Directive (EU) 2017/2399

What it is

to harmonise the priority ranking of unsecured debt instruments in insolvency hierarchy. PROPOSED ACT: Directive of the European Parliament and of the Council. ROLE OF THE EUROPEAN PARLIAMENT: the European Parliament decides in accordance with the ordinary legislative procedure and on an equal footing with Council. BACKGROUND: following the adoption of the total loss absorbing capacity (TLAC) standard by the G20, and in order to facilitate a more efficient path towards compliance with TLAC, a number of EU Member States have amended (or are in the process of amending) the ranking of creditor claims under their national insolvency law, creating significant divergences. Such discrepancies have the potential to amplify uncertainty for debt issuers, investors and resolution authorities and to make the application of the bail-in tool in cross-border resolution cases legally more complex and less transparent. At the same time, the buyer side would experience information asymmetry among different EU jurisdictions, rendering the process of pricing the risk more cumbersome. The resulting uncertainty could also trigger competitive distortions because unsecured debt holders could be treated differently in different Member States and the Minimum Requirement for own funds and Eligible Liabilities (MREL) compliance costs for banks may be different according to the location of the issuance. The Committee on Economic and Monetary Affairs adopted the report by Gunnar HÖKMARK (EPP, SE) on the proposal for a directive of the European Parliament and of the Council on amending Directive 2014/59/EU of the European Parliament and of the Council as regards the ranking of unsecured debt instruments in insolvency hierarchy. As a reminder, the proposed amendments to Directive 2014/59/EU is part of the efforts to implement in the European Union the standard the Total Absorption Loss Capacity (TLAC) standard adopted by the G20. In order to enhance the operational execution and robustness of bail-in powers and to avoid legal uncertainty, the TLAC standard requires that liabilities may be eligible for TLAC only if they are subordinated to other liabilities, i.e. if they absorb losses in insolvency or in resolution prior to other “preferred” liabilities that are explicitly excluded from TLAC eligibility, such as derivatives, covered deposits or tax liabilities. The TLAC standard provides, therefore, for a subordination requirement subject to certain exemptions, but it is not prescriptive on the way to achieve it. The committee recommended that European Parliament’s position adopted at first reading under the ordinary legislative procedure, should amend the Commission proposal as follows. Objective of the Directive : it is specified that the amending Directive shall lay down harmonised rules for the insolvency ranking of unsecured debt instruments for the purposes of the Union recovery and resolution framework especially with regard to ensuring a credible bail-in regime . The objective of the TLAC standard is to ensure that global systemically important banks (G-SIBs), referred to as global systemically important institutions (G-SIIs) in the Union framework, have…

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