institution and the other stakeholders, for example the role of Euroclear France in the context of processing conversion measures. 

In any case, any distribution of the resources resulting from the coordinated application of a bail-in measure between the central body and all affiliates would have to be carried out in accordance with the group's consolidated capital requirements and within the framework of its legal mechanism of internal financial solidarity. The publication does not provide for a ‘one-size-fits-all’ approach on how this interaction plays out in practice, reflecting the variety of the structures of such groups.

As part of its gradual approach to operationalize bail-in, the ACPR publication may be updated in the future in order to clarify the following topics: the way to deal with the specificities of bail-in for mutualist group but also cross-border aspects of bail-in implementation; the scope of eligible instruments likely to be subject to bail-in (beyond the reference scenarios); and the legal procedures for implementing the French compensation mechanism in the event of a valuation error.

[1]    Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms.

[2]    Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements. 

[3]    Directive (EU) 2019/879 of the European Parliament and of the Council of 20 May 2019 amending Directive 2014/59/EU as regards the loss-absorbing and recapitalisation capacity of credit institutions and investment firms and Directive 98/26/EC.

[4]    Including notably the following: the credit institutions likely to be subject to a resolution procedure; Single Resolution Board; Resolution College of the ACPR; French Financial Markets Authority; the national Central Securities Depository (Euroclear France); the national market operator (Euronext Paris); the paying agents; and the designated special administrator (as the case may be in the event of eviction from the management bodies of the credit institution). 

[5]    The implementation of the bail-in instrument consists in reducing the equity and debt instruments of the institution in resolution, and in allocating new equity instruments to certain creditors.

[6]    Guidelines to resolution authorities on the publication of the write-down and conversion and bail-in exchange mechanic (EBA/GL/2023/01). 

[7]    Within the same rank in the creditor hierarchy and based on the granular data provided by the defaulting institution. 

[8]    Section 2.1.2 of the publication. The updated balance sheet is particularly necessary to be able to calculate, at the end of the resolution procedure, the level of capital that will enable the institution to comply with its licensing conditions.

[9]    Such instruments are used to compensate creditors excessively affected by bail-in, due to a difference between the provisional and final valuations. 

[10]   The ACPR's decision will include, among other things, the following items: data relating to the defaulting institution; details relating to the resolution tools to be implemented; the reduction and conversion rates for each rank and the post-resolution valuation of eligible instruments; the effective date of entry into resolution; the record date on which positions would be frozen in order to identify investors affected by the reduction/conversion of instruments; and the resolution powers of the authority and the required designations to implement the bail-in instrument.