EBA proposes first-stage resolution rules

Wed Jul 9, 2014 12:24pm EDT

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* Early-stage assessment of banks' strength could result in higher bail-in demands

* EBA proposals give national authorities "wide discretion" on precautionary measures

By Anna Brunetti

LONDON, July 9 (IFR) - The European Banking Authority is proposing giving national authorities the clout to require certain banks to hold a specific amount of bail-in-able assets to ensure institutions can be resolved without using taxpayer money.

The EBA published a consultation paper on Wednesday on the assessment of lenders' "resolvability", setting out when and how national authorities could ask a bank to step up its loss-absorbency capacity as a precautionary move to make its resolution plan more credible.

As part of the EU Bank Recovery and Resolution Directive, national authorities first will be called to examine banks individually to decide whether normal insolvency procedures would be sufficient to keep the business running in a distressed scenario, or whether ad-hoc resolution plans would be needed. If this was the case, the authorities would then draw up targeted resolution plans and check whether the bank's business model would allow that plan to become operational when things turn sour.

If they believe there are some elements in the bank's business that wouldn't allow the resolution plan to roll out smoothly, the authorities can apply three different sets of measures to increase the bank's strength - structural, financial and transparency measures.

Within the financial measures, the authorities could effectively ask the bank to gear up levels of bail-in-able instruments higher than 8% of total liabilities - established as the threshold for lenders to access resolution funds under the BRRD.

This may mean that a higher number of subordinated and senior bonds could be written off or converted into equity whenever the resolution process is triggered.

The document would grant national authorities "wide discretion in selecting appropriate measures" to remove or reduce obstacles to resolvability, the EBA said in the consultation.

More details on how bail-in requirements as a whole would be calibrated on a case-by-case basis will be disclosed in another set of rules that the EBA will publish in September/October. Those guidelines will spell out how and to what extent creditors would take losses, and will regulate the degree of discretion granted to national authorities. (Reporting By Anna Brunetti; Julian Baker)

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