30 Jun Eba Consults on Technical Standards on Impracticability of Contractual Recognition of Bail-In

EBA Consults on Technical Standards on Impracticability of Contractual Recognition of Bail-In: What You Need to Know

The European Banking Authority (EBA) has recently published a consultation paper on technical standards relating to the impracticability of contractual recognition of bail-in. This paper aims to provide guidance to the financial sector on the implementation of the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) Regulation, which require that certain financial institutions include bail-in clauses in their contracts.

What is Bail-In?

Bail-in is a resolution tool that enables regulators to recapitalize a distressed financial institution with the funds of its shareholders and creditors, rather than using taxpayers` money. The bail-in process allows the institution to continue its operations while minimizing the risks to the financial system.

Why is Contractual Recognition of Bail-In Important?

The BRRD and SRM Regulation require that certain financial institutions include a contractual recognition of bail-in clause in their contracts. This clause ensures that creditors are aware that they may be subject to a bail-in and that they accept the risks and consequences of such an event.

However, the EBA has acknowledged that including such clauses in all types of contracts may not be feasible. Hence, it has proposed technical standards that provide guidance on the appropriate implementation of contractual recognition of bail-in clauses.

What are the Proposed Technical Standards?

The EBA`s proposed technical standards require that:

1. Financial institutions must identify all their liabilities that are subject to bail-in, and categorize them into separate classes based on their legal and economic characteristics.

2. The contractual recognition of bail-in clause must be included in the contracts of liabilities that are eligible for bail-in. The clause must be written in clear and comprehensible language so that creditors can understand the risks associated with the clause.

3. For liabilities that are not eligible for bail-in, financial institutions must include a written explanation of why the clause is not applicable.

4. Financial institutions must periodically review their liabilities to ensure that they remain eligible for bail-in, and update their contractual recognition of bail-in clauses accordingly.

What is the Timeline for Implementation?

The EBA`s consultation period on the proposed technical standards will end on October 1, 2021. Following this, the EBA will review the feedback received and finalize the technical standards. Once finalized, financial institutions will be required to implement the standards within six months.

In conclusion, the EBA`s proposed technical standards provide guidance to financial institutions on the implementation of the contractual recognition of bail-in clause. This will ensure that creditors are aware of the risks and consequences associated with bail-in, and enable regulators to resolve distressed financial institutions without using taxpayers` money. Financial institutions must carefully review the proposed technical standards and implement them within the prescribed timeline to comply with the BRRD and SRM Regulation.