On 26 November 2015 the harmonized financial institution resolution rules from the Bank Recovery and Resolution Directive have been implemented in national Dutch legislation. Among other things these rules confer upon the Dutch Central Bank the so-called "bail-in power". Pursuant to the bail-in instrument, the Dutch Central Bank has the power to cancel and/or reduce the unsecured liabilities of a financial institution under resolution or convert such liabilities into equity.
The Bank Recovery and Resolution Directive's objectives are to introduce a minimum set of special resolution instruments in all EU member states and to institutionalize and formalize cooperation among national resolution authorities with regard to the resolution of banks and other financial institutions. On 26 November 2015, the harmonized resolution rules from the Directive have been implemented in the Dutch Financial Markets Supervision Act (Wet financieel toezicht, the "Wft") pursuant to an implementation act. This article focuses on the bail-in instrument as part of the resolution powers conferred upon the national resolution authorities.
The bail-in rules grant the national resolution authorities the power to write down or convert into equity unsecured debt of a financial institution under resolution. Like other resolution powers from the Directive, the bail-in power is subject to the following general principles:
- shareholders of the institution under resolution shall bear losses first;
- creditors of the institution under resolution bear losses after the shareholders in accordance with the normal order of priority but subject to certain exceptions;
- creditors of the same class are treaded in an equitable manner;
- no creditor shall incur greater losses than would have been incurred had the institution under resolution been wound up under normal insolvency proceedings; and
- covered deposits are fully protected.
In the Netherlands, the Dutch Central Bank (DNB) has been designated as the national resolution authority. The Wft confers the bail-in power to DNB. According to the explanatory memorandum (Memorie van Toelichting) to the implementation act, the purposes of the bail-in power are to avoid destabilization of the financial markets and to reduce the costs of a failure of a financial institution for the taxpayers.
Pursuant to the Wft DNB has the power, upon resolution of a financial institution, to:
- cancel or reduce amounts outstanding under equity instruments;
- (in whole or in part) convert equity instruments in (other) equity instruments; and
- direct an institution under resolution to issue equity instruments.
Under the bail-in instrument DNB has the power to:
- reduce or cancel the principal of, or outstanding amount due in respect of, eligible liabilities;
- convert eligible liabilities into ordinary shares of the institution, a relevant parent institution or an associated bridge institution; and
- cancel debt instruments or write down the nominal amount of shares to zero.
Under the Wft the cancellation of liabilities pursuant to a bail-in measure applied by DNB will have the effect that such liabilities are deemed to have been satisfied. It is uncertain whether the effect would be identical under the laws of other jurisdictions, notably those of non-EU member states. In order to remedy this uncertainty the Directive stipulates that EU member states adopt national legislation pursuant to which financial institutions are under an obligation to include provisions in their contracts which are not governed by the laws of an EU member state, pursuant to which the counterparties under such contracts agree to the potential application of bail-in measures and the purported consequences thereof. This requirement has also been implemented in the Wft.
The Association for Financial Markets in Europe has published a template contractual provision which can be found at: http://www.afme.eu/Documents/Standard-forms-and-documents.aspx.
The Loan Market Association (LMA) has also recently published a recommended form of contractual recognition of bail-in clause, which can be downloaded by LMA members from their website: www.lma.eu.com.
This article was published in the Banking and Finance Update of December 2015.