The European Banking Authority (EBA) lunched today two public consultations on (i) Guidelines on the treatment of shareholders when applying the bail-in tool or the write down or conversion of capital instruments and (ii) Guidelines on when and how different conversion rates from debt to equity should be set for different types of liability. These two sets of Guidelines are part of a series of EBA regulatory mandates under the Bank Recovery and Resolution Directive (BRRD), which aim to ensure that the bail-in power is an effective way of absorbing losses and recapitalising banks in resolution, and that resolution authorities and other stakeholders have a clear understanding of the terms on which it should be applied. Both consultations run until 6 February 2015.
In particular, these Guidelines, together with those on the treatment of liabilities in bail-in and the draft Technical Standards on valuation in resolution, aim to clarify how valuation information should help determine the terms of bail-in.
The first set of Guidelines clarifies the circumstances which should guide the choice between cancellation and severe dilution of existing shares (or other instruments of ownership) when applying the bail-in tool or the write down or conversion of capital instruments power provided for in the BRRD.
Dilution may only be used when, according to the valuation, the institution under resolution has a positive net asset value, and the conversion shall be conducted at a rate that severely dilutes existing holdings of shares and other instruments of ownership. If the net asset value of the institution being resolved is negative or zero, shares should instead be cancelled or transferred. Resolution authorities should not seek to impose losses on other creditors of the institution until shareholders have absorbed losses to the maximum possible extent.
The second set of Guidelines clarifies when and how different conversion rates from debt to equity should be set for different types of liability. Resolution authorities should set conversion rates, first, to seek to ensure that no shareholder or creditor receives worse treatment than they would have done in insolvency. This should be assessed on the basis of the ex ante valuation to inform resolution decisions, and the ex ante valuation estimate of outcomes in insolvency. Subject to that, conversion rates should be set to ensure that the resolution principles of the BRRD, in particular respect for the creditor hierarchy, are complied with.
Comments to these consultations can be sent to the EBA by clicking on the "send your comments" button on the respective consultation pages. Please note that the deadline for the submission of comments is 6 February 2015.
A public hearing will then take place at the EBA premises on 12 January 2015 from 10:00 to 13:00 UK time. All contributions received will be published following the close of the consultation, unless requested otherwise.
These Guidelines have been developed according to Article 47 and 50 of the BRRD which mandate the EBA to (i) produce Guidelines specifying the circumstances under which it would be appropriate to cancel, transfer or severely dilute existing shares and (ii) on the setting of conversion rates