EBA publishes technical advice on protected arrangements in a resolution situation

The European Banking Authority (EBA) issued today its Opinion on how to define what arrangements should be protected in a partial property transfer in resolution. The Opinion ensures full protection of well-established sources of refinancing such as secured debt, including securities lending and covered bonds, and of means of risk mitigation. The Opinion is issued today in response to a request for advice from the European Commission and it will inform its delegated acts on the classes of arrangements to be protected in a partial transfer of the property of a bank under resolution.

 

The BRRD lists five general categories of arrangements which may be protected (security arrangements, title transfer collateral arrangements, set-off arrangements, netting arrangements, covered bonds and structured finance arrangements). As these categories are quite broad, the scope needs to be further specified, and the Commission is empowered to do so in its delegated acts.

 

The underlying principle proposed by the EBA in this Opinion aims at allowing effective separation and transfer of critical functions of the failing bank to another entity under a framework of safeguards. The resolution authority should have sufficient flexibility in splitting the balance sheet to reach the resolution objectives.

 

In particular, the EBA recommends that the European Commission's delegated acts provide the highest possible degree of legal certainty with regard to the integrity of the arrangement as a whole and minimise the risk of legal challenges. At the same time, the delegated acts should avoid hampering the use of partial transfers within the application of a resolution tool and preventing contracts that would create an impediment to a partial transfer without a legitimate interest. On the other hand, the criteria in the delegated acts should not impair legitimate interests in developing new products and in structuring transactions.

 

The EBA underlines that the protection granted should reflect the economic rationale for the specific legal treatment. This in particular applies to the function of protected arrangements in relation to reducing systemic risk in financial markets by minimising contagion, and should take into account whether they are recognised for this purpose under the applicable regulatory rules. In the same vein, statutory protection of those arrangements in Member States' insolvency laws should be taken into consideration. 

 

Accordingly, the EBA also recommends that in the case of set-off and netting arrangements, the protection should be limited to arrangements covering financial contracts, and to those recognised under prudential rules. 

Article 76(4) of the Bank Resolution and Recovery Directive (BRRD) mandates the European Commission to adopt delegated acts further specifying the classes of arrangement that fall within the scope of points (a) to (f) of Article 76(2) and consequently are protected in a partial property transfer. The Commission has requested the EBA to provide an opinion with technical advice on this mandate. The appropriate form of protection is specified in the BRRD, therefore, the EBA technical advice, provided according to Art. 8(1)(a) of the EBA Regulation, is not meant to address this point. Typically the safeguard means that either none or all of the assets and liabilities covered by the protected arrangement may be transferred (i.e. it would not be possible to transfer some, but not all of them). This, however, may impair the effectiveness or the partial property transfer as a resolution tool. Therefore, it is necessary to ensure that the scope of the safeguard is limited to what is needed to ensure legal certainty for the investors and the protection only of legitimate interests.