Ranking of unsecured debt instruments in insolvency hierarchy

‘EU Legislation in Progress’ briefings aim to provide Members of the European Parliament with systematic and automatic analysis on all substantial proposals for EU legislation at every stage of the legislative procedure. Each contains an account of the purpose, content and legal aspects of the legislation proposed, in particular analysing what the legislation would change, as well as any previous legislation and the background. An overview of stakeholders’ views is also provided, as well as the opinions of national parliaments and the two advisory committees.

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The briefings are continuously updated as they pass through the policy making process and the source url hyperlink above should take you to the latest available version.Following the global financial crisis, the European Union extensively reformed its regulatory framework for financial services. With legislation such as the Bank Recovery and Resolution Directive (BRRD), it ensures that, through mechanisms such as 'bail-in', the recovery or restructuring of distressed financial institutions is done without spreading to other institutions, or using taxpayers' money to bail them out.

To ensure that sufficient financial resources are available for bail-in, the BRRD requires resolution authorities to set financial institutions a minimum requirement for own funds and eligible liabilities (MREL). In parallel, a similar standard, the total loss-absorbing capacity (TLAC), was adopted internationally for systemically important financial institutions. The discretionary requirements in MREL and the compulsory requirement in TLAC concerning subordination of eligible liabilities have driven some Member States to amend the ranking of certain bank creditors under their national law. Given that national rules adopted so far diverge, unsecured debt holders and other creditors of banks can be treated differently from one Member State to another.

The European Commission aims to remedy this by establishing harmonised rules.

Author: Angelos Delivorias

EP: EPRS: Briefing: EU Legislation in Progress http://epthinktank.eu/eu-legislation-in-progress/

ESO: Background information: Proposal for a Directive of the European Parliament and of the Council amending Directive 2014/59/EU of the European Parliament and of the Council as regards the ranking of unsecured debt instruments in insolvency hierarchy (COM (2016)853) http://www.europeansources.info/record/proposal-for-a-directive-amending-directive-2014-59-eu-as-regards-the-ranking-of-unsecured-debt-instruments-in-insolvency-hierarchy/

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