Final Report on Guidelines on the publication of the write-down and conversion and bail-in exchange mechanic.pdf

General Information

This document is the final report of the guidelines published by the European Banking Authority (EBA) in 2023, referenced EBA/GL/2023/01, intended for banking resolution authorities. It concerns the publication by these authorities of their approach regarding the write-down and conversion mechanism of capital instruments and bail-inable liabilities, notably the operational exchange process allowing depreciation or conversion into new shares. The scope covers resolution authorities within the European Banking Union, the instruments concerned by Directive 2014/59/EU (BRRD), and applies from January 1, 2024. The document comprises 17 pages and aims to harmonize transparency and predictability of the banking resolution framework.

Executive Summary

The central topic is the publication by resolution authorities of their approach to the exchange mechanism (write-down and conversion and bail-in exchange mechanic), a key process for executing bail-in measures aimed at absorbing losses and recapitalizing troubled banks. This publication is essential to strengthen the credibility and predictability of the resolution framework, protect investors, and facilitate coordination, notably cross-border. The main findings are that current practices vary between authorities, there is a need for minimal harmonization of published information, and national legal complexity requires a clear description of steps, involved stakeholders, possible use of interim instruments, indicative timeline, and valuation adjustments. Conclusions emphasize the necessity for each authority to publish a high-level document by January 2024, regularly updated, specifying their approach, notably regarding the use of interim instruments. Recommendations concern publishing a detailed description including actors' roles, trading suspension, treatment of ongoing transactions, conversion process, valuation adjustments, management of fractional shares, as well as indicative templates of legal acts used. This approach aims to increase transparency, reduce investor uncertainty, and facilitate operational implementation of the bail-in.

Context and Objectives

The document responds to an identified need to improve transparency and predictability of the exchange mechanism within banking resolutions, particularly for implementing the bail-in as provided by Directive 2014/59/EU (BRRD). Divergent practices among authorities and national legal complexity complicate understanding and coordination, especially in a cross-border context. The objective is to provide a minimal harmonized framework for resolution authorities to publish their operational approach, to strengthen the credibility of the system, protect investors, and facilitate coordination of resolution plans. The scope covers national resolution authorities within the Banking Union, capital instruments and bail-inable liabilities, and the steps of the exchange mechanism, with application from January 1, 2024. The document also specifies that the publication must be a living document, updated as practices evolve.

Summary of Key Points by Theme

Publication of the exchange mechanism approach: Resolution authorities must publish on their website a high-level description of their approach, covering the write-down and conversion steps, including subsequent valuation adjustments (p. 10-11). This description must include identification of stakeholders (central securities depositories, special managers, market authorities, possible advisors) with their roles and contacts, suspension or withdrawal of instruments from the market, operation of interim instruments if applicable, treatment of ongoing transactions, conversion process (direct, via interim instruments or mixed), management of fractional shares, and an indicative timeline of phases (planning, implementation, execution, end of procedure) (p. 10-11). Regulatory framework and definitions: The guide relies on Directive 2014/59/EU and EBA guidelines on resolvability, notably defining the exchange mechanism and interim instruments (p. 9). Implementation and compliance: The guidelines apply from January 1, 2024. Authorities must notify their compliance to the EBA before June 5, 2023 (p. 8-9). Cost-benefit analysis: Two options were studied: a detailed and prescriptive publication, or a high-level description to be published by January 2024 with subsequent updates. The chosen option is the latter, to allow authorities to quickly publish minimal information while developing their approach (p. 12-14). Public consultation: The consultation received two responses from banking associations, which welcomed the approach and requested more operational details and clarification on stakeholders' roles. The EBA incorporated some suggestions, notably on the level of detail and templates of legal acts, while maintaining some flexibility (p. 14-16). Cross-border coordination: Publication by national authorities is preferred, with the Single Resolution Board able to reference these publications for banks operating in multiple jurisdictions (p. 5).

Main Findings and Lessons Learned

Findings: Resolution authorities have diverse approaches regarding the publication of the exchange mechanism, which harms predictability and transparency. The national legal framework is complex and non-harmonized, making clear and updated publication necessary. The EBA defined guidelines specifying minimal information to publish, applicable from January 1, 2024. Assumptions: The chosen option assumes authorities will publish a high-level description in 2024 and update it as they progress. Interpretations: Publishing a clear and accessible description will strengthen bail-in credibility, investor protection, and coordination among actors, notably in a cross-border context. Uncertainties: The document emphasizes that actual execution of the mechanism may differ from the published description, which must remain a living document. Moreover, some authorities fear that overly detailed publications may limit their discretion or expose them to legal challenges.

Conclusions and Recommendations

The EBA recommends that resolution authorities publish, no later than January 2024, a high-level document describing their approach to the exchange mechanism, including stakeholders' roles, treatment of instruments, conversion process, valuation adjustments, management of fractional shares, and an indicative timeline. This document must specify whether interim instruments will be used and include, if possible, indicative templates of legal acts. It must be clearly indicated that the description is indicative and subject to change. Authorities must regularly update this publication as their approach evolves. They must notify their compliance to the EBA before June 5, 2023. This approach aims to improve transparency, predictability, and coordination, while protecting investors and facilitating operational implementation of the bail-in. The Single Resolution Board may reference these publications for banks operating in multiple Banking Union countries.