Directive 2014/59/EU (“BRRD”) and Council Regulation (EU) No. 806/2014 (“SRM”) form a common regime for the recovery and resolution of banks – the so-called “second pillar” of the European Banking Union, which compliments the rules of the Single Supervisory Mechanism (“SSM”), the “first pillar” of the European Banking Union. The provisions of the BRRD bring together material regulations ensuring a minimum level of harmonisation for the recovery and resolution of banks in EU member states. Furthermore, the SRM has been created as a separate resolution authority on a European level for the purpose of resolution (and resolution planning) for banks which are subject to direct ECB supervision. The SRM will be operated by the respective national resolution authorities for the execution of resolution actions, but the most important decisions will, however, be taken by the European resolution authority (in part jointly in conjunction with the EU Council and the European Commission).
The bail-in tool forms the core element of the BRRD. It permits the resolution authority to write down the eligible liabilities in a cascading contribution to loss absorption of an institution, or to convert them into equity capital. The most important examples for exceptions to the scope of application of the bail-in tool are secured deposits, liabilities held against employees, secured liabilities and interbank liabilities with an original maturity of less than seven days. Furthermore, the FMA may also take measures for ensuring the continuity of services and avoiding adverse effects on financial stability by separating performing assets from impaired or under-performing assets. For this purpose the FMA may transfer shares or all or part of the assets of an institution to a private purchaser or a bridge institution without the consent of the shareholders.
The resolution process is primarily funded by the participation of the owners and creditors (“bail-in”). In the event that the costs of the resolution cannot be borne adequately by means of a bail-in, a resolution fund exists that is to be funded by the banks in accordance with their liabilities and their risk profile.