Resolution Recovery and Resolution Act (SAG)

Conditions for resolution

The resolution authority takes resolution action provided the following conditions for resolution are met.

  • The bank’s status as a going concern is jeopardised (failing or likely to fail).
  • The threat to its going concern status cannot with equal certainty be eliminated through action other than resolution, with both private-sector measures and those adopted by the supervisor (eg early intervention measures) coming into consideration as alternative measures in this respect.
  • Implementation of the resolution action must be necessary for, and proportionate to, achieving one or more resolution objectives; it should not already be possible to achieve this/these objective(s) by means of normal insolvency proceedings (public interest).

A bank's status as a going concern should be assumed to be jeopardised at the very least if it breaches requirements for continuing authorisation in a way that would justify the withdrawal of the authorisation by the respective competent authority. However, a bank's status as a going concern may also be jeopardised if it becomes or will, in the near future, be overindebted or insolvent. Also, if extraordinary public financial support is required.

Resolution tools

Where the aforementioned conditions for resolution are met, the resolution authority has four different resolution tools at its disposal.

  • Sale of business
  • Transfer to a bridge institution
  • Asset separation
  • Bail-in of shareholders and creditors

The last of these resolution tools gives the resolution authority the power to write down or convert relevant capital instruments into Common Equity Tier 1 capital instruments. However, some liabilities – covered deposits up to €100,000 and secured liabilities, in particular – are excluded from bail-ins.

The bail-in tool is designed to ensure that, should a bank fail, its shareholders and creditors will generally be first in line to absorb any risks, and thus any losses. Only then should it be possible to tap the resolution fund financed by the entire banking industry – the Single Resolution Fund, or SRF.

Capital requirements for resolution (TLAC, MREL)

To ensure that banks have sufficient capital that can credibly and effectively be bailed-in, minimum requirements have been developed at global and European level. In addition to own funds, these also include certain liabilities (“eligible liabilities”).

  • TLAC: At the global level, the G20 agreed in November 2015 on the total loss-absorbing capacity (TLAC) standard, which sets a minimum volume of certain bail-inable capital. It only applies to global systemically important banks (G-SIBs), i.e. to around 30 institutions worldwide. The TLAC standard published by the Financial Stability Board (FSB) was transposed into European law as part of the banking package. The TLAC minimum requirement is being phased in two stages and must be met by banks from 2019 and 2022, respectively.
  • MREL: The minimum requirement for own funds and eligible liabilities (MREL), a concept introduced in the EU parallel to the development of the TLAC standard, pursues the same objective. Its aim is to ensure that banks have a minimum level of certain bail-inable capital in case of resolution. MREL is determined on an individual basis for each bank by the respective resolution authority and is thus designed to take account of the heterogeneity of the European banking sector.

The TLAC standard was transposed into European law by way of the banking package which entered into force in June 2019 integrating the TLAC requirements into the MREL rules, which were amended in this context accordingly.

As a result, there is a minimum MREL requirement for G-SIBs and certain other large banks (so-called top-tier banks) which must be taken into account by the resolution authority when setting MREL for the respective institution. MREL instruments will also have to meet certain qualitative criteria in future. G-SIBs and top-tier banks will be required to meet their minimum MREL requirement using subordinated MREL instruments. For all other banks, the resolution authority decides whether and to what extent (up to a certain upper limit) the MREL instruments need to be subordinated. The same applies to G-SIBs and top-tier banks for the institution-specific part of the MREL requirement that goes beyond the minimum requirement.

For the majority of small banks – of which there are many, particularly in Germany – it can be assumed that these could be wound up in regular insolvency proceedings due to the fact that they do not perform any critical function in the financial market that would need to be maintained in resolution. In these cases, the resolution authority can set MREL, which consists of a loss absorption amount (equivalent to the minimum capital requirements) and a recapitalisation amount, at the level of the loss absorption amount solely. These banks are then not required to hold own funds or eligible liabilities above their minimum capital requirements in order to meet their MREL requirement.