The ECB, after consulting the SRB, determines whether a bank is failing or likely to fail. However, the SRB can make such an assessment after informing the ECB of its intention and only if the ECB does not make such an assessment within three calendar days of receipt of that information. The ECB shall provide all relevant information about a bank to the SRB to help inform its assessment process. The SRB remains ultimately responsible to determine whether no alternative solution is available and whether a resolution action is necessary in the public interest.
If a bank meets the relevant conditions, the SRB places the bank under resolution. This is achieved by the adoption of a resolution scheme, which determines what resolution tools are to be applied to the bank and, if necessary, whether the SRF is to be used to support the resolution action. Before any resolution action is taken, the capital instruments of the bank must be written down or converted. The resolution tools are:
- the sale of business tool;
- the bridge institution tool;
- the asset separation tool; and
- the bail-in tool.
The relevant NRAs take the necessary steps to implement the resolution scheme.
The bail-in tool
Bail-in is a key resolution tool provided for in the BRRD. It allows to write-down debt owed by a bank to creditors or to convert it into equity.
By replicating how creditors would incur losses if the bank had gone bankrupt, it reduces the value and amount of liabilities of the failed bank. It thereby protects taxpayers from having to provide funds to cover these liabilities, while allowing for the critical functions of the bank (e.g. deposit-taking, lending, operation of payment systems) to be uninterrupted.
The bail-in tool can be used to:
- Recapitalise the institution under resolution to the extent necessary to restore its ability to comply with the conditions for its authorisation and so continue performing its authorised activities, and to sustain market confidence in the institution; or
- Convert to equity, or reduce the principal amount of, claims or debt instruments that are transferred to a bridge institution (in order to provide capital for that bridge institution) or under the sale of business tool or asset separation tool.
Bail-ins versus bail-outs
Bail-outs occur when outside investors, such as a government, rescue a borrower by injecting money to help make debt payments. In the past, this helped save the companies from bankruptcy, with taxpayers assuming the risks associated with their inability to repay the loans.
A bail-in, on the other hand, occurs when the borrower's creditors are forced to bear some of the burden by having a portion of their debt written off. This approach eliminates some of the risk for taxpayers by forcing other creditors to share in the pain and suffering.
Resolution authorities must ensure resolution action in accordance with following principles:
- Shareholders of the institution must bear the losses first;
- creditors of the institution bear losses after the shareholders (in accordance with the priority of their claims under normal insolvency proceedings, except where expressly provided for otherwise in the BRRD);
- Management and senior management of the institution are replaced (except where their retention is considered necessary to achieve the resolution objectives);
- Creditors of the same class are treated in an equitable manner (except where otherwise provided);
- No creditor shall incur greater losses than they would have incurred under normal insolvency proceedings; and
- Covered deposits are fully protected by the respective Deposit Guarantee Schemes.