European Union: Implications For Bank Creditors: The Latest EU Banking Reform Proposals

The European Commission recently announced an extensive package of banking reform proposals. Of particular interest to bank creditors, proposed amendments to the Bank Recovery and Resolution Directive aim to amend the creditor hierarchy in European bank resolution and insolvency proceedings. The Commission is also proposing changes to the onerous requirement that banks procure third party agreements to the recognition of bail-in for contracts governed by the laws of a third country. The timing of these proposals is significant because in both areas national rulemakers in different EU Member States are currently implementing, or planning to implement, differing requirements. This note discusses the Commission's proposals in the context of the bail-in tool with a particular focus on the implications for creditors.


On 23 November 2016, the European Commission published legislative proposals outlining far-reaching amendments to the Bank Recovery and Resolution Directive ("BRRD")1 and other key pieces of EU banking legislation.2 Under the BRRD, resolution authorities have the power, among other things, to write down or convert into equity certain debt liabilities of an EU firm in resolution ("Bail-In").

Bail-In Clauses

Bail-In is one of the resolution measures available to EU resolution authorities which is given cross-border recognition throughout the EU. This means that any Bail-In with regard to contracts governed by the laws of an EU Member State should be construed as a valid administrative act under the governing law of the contract. We would not expect Bail-In measures to exclude liabilities under contracts which are governed by the laws of a third-country (i.e., non-EU law governed contracts). However, due to concerns as to the effectiveness of a Bail-In under the governing law of the contract, there is a requirement in BRRD to procure contractual agreement to Bail-In under such contracts. Without such language, under a contract governed by New York law for instance, a creditor might argue in the US courts that a write-down or conversion into equity was not valid to modify the parties' obligations under the contract and that the EU firm is in default of a payment obligation, notwithstanding the resolution action.

BRRD requires EU firms to include in their non-EU law governed contracts a clause by which "a creditor or party to the agreement" recognises and agrees that liabilities may become subject to Bail-In (the "Bail-in Clause"). As currently drafted, the scope of the Bail-in Clause requirement is very broad. Beyond certain limited exceptions, it appears to be triggered by any type of liability regardless of the circumstances.3

Sequence of Bail-In

When applying the Bail-In tool under BRRD, resolution authorities must respect the following order of loss- absorbency in terms of creditor hierarchy (from last to first): regulatory capital (namely Common Equity Tier 1, then Additional Tier 1 and Tier 2), other subordinated debt and, last, senior debt. Within the categories of non- regulatory required subordinated debt and senior debt, any Bail-In must follow the hierarchy of claims in normal insolvency proceedings as stipulated in the relevant national insolvency law. One exception to this principle applies for deposit-takers: protected (typically consumer) deposits are outside the scope of the Bail-In tool. BRRD also requires EU Member States to ensure that any deposits of natural persons and SMEs that are not covered by depositor protection rank higher than other (non-preferred) senior debt.

Loss-Absorbing Capital

To ensure that EU firms have at all times sufficient liabilities that are eligible for a Bail-In, BRRD introduced a minimum requirement for own funds and eligible liabilities ("MREL"). Resolution authorities must set an individual MREL for each EU firm which will depend on, amongst other things, their resolution strategy. MREL serves a similar purpose to the total loss absorbing capital ("TLAC") standard established by the Financial Stability Board for global systemically important banks ("G-SIBs"), but the two concepts differ in a number of details, particularly the subordination criterion.4

BRRD does not include a formal requirement for subordination but resolution authorities may require a specific EU firm's MREL (or part thereof) to be met with subordinated instruments. By contrast, subject to certain exemptions, the TLAC standard includes a subordination requirement.

Diverging Approaches of EU Member States to the Ranking of Senior Unsecured Bonds

EU Member States have taken very different approaches to help local banks comply with the subordination requirement of the TLAC standard and the broader MREL requirements. The UK favours a structural subordination approach under which major banks issue senior unsecured bonds from holding companies that do not have operational liabilities. This approach ensures that liabilities of operational entities are not impacted by any Bail-In at the level of the non-operating holding company. However, many of the largest continental banks have an operating top-level entity. Bailing-in senior unsecured bonds which have the same rank as large deposits, liabilities arising from derivative contracts and other operational liabilities may entail significant legal risks and render a Bail-In less effective. To address this, some EU Member States have favoured an approach based on either contractual or statutory subordination. The latter is the current German and Italian approach, whereas France and Spain plan to follow an approach based on contractual subordination.

New Non-Preferred Senior Debt Instruments

To address the legal patchwork arising from diverging national approaches, the Commission is proposing to harmonize legislation in this area by introducing a separate tier within the category of senior debt. The new non- preferred senior debt instruments would rank junior to all other senior liabilities but would be senior to the subordinated debt. Much like the French approach, the Commission proposes that these instruments, when issued, must explicitly refer to the 'non-preferred' ranking in their terms and conditions. The status as non- preferred senior debt would mean that, in case of a Bail-In that breaks within the senior debt, losses could be allocated to the holders of such instruments ahead of the creditors of other senior liabilities. Through the establishment of a statutory basis for the issuance of non-preferred senior debt instruments, combined with explicit contractual subordination arrangements, legal certainty around the ability of resolution authorities to resolve failing EU firms is expected to increase significantly. The proposed harmonised approach should also help the holders of ordinary senior unsecured bonds (i.e., those issued without reference to the new regime) and the creditors of other senior liabilities (such as large deposits, liabilities arising from derivatives contracts and other operational liabilities) with the assessment of their Bail-In risk. From their perspective, a new layer of non-preferred senior debt would function as an extra safety cushion, making it less likely that they get bailed-in themselves.


These proposed amendments are intended to be transposed throughout the EU by June 2017 and to apply from July 2017. However, the ultimate timing will depend on how long the EU legislative process takes. Unlike under the German approach, the Commission does not intend to apply the provisions retroactively, which means that any instruments issued before the date of application of the revised BRRD provisions would remain subject to national insolvency regimes. To the extent that any of the existing national approaches adopted by EU Member States conflict with the final text, they will need to amended or adjusted accordingly.

New Waiver to Bail-In Clause Requirement

The Commission is also proposing a new right of resolution authorities to waive the Bail-In Clause requirement under certain circumstances.5

The intention is to remove the practical and legal issues that EU firms and, in particular, those operating branches in third countries, have faced in complying with the Bail-In Clause requirement, and will help them avoid having to discontinue business lines. Some third-country counterparties have persistently declined to include the Bail-In Clause in contracts with EU firms. In other instances, third- country regulators have even prohibited agreement to such clauses. Due to the many difficulties faced by EU firms in complying with the Bail-In Clause requirement, the banking industry has lobbied for a more flexible implementation and enforcement approach. This has led some of the EU national regulators, in particular those in the UK and Germany, to give guidance on their supervisory practice to mitigate some of the challenges. For example, UK firms may decline to include a Bail-In term for unsecured liabilities which are not debt instruments where it would be "impracticable" to do so.6

The UK Prudential Regulation Authority ("PRA") has provided some examples of where firms might assess that their compliance is impracticable, such as where it would be illegal to include the language in a contract governed by a particular country's laws or where the liability is contingent on a breach of the relevant contract. However, the PRA will not allow the rule to be used where a bail-in clause is merely inconvenient or leads to loss of competitiveness or profitability. In light of diverging approaches at national level and the limited leeway in BRRD, amendments to the text of BRRD itself will be broadly welcomed. Building on the UK approach, the Commission proposes to give resolution authorities discretion to grant a waiver from compliance with the Bail-In Clause requirement where:

  • it is determined that it would be "legally, contractually or economically impracticable" for a EU firm to include a Bail-In Clause;
  • the waiver would not impede the resolvability of the EU firm; and
  • the liabilities or instrument can be subject to the Bail-In powers of an EU resolution authority according to the laws of the relevant third country.

The European Banking Authority ("EBA") would be charged with preparing draft technical standards on the conditions under which it would be legally, contractually or economically impracticable for an EU firm to include a Bail-In Clause in certain liabilities and the conditions under which a waiver would not impede the resolvability of an EU firm. The waiver would only be available for liabilities that are not unsecured debt instruments, Additional Tier 1 instruments or Tier 2 instruments and for liabilities that would be senior to any MREL liabilities. If a waiver is granted, the liabilities would not count towards the EU firm's MREL. If the Commission's amendments go ahead as currently drafted, a waiver could only be given if all three of the conditions are met. This may be difficult to achieve and, with regard to the third condition, also depend on the analysis of the relevant third-country law. With regard to the details, much will depend on the EBA's technical standards. The Commission intends the revisions to be transposed by EU Member States within 12 months after the date of entry into force of the revised BRRD and to apply within six months after that transposition date. Those national regulators that have already adopted supervisory practices, such as the UK's PRA, will need to assess whether the final text will require an alteration to their existing practices.


1  The Bank Recovery and Resolution Directive 2014/59/EU.

2  The proposals also covered the Capital Requirements Regulation 575/2013 (CRR) and Capital Requirements Directive 2013/36/EU (CRD IV). The changes to the BRRD are mirrored in the Single Resolution Mechanism Regulation 809/2014. The proposals amending CRD IV are available here and the proposals amending CRR are available here. Those amending the BRRD on ranking of unsecured debt instruments in the insolvency hierarchy are available here and on loss-absorbing and recapitalisation capacity of credit institutions and investment firms here. The proposals amending Single Resolution Mechanism Regulation are available here.

3   Further detail on the scope of the Bail-In Clause requirements is available in our client note, "BRRD: Contractual Recognition of Bail-in and Resolution Stays," available here.

4  The European Commission's proposals to amend the BRRD and CRR include proposals to amend the EU MREL to introduce the TLAC standards for EU G-SIBs. Those proposals are not discussed in this note. The Commission suggests that, in light of the similar purpose of MREL and TLAC, an integrated approach is best so as to avoid undue complexity.

5  The bail-in tool is a separate resolution mechanism to that of the resolution stay. You may like to view our client note, BRRD: Contractual Recognition of Bail-in and Resolution Stays, available here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Morrison & Foerster LLP
Morrison & Foerster LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Morrison & Foerster LLP
Morrison & Foerster LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions