All change: BRRD, SRM and ring-fencing of risks – significant amendments to the German bank recovery and resolution regime
The German bank recovery and resolution regime is about to reach its next phase.
During 2008, as a response to the financial crisis, the German legislator for the first time amended various bank regulatory provisions to foster the stability of the financial system and to rescue banks in crisis. Since then, several additional amendments have been made to the regime.
There are currently three upcoming developments. First, the draft legislative package 1 from 9 July 2014 which, inter alia, implements Directive 2014/59/EC (Bank Resolution and Recovery Directive – BRRD). This will apply (for the most part) as of 1 January 2015. Secondly, the EU Regulation 2 establishing uniform rules and procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund (the SRM Regulation), will apply (for the most part) as of 1 January 2016. Thirdly, the German provisions on the ring-fencing of risks, which will enter into force on 1 July 2015 and introduce a modified split-bank regime.
German law already provides for: (i) rules on preparation and planning; (ii) provisions dealing with early intervention; (iii) resolution powers and tools; and (iv) a split-bank system (applicable from 1 July 2015). The draft legislative package published on 9 July 2014 will amend those provisions, save for the split-bank system, to align them with the rules of the BRRD. This will in particular affect resolution tools, powers, and safeguards. The draft legislative package will expand the scope of available resolution tools to: (a) the sale of business tool; (b) the transfer to a bridge bank tool; (c) the transfer to an asset-management vehicle tool; and (d) the bail-in tool. Under the new regime, shareholders and holders of other instruments will in future be the first stakeholders to contribute to the resolution by means of a mandatory write-down/ cancellation/conversion of their instruments, taking account of the ranking of these instruments in an insolvency proceeding. In addition, the bail-in tool is expected to be implemented in Germany upon the entry into force of the legislative package on 1 January 2015 (ie ahead of the 1 January 2016 implementation date required by the BRRD).
Under the draft legislative package (and other parallel developments), the German Federal Financial Supervisory Authority (BaFin) will to a large extent be deprived of its powers. It has been established for some time that, on 4 November 2014, the European Central Bank will take over direct supervision of several German banks from BaFin. On 1 January 2015, based on the legislative package, BaFin will lose responsibility for bank resolutions to the Federal Financial Stability Authority (FMSA) as the competent national resolution authority. The resolution competency will, however, only partially remain with the FMSA as the resolution planning and the right to pass a resolution decision for most EU banks will be transferred under the SRM Regulation to a yet-to-be established EU agency, the Single Resolution Board. The draft legislative package does not yet reflect the final SRM Regulation.
Since 2011, German law has provided for a so-called "restructuring fund" financed by a bank levy.
On 1 January 2015, the fund will become part of a European system of financing arrangements which will, inter alia, provide for borrowings between national financing arrangements and a mutualisation of national financing arrangements in the case of a group resolution. As of 1 January 2016, the restructuring fund will be transferred into a compartment of the Single Resolution Fund (SRF) of the Eurozone (and some additional states). The SRF will initially provide for limited ring-fencing of risks between the compartments. However, between 2016 and 2024, such partial ring-fencing will fade out and all compartments will ultimately be dissolved.
The legislative package published on 9 July 2014 further amends provisions on public financial support. In 2008, the German Special Financial Market Stabilisation Fund (the SoFFin) was set up on a temporary basis. It is financed by a public budget and has granted financial support to numerous institutions in Germany since its establishment. According to the legislative package, the SoFFin will not – as currently planned – be dissolved by the end of 2014 but only by the end of 2015. In addition, the legislative package also provides for the German legislator's consent to the introduction of the new tool of direct bank recapitalisation of the European Stabilisation Mechanism (ESM). Combining not only the resolution planning and resolution decision but also the SRF and public sources at a centralised European level seems to be a logical step.
Additionally, the split-bank regime will come into effect in Germany on 1 July 2015 (with further transitional periods). Credit institutions and their financial groups will, if they exceed certain accounting thresholds, be prohibited from conducting certain risky, speculative transactions. These transactions can then only be rendered through a so-called financial trading institution.
As a result of these upcoming amendments, the German bank recovery and resolution regime will (again) be significantly amended. Institutions will (again) need to assess their recovery plans and be prepared for the resolution authority potentially questioning them again about their resolvability. Resolvability consideration should, if applicable, always take account of the upcoming German split-bank regime and the respective rules established in other countries, such as the U.S. and the UK.
At the same time, shareholders and holders of other instruments of ownership, as well as (other) creditors, need to consider the amended risk characteristics of their claims/instruments resulting from the new rules. Opportunities and risks might need to be recalibrated from an investor perspective.
1 An overview of the legislative package of the German Federal Government is available in English under: http://www.bundesregierung.de/Content/EN/Artikel/2014/07_en/2014-07-09-kabinett-massnahmenpaket-bankenunion_en.html.f/s.
2 (EU) No 806/2014 of 15 July 2014.