Changes from report parliamentary committee draft to plenary report

Added(37) Directive 2014/59/EU partially harmonised the ranking of deposits under national laws governing normal insolvency proceedings. Those rules provided for a three-tier ranking of deposits, whereby covered deposits had the highest priority ranking, followed by eligible deposits of natural persons and micro, smaller and medium-sized enterprises above the coverage level. The remaining deposits, i.e. deposits of large corporates exceeding the coverage level and deposits that are not eligible for repayment by the DGS, were required to have a lower priority ranking, but their position was not otherwise harmonised. Finally, the claims of DGSs benefitted from the same higher priority ranking as covered deposits. Nevertheless, this has not proved to be the optimal solution for depositor protection. Partial harmonisation created differences in the treatment of those remaining depositors across Member States, in particular as an increasing number of Member States have decided to also grant a legal preference to the remaining deposits. Those differences also created difficulties when determining the insolvency counterfactual for cross-border groups during the resolution valuations. Furthermore, ▌the three-tiered ranking of depositors’ claims had the potential to create problems regarding compliance with the ‘no creditor worse off’ principle, particularly when the deposits the priority of which had not been harmonised by Directive 2014/59/EU ranked at the same level as senior claims. Lastly, the high priority ranking given to the claims of DGSs had not made it possible for the available financing means of those schemes to be used in a more efficient and effective way in interventions other than the payout of covered deposits in insolvency, namely in the context of resolution, alternative measures in insolvency or preventive measures. The protection of covered deposits does not rely on the priority ranking of the claims of the DGS but is instead ensured through the mandatory exclusions from bail-in in resolution and the prompt repayment from the DGS in case of unavailability of deposits. Therefore, the ranking of deposits in the current hierarchy of claims should be amended.

Added(37a) The modification in the ranking of creditors not only enhances the accessibility of DGSs and the single resolution fund rather than the use of public support, but also paves the way for more financially effective solutions in the resolution of financial institutions. That should in turn reduce costs for taxpayers and promote an efficient use of the different tools existing in the Union financial ecosystem.

Added(38) The ranking of ▌deposits should be fully harmonised through the implementation of ▌a two-tiered approach, whereby ▌deposits of natural persons and micro, small and medium-sized enterprises benefit from a higher priority ranking over eligible deposits of large enterprises and central and regional governments. That tiered approach is designed to provide enhanced protection for a wide range of depositors, reflecting the unique characteristics of their deposits, while opening up the possibility of resolution to entities not covered by the current framework. At the same time, the use of the deposit guarantee schemes in resolution, insolvency and in preventive measures should always remain subject to compliance with the relevant conditionality, in particular the so-called ‘least cost test’.

Added▌

Added(41) The changes to the priority ranking of deposits ▌would not negatively affect the protection afforded to covered deposits in the event of failure, as that protection would continue to be guaranteed through the mandatory exclusion of covered deposits from loss absorption in case of resolution and, ultimately, by the payout provided by the DGS in event of unavailability of deposits.

Added(42) Resolution financing arrangements can be used to support the application of the sale of business tool or of the bridge institution tool, whereby a set of assets, rights and liabilities of the institution under resolution are transferred to a recipient. In that case, the resolution financing arrangement may have a claim against the residual institution or entity in its subsequent winding up under normal insolvency proceedings. That may occur where the resolution financing arrangement is used in connection to losses that creditors would have otherwise borne, including under the form of guarantees to assets and liabilities or coverage of the difference between the transferred assets and liabilities. To ensure that the shareholders and creditors left behind in the residual institution or entity effectively absorb the losses of the institution under resolution and improve the possibility of repayments in insolvency to the resolution-specific safety net, those claims of the resolution financing arrangement against the residual institution or entity, and claims that arise from reasonable expenses properly incurred, should rank in insolvency above the claims of deposits and of the DGS. Since compensations paid to shareholders and creditors by resolution financing arrangements due to breaches of the ‘no creditor worse off’ principle aim to compensate for the results of resolution action, those compensations should not give rise to claims of those arrangements.

Added(43) To ensure sufficient flexibility and to facilitate DGS interventions in support of the use of the resolution tools, ▌where necessary to prevent losses being borne by depositors, certain aspects of the use of DGS in resolution should be specified. In particular, it is necessary to specify that the DGS can be used to support transfer transactions that include deposits, including eligible deposits beyond the coverage level provided by the DGS, and also deposits excluded from repayment by a DGS, in certain cases and under clear conditions. The contribution of the DGS should be aimed at covering the shortfall in the value of the assets transferred to a buyer or bridge institution in comparison to the value of the transferred deposits. Where a contribution is required by the buyer as part of the transaction to ensure its capital neutrality and preserve compliance with the buyer’s capital requirements, the DGS should also be allowed to contribute to that effect. The support of the DGS to resolution action should take the form of cash or other forms, such as guarantees or loss sharing agreements that can minimise the impact of the support on the available financial means of the DGS while simultaneously allowing the contribution of the DGS to meet its purposes.

Added(44) The contribution of the DGS in resolution should be subject to certain limits. First, it should be ensured that any loss which the DGS may bear as a result of an intervention in resolution does not exceed the loss that the DGS would bear in insolvency if it paid out covered depositors and subrogated to their claims over the institution’s assets. That amount should be determined on the basis of the least cost test, in accordance with the criteria and methodology set out in Directive 2014/49/EU, taking into account all relevant factors, including the time value of money as well as delays in the recovery of funds in insolvency proceedings. Those criteria and methodology should also be used when determining the treatment that the DGS would have received had the institution entered normal insolvency proceedings when carrying out the ex-post valuation for the purposes of assessing compliance with the ‘no creditor worse off’ principle and determining any compensation owed to the DGS. Second, the amount of the DGS’s contribution aimed at covering the difference between the assets and liabilities to be transferred to a purchaser or to a bridge institution should not exceed the difference between the transferred assets and the transferred deposits and liabilities with the same or a higher priority ranking in insolvency than those deposits. That would ensure that the contribution of the DGS is only used for the purposes of avoiding the imposition of losses on depositors, where appropriate, and not for the protection of creditors that rank below deposits in insolvency. Nevertheless, the sum of the contribution of the DGS to cover the difference between assets and liabilities with the contribution of the DGS towards the own funds of the recipient entity should not exceed the cost of repaying covered depositors as calculated under the least cost test.

Added(45) It should be specified that the DGS may only contribute to a transfer of liabilities other than covered deposits in the context of a resolution if the resolution authority concludes that deposits others than covered deposits cannot be bailed-in, nor left in the residual institution under resolution which will be wound up. In particular, the resolution authority should be allowed to avoid allocating losses to those deposits where the exclusion is strictly necessary and proportionate to preserve the continuity of critical functions and core business lines or where necessary to avoid widespread contagion and financial instability, which could cause a serious disturbance to the economy of the Union or of a Member State. The same reasons should apply to the inclusion in the transfer to a buyer or to a bridge institution of bail-inable liabilities with a priority ranking lower than that of deposits. In that case, the transfer of those bail-inable liabilities should not be supported by the contribution of the DGS. If any financial support to the transfer of those bail-inable liabilities is required, that support should be provided by the resolution financing arrangement.

Added(46) Given the possibility to use DGS in resolution, it is necessary to specify further the way in which the DGS contribution can count towards the calculation of the requirements to access resolution financing arrangements. If the contribution made by shareholders and creditors of the institution under resolution through reductions, write-down or conversion of their liabilities, summed with the contribution made by the DGS, amounts to at least 8 % of the institution’s total liabilities including own funds, the institution should be able to access the resolution financing arrangement to receive further funding, where necessary to ensure effective resolution in line with the resolution objectives. If those conditions are met, the contribution of the DGS should be limited to the amount necessary to enable access to the resolution financing arrangement, unless the amount contributed by the resolution financing arrangement exceeds the limit of 5% of total liabilities including own funds, in which case the DGS should contribute proportionately to the excess amount. To ensure that resolution continues to be primarily financed by the institution’s internal resources and to minimise distortions of competition, the possibility to use the DGS contribution to ensure access to resolution financing arrangements should only be possible for institutions for which the resolution plan or the group resolution plan does not provide for their winding up in an orderly manner in case of failure, given that the MREL determined by resolution authorities for those institutions has been set at a level that includes both the loss absorption and the recapitalisation amounts. The possibility to use the DGS contribution to ensure access to resolution financing arrangements should also only be available to institutions with a minimum record of compliance with MREL requirements.

Added(47) In view of the role of EBA in furthering the convergence of authorities' practices, EBA should monitor and report on the design and implementation of the resolvability assessments of institutions and groups and on the actions and preparations of resolution authorities to ensure an effective implementation of the resolution tools and powers. In those reports, EBA should also assess the level of transparency of the measures taken by resolution authorities towards relevant external stakeholders and the extent of their contribution to resolution preparedness and institutions’ resolvability. EBA should furthermore report on the measures adopted by Member States for the protection of retail investors in what concern debt instruments that are eligible for the MREL pursuant to Directive 2014/59/EU, comparing and assessing any potential impact on cross-border operations. The scope of existing regulatory technical standards on the estimation of the additional own funds requirements and the combined buffer requirement for resolution entities should be expanded to include entities that have not been identified as resolution entities, where those requirements have not been set on the same basis as the MREL. In the annual report on MREL, EBA should also assess the policy implementation by resolution authorities of the new rules for the calibration of the MREL for transfer strategies. In the context of EBA’s tasks of contributing to ensure a coherent and coordinated crisis management and resolution regime in the Union, EBA should coordinate and oversee crisis simulation exercises. Those simulations should cover the coordination and cooperation between competent authorities, resolution authorities and DGSs during the deterioration of the financial situation of institutions and entities, testing the application of the toolbox in recovery and resolution planning, early intervention, and resolution in a holistic manner. Those exercises should consider in particular the cross-border dimension in the interaction between the relevant authorities and the application of the available tools and powers. Where relevant, the crisis simulation exercises should also capture the adoption and implementation of resolution schemes within the Banking Union, pursuant to Regulation (EU) No 806/2014.

Added(48) High-quality impact assessment is crucial for the development of sound and evidence-based legislative proposals, while facts and evidence are key to inform the decisions taken during the legislative procedure. For that reason, resolution authorities, competent authorities, the Single Resolution Board, the ECB and other members of the European System of Central Banks and EBA, should provide the Commission, at its request, with all the information it needs for its policy development related tasks, including the preparation of impact assessments and the preparation and negotiation of legislative proposals.

Added(49) Directive 2014/59/EU should therefore be amended accordingly.

Added(50) Since the objectives of this Directive, namely to improve the effectiveness and efficiency of the recovery and resolution framework for institutions and entities, cannot be sufficiently achieved by the Member States due to the risks that diverging national approaches might entail for the integrity of the single market but can rather, by amending rules that are already set at Union level, be better achieved at Union level, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on the European Union. In accordance with the principle of proportionality, as set out in that Article, this Directive does not go beyond what is necessary in order to achieve those objectives,

AddedHAVE ADOPTED THIS DIRECTIVE:

AddedAmendments to Directive 2014/59/EU

AddedDirective 2014/59/EU is amended as follows:

Added(1) Article 2(1) is amended as follows:

Added(a) the following point (29a) is inserted:

Added‘(29a) ‘alternative private sector measure’ means any support not qualifying as extraordinary public financial support;’;

Added(b) point (35) is replaced by the following:

Added‘(35) ‘critical functions’ means activities, services or operations the discontinuance of which is likely in one or more Member States to lead to the disruption of services that are essential to the real economy or to disrupt financial stability at national level or, where relevant, regional level, due to the size, market share, external and internal interconnectedness, complexity or cross-border activities of an institution or group, with particular regard to the substitutability of those activities, services or operations. For the purposes of this point, the regional level shall be assessed by reference to the territorial unit corresponding to level 1 of territorial units of the Nomenclature of territorial units for statistics (NUTS level 1) within the meaning of Regulation (EC) No 1059/2003 of the European Parliament and of the Council* or to NUTS level 2 where a significant disruption of services at NUTS level 2 implies a material risk of a systemic crisis at national level’;

Added(c) point (71) is replaced by the following:

Added‘(71) ‘bail-inable liabilities’ means the liabilities, including those giving rise to accounting provisions, and capital instruments that do not qualify as Common Equity Tier 1, Additional Tier 1 or Tier 2 instruments of an institution or entity as referred to Article 1(1), points (b), (c) or (d), and that are not excluded from the scope of the bail-in tool pursuant to Article 44(2);’;

Added(d) the following points (83d) and (83e) are inserted:

Added‘(83d) ‘non-EU G-SII’ means a non-EU G-SII as defined in Article 4(1), point (134), of Regulation (EU) No 575/2013;

Added(83e) ‘G-SII entity’ means a G-SII entity as defined in Article 4(1), point (136), of Regulation (EU) No 575/2013;’;

Added(e) the following point (93a) is inserted:

Added‘(93a) ‘deposit’ means, for the purposes of Articles 108 and 109, deposit as defined in Article 2(1), point (3), of Directive 2014/49/EU;’;

Added(2) in Article 5, paragraphs 2, 3 and 4 are replaced by the following:

Added‘2. Competent authorities shall ensure that the institutions update their recovery plans at least annually or after a change to the legal or organisational structure of the institution, its business, or its financial situation, which could have a material effect on, or necessitates a material change to, the recovery plan. Competent authorities may require institutions to update their recovery plans more frequently.

AddedIn the absence of changes referred to in the first subparagraph in 12 months following the latest annual update of the recovery plan, the competent authorities may exceptionally waive, until the subsequent 12-month period, the obligation to update the recovery plan. Such a waiver shall not be granted for more than two consecutive 12-month periods.

Added3. Recovery plans shall not assume any access to or receipt of any of the following:

Added(a) extraordinary public financial support;

Added(b) central bank emergency liquidity assistance;

Added(c) central bank liquidity assistance provided under non-standard collateralisation, tenor or interest rate terms.

Added4. Recovery plans shall include, where applicable, an analysis of how and when an institution may apply, in the conditions addressed by the plan, for the use of central bank facilities not excluded from the scope of the recovery plan pursuant to paragraph 3 and identify those assets which would be expected to qualify as collateral.’;

Added(3) in Article 6, paragraph 5 is replaced by the following:

Added‘5. Where the competent authority assesses that there are material deficiencies in the recovery plan, or material impediments to its implementation, it shall notify the institution or the parent undertaking of the group of its assessment and shall require the institution to submit, within 3 months, extendable with the authorities’ approval by 1 month, a revised plan demonstrating how those deficiencies or impediments are addressed.’;

Added(4) in Article 8(2), the third subparagraph is replaced by the following:

Added‘EBA may, at the request of a competent authority, assist the competent authorities in reaching a joint decision in accordance with Article 31(2), point (c), of Regulation (EU) No 1093/2010.’;

Added(5) ▌Article 10 is amended as follows:

Added(a) paragraph 7 is amended as follows:

Added(i) the following point is inserted:

Added‘(aa) where applicable, a detailed description of the reasons for determining that an institution is to be qualified as a liquidation entity, including an explanation of how the resolution authority came to the conclusion that the institution lacks critical functions;’;

Added(ii) the following point is inserted:

Added‘(ja) a description of how the different resolution strategies would best achieve the resolution objectives set out in Article 31;’;

Added(iii) the following point is inserted:

Added‘(pa) a detailed and quantified list of covered deposits and eligible deposits from natural persons and micro, small and medium-sized enterprises;’;

Added(b) the following paragraph 8a is inserted:

Added‘8a. Resolution authorities shall not adopt resolution plans where insolvency proceedings have been initiated with regard to an entity in accordance with the applicable national law pursuant to Article 32b or where Article 37(6) applies.’;

Added(c) in paragraph 9, the second subparagraph is replaced by the following:

Added‘EBA shall submit revised draft regulatory technical standards to the Commission by [12 months from the date of entry into force of this amending Directive].’;

Added(6) Article 12 is amended as follows:

Added(a) in paragraph 1, the following third and fourth subparagraphs are added:

Added‘The identification of the measures to be taken in respect of the subsidiaries referred to in the first subparagraph, point (b), that are not resolution entities may be subject to a simplified approach by resolution authorities if such approach does not negatively affect the resolvability of the group, taking into account the size of the subsidiary, its risk profile, the absence of critical functions and the group resolution strategy.

AddedThe group resolution plan shall determine whether entities within a resolution group, other than the resolution entity, qualify as liquidation entities. Without prejudice to other factors that may be deemed relevant by resolution authorities, entities that provide critical functions shall not qualify as liquidation entities.’;

Added(aa) paragraph 2 is replaced by the following:

Added‘2. The group resolution plan shall be drawn up on the basis of the requirements laid down in Article 10 and the information provided pursuant to Article 11.’

Added(ab) in paragraph 3, the following point is inserted: