The European Banking Authority (EBA) published today its final Guidelines specifying the type of tests, review or exercises that may lead to extraordinary public support measures for institutions in the banking sector. These Guidelines aim at promoting a consistent and coherent approach to bank resolution across the European Union and will be part of the EU Single Rulebook in the banking sector.
The Bank Recovery and Resolution Directive (BRRD) defines a harmonised regulatory framework for resolving institutions across the EU. It establishes that resolution should be primarily and almost exclusively financed by private resources, in order to avoid, as far as possible, resorting to taxpayers' funds when dealing with unsound or failing credit institutions and investment firms.
The Directive also defines a request for extraordinary public support, as an indicator that an institution is failing or likely to fail. However, such support will not necessarily trigger a resolution if certain exceptional elements and conditions are met. Among these elements and conditions, the BRRD specifically refers to public injections of own funds or to acquisition of capital instruments addressing a capital shortfall that may result from a stress test, an asset quality review or other equivalent exercises.
In the Guidelines published today, the EBA has developed the necessary elements and features of the tests, reviews and exercises mentioned in the BRRD. The EBA Guidelines specify that these tests, reviews, and exercises should have a specific timeline and scope, should provide a time horizon and reference dates, as well as a quality review process. Moreover, where relevant, they should also provide a macro-economic scenario and hurdle rates, and a timeframe to address the shortfall.
Legal basis and next steps
The draft Guidelines have been developed in accordance with Article 32(4)(d)(iii) of Directive 2014/59/EU (BRRD), which mandates the EBA to specify the type of tests, reviews or exercises which may lead to a precautionary recapitalisation of an institution, under certain conditions.