The European Banking Authority published on 13th of February its final Guidelines to resolution authorities on the publication of the write-down and conversion and bail-in exchange mechanic. These Guidelines aim at ensuring that a minimum level of harmonized information on how authorities would effectively execute the write down and conversion of capital instruments and the use of the bail-in tool, namely exchange mechanic, is made public.
The exchange mechanic is a complex matter, largely involving the implementation of national, nonharmonized legislation. In the Banking Union, National Resolution Authorities are in charge of executing the decision adopted by the Single Resolution Board. To foster transparency, in particular with regards to difficulties in a cross-border context and taking related risks into account, with these guidelines, EBA aims to increase predictability and minimize uncertainty for investors in resolution.
What are resolution authorities expected to do?
Bail-in is the main tool available to authorities to avoid using tax-payers’ money in case of failure of a large bank. To ensure that authorities’ approach is credible and that institutions have the necessary information to prepare, the EBA is asking authorities that have not yet done so to start publishing, from January 2024, a high-level document setting out the key aspects of their favored approach.
In particular, authorities are asked to specify if they intend to make use of interim instruments and to set out a timeline of the bail-in process. Those authorities that have already published information are expected to assess the compliance with these Guidelines.
The Description of the exchange mechanic should at least include the following information:
• Identification and description of the role of the stakeholders to be involved in the process of the exchange mechanic, including central securities depositories, potential special manager, relevant market authorities and, where relevant, any exchange adviser to be appointed by the resolution authority to support the execution of the exchange mechanic. The description should include, where possible, their contact details.
• Approach to the discontinuation or suspension of trading and delisting or removal of instruments from the trading venues.
• Clear description of the functioning of the potential interim instrument, if any.
• Description for the write-down and cancellation of relevant instruments, including possible solutions for dealing with instruments whose transactions have not yet been settled.
• Detailed description, albeit indicative, of the conversion process, including delivery of new instruments where relevant, which may refer to one of the following:
a. Conversion of bailed-in instruments or liabilities into new equity;
b. Conversion of bailed-in instruments or liabilities involving interim instruments;
c. a mix of both.
• Approach to address potential differences between definitive and provisional valuation, such as a compensation in case of over-conversion.
• Approach to deal with any fractional shares.
• A detailed, albeit indicative, timeline for the steps above to be realized.
• Indicative templates or the main features of the legal instruments to be used to formally implement bail-in, where available.
Authorities should continuously update that document as they further develop their approach on this complex matter.
Conclusions
Resolution authorities are not in charge of all aspects of the exchange mechanic. But to increase clarity of the framework they should aim to describe their understanding of how other stakeholders would act – or at least identify these stakeholders as responsible for certain actions, to ensure the smooth implementation of the resolution strategy and to enhance effective coordination of resolution plans and actions in a cross-border context.
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