Banks now using schemes to comply with BRRD

Banks now using schemes to comply with BRRD

Tom Garske, associate partner at Citihub Consulting, discusses what the benefits of using schemes to abide by the provisions of the EU Bank Recovery and Resolution Directive (BRRD) are to banks.

What are the key provisions of BRRD?

Directive 2014/59/EU (BRRD) sets forth a common framework of recovery tools and crisis management planning for how banks need to cope in times of financial stress.

Banks have long been working on resolution and recovery planning, devising ways in which they can sustain themselves without the use of public funds or government bailouts should they need to proceed towards bankruptcy. These plans are very detailed and scrutinise all aspects of a bank’s business model—measuring risk, limiting investment of their own funds, restructuring business models, understanding how technology is inter-linked, and ultimately ensuring that banks would finally know their entire eco-system. The establishment of BRRD ultimately describes how to avoid failure in a crisis and how to mitigate systematic impact in the event of insolvency.

Some key areas on which banks have focused include:

  • total loss absorbing capacity—long-term debt that could be converted into equity to absorb losses and recapitalise the firm’s operating subsidiaries in a resolution
  • bail-in funding—restructure the liabilities of a distressed financial institution by writing down its unsecured debt and/or converting it to equity. Done to recapitalise and restructure the distressed institution
  • bail-in reporting—deliver reports to regulators that detail current market valuations of anticipated financial support for bail-in
  • financial market infrastructure (FMI)—ensure the continuity of key FMI memberships during a recovery and resolution
  • key people—identification of living wills critical employees for retention that are needed to support the recovery and resolution plan (RRP)
  • system ownership—having documented ownersh

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