SRB’s publication on the bail-in approach

The preparation of financial institutions for a resolution event has been a focus topic for banking authorities. As a latest addition, the Single Resolution Board (SRB) has published on 26th June 2024 a new introductory document to one specific resolution tool: bail-in.

Bail-in allows for imposing losses on owners and creditors of a failing bank, and/or recapitalisation of a bank through conversion of its relevant capital instruments and bail-inable liabilities into new equity.

The document provides a deep-dive into the process and steps of using the bail-in tool, including descriptions of the roles of relevant stakeholders (e.g., SRB, National Resolution Authority - NRA, the bank etc.). The process includes three main phases, each broken down to further steps:

1. Resolution planning and preparation for resolution;
   
   
2. Resolution period - external execution of bail-in;
   
   
3. Post-resolution.

During resolution planning, the resolution authorities work together with the bank’s internal staff, namely the Internal Resolution Teams (IRTs) to prepare the resolution plans, determine MREL and assess resolvability based on data provided by the bank and Joint Supervisory Team (JST). One of the main steps in preparation for bail-in implementation, is the creation of a bail-in playbook, which outlines the operationalization of the bail-in tool. The final playbooks are to be tested by the banks during bail-in dry-runs. Besides the preparation of a playbook, banks are also expected to provide in-depth data for the resolution execution process, such as information on bail-inable liabilities to determine the amount of write-down or recapitalisation.

If the Bank experiences severe stress, the preparation for resolution will start. A crisis management team (CMT) will be formed, which works together with the SRB and relevant NRAs to prepare for a possible resolution. Close coordination with the ECB and EU Commission is also a requirement. The preparations made during the resolution planning phase are updated, and the SRB identifies the best course of action to be taken via a valuation process. During this phase, an independent valuer performs the first of three valuations in the resolution process (Valuation 1), which determines whether the conditions for resolution or the write-down or conversion of capital instruments and eligible liabilities are met. If necessary, an ex-ante Valuation 2 might also be performed to inform SRB on – among others – (i) the resolution action to be taken; (ii) the specifics of the action to be taken, such as: the extent of the cancellation, transfer or dilution of shares; (iii) the extent of write-down or conversion of relevant capital instruments and liabilities. Lastly, Valuation 3 will take place, which determines whether shareholders and creditors would have benefited more from a different approach instead of resolution (e.g. normal insolvency proceedings).

The SRB will prepare the resolution scheme, which includes: (i) the resolution tool to be applied, (ii) the use of the Single Resolution Fund; and (iii) discretionary exclusions from the application of bail-in.

The resolution scheme is then implemented in the relevant national jurisdiction via a national implementing act, allowing for the bank and its external stakeholders to give effect to the SRB's resolution scheme. The bank is notified of the implementing act, after which it must perform all necessary internal operations (internal execution) and must inform external stakeholders to perform their tasks (external execution) to execute bail-in.

The external execution of bail-in is carried out during the resolution period, and can be separated into 5 steps:

Step #1: Suspension of trading and delisting or removal of instruments from the trading venue

To avoid adverse price changes, and to support transparency towards owners of instruments to be separated for bail-in, suspension of trading might occur during the resolution period. In the EU, NRAs can require the delisting or removal from trading of shares or debt instruments. This can happen directly or by a request to the relevant market authorities. Suspension applies to the regulated market and other trading venues. SRB’s document also explains the rules of suspension for instruments issued in foreign markets.

The market authorities publish the suspension decision and inform the relevant authorities and trading venues, afterwards the trading venues inform their participants. For not regulated market instruments, the shareholders or creditors are informed via other forms of notification.

Step #2: Suspension of settlement

The suspension of settlement by the Central Securities Depositories (CSDs) aims to prevent instruments from effectively changing hands in their systems. CSDs may suspend the settlement of new transactions once the implementing act enters into force or once it becomes necessary for their own processes. However, transactions initiated prior to the resolution and adequately matched would typically go through still.

Holders of affected securities are notified of the suspension of settlement, possibly combined with the write-down or conversion notification.

Step #3: Write-down or conversion, including issuance of new securities or interim instruments

Shortly after the resolution scheme and the implementing act enters into force, the technical execution of the write-down or conversion takes place. This is based on a thorough identification of impacted International Securities Identification Numbers (ISINs), and a comprehensive reconciliation of information from the bank with that available to the CSDs. In parallel, the settlement of securities marked for bail-in will be suspended (see Step #2).

The write-down or conversion process starts with the notification of resolution of the CSD and the issuer of securities (within the bank). Afterwards, technical instructions for bail-in are prepared, the write-down or conversion process is performed, investors involved are notified, and lastly information reconciliation between the CSD and the notifier takes place. Generally, a full write-down leads to cancellation, while conversion encompasses both a write-down of bail-inable securities and simultaneously the issuance and distribution of the new instruments. Additionally, if during resolution, interim instruments have been issued, conversion of these instruments into definitive instruments is necessary.

The document also details actions to be taken during the bail-in of liabilities issued in countries governed by third country law (e.g. Eurobonds). In such a case, local rules must be followed, but appliable relevant foreign country investor protection legislations have to be complied with as well.

Step #4: (Re-)admission to trading and listing of new instruments.

The new instruments will be recognised, admitted to trading, clearing and settlement where appropriate. If the securities will be traded and listed on a regulated market or other trading venues, the admission rules will be considered. NRAs can ensure the listing or admission of new instruments, and re-listing and re-admission of written-down instruments without issuing a prospectus. However, a minimum set of information must be provided to market authorities and operators. The re-admission and re-listing process is similar to the processes leading to trading suspension and delisting.

Step #5: Definitive Valuation 2 and bail-in adjustments.

As mentioned before, Valuation 2 supports the decision on many elements of bail-in, and where necessary (due to urgency) a provisional Valuation 2 could be performed. If a provisional valuation takes place, the bail-in could be adjusted after a definitive valuation, meaning, if investors received too low a value, the resolution authority may consider how to increase the value of their claims.

In the period after the resolution (post-resolution), further finalising steps must be taken by the resolution authorities and the bank.

The banks subject to bail-in must prepare and submit to the NRA a business reorganisation plan (BRP) within one month of the bail-in execution, and must include at minimum the elements specific in the Commission Delegated Regulation (EU) 2016/1400, with further guidance available in the EBA Guidelines on BRPs. To support preparation, banks must provide a preliminary assessment of key BRP elements already during the resolution planning phase.

Furthermore, Valuation 3 is performed after the application of resolution actions, but with the resolution date as a reference. This aims to determine whether shareholders and creditors would have benefited more if the institution had entered normal insolvency proceedings instead of resolution (No Creditor Worse Off, NCWO principle). If the valuation determines a breach of NCWO, the shareholders or creditors worse off are to be compensated by the Single Resolution Fund.

SRB's document on bail-in provides a comprehensive picture on the bail-in process before, during and after resolution, creating an excellent information base and overview for financial institutions related to the bail-in resolution tool. For more in-depth information on the topic, contact us.