Implementation Of The BRRD Unfolds

UK regulators implemented the majority of the Bank Recovery and Resolution Directive from January 2015, using a combination of changes to primary legislation, new secondary legislation, along with regulatory rules and supervisory statements. Even though the British 'living wills' initiative had largely anticipated the BRRD, legislators and regulators needed to make several changes to ensure compliance with EU standards. Michael Wainwright and Josie Day outline how the UK's BRRD legislative toolkit has developed.

Overview: the BRRD's aims

The title of the Bank Recovery and Resolution Directive (the BRRD - 2014/59/EU) states its aim is to establish "a framework for the recovery and resolution of credit institutions and investment firms" ('institutions'). As its recitals explain, in the financial crisis there was "a significant lack of adequate tools at Union level to deal effectively with unsound or failing credit institutions and investment firms." So the directive sets out to remedy this in a number of ways. In summary it calls for tools, measures and powers:

to ensure relevant institutions make plans to facilitate their recovery if they are in financial difficulty and so seek to prevent their insolvency; for early intervention by national competent authorities if problems arise at relevant institutions; "to minimise negative repercussions by preserving the systemically important functions of the institution concerned" and to resolve relevant institutions that become insolvent, in a way that minimises costs to the public and the impact on the financial system. Why was the BRRD necessary?

Previously there were no harmonised procedures to resolve such institutions at Union level. The financial crisis showed that general corporate insolvency procedures were largely inadequate to resolve complex financial institutions. This meant a new toolkit was needed, for quick and early intervention in unsound or failing institutions, while aiming always to preserve the institution's critical functions and minimise the impact of its failure on the economy and financial system.

In such a resolution, first the shareholders and then the institution's creditors bear the losses. Importantly, no creditor is to end up worse off than it would have been had the institution been wound up under normal insolvency proceedings. Government bail outs (including temporary public ownership) are not banned: but are a last resort. Harmonised procedures would also make it possible to achieve consistency in the recovery and resolution planning across groups in the Union.

What does the BRRD do?

In principle, the BRRD provides a comprehensive recovery and resolution regime for banks and key investment firms. It sets minimum levels of requirement that each EU member state must adhere to and provides for regulatory co-operation.

The Financial Conduct Authority usefully summarises the BRRD as involving three main steps. Preparation: Firms and regulators must put in place plans to prepare for...