The European Banking Authority (EBA) has launched a consultation on its draft guidelines specifying the type of tests, review or exercises that may lead to extraordinary public support measures for institutions. These guidelines are part of the EBA's approach to bank resolution across the European Union.
The Bank Recovery and Resolution Directive (BRRD) sets out a harmonised regulatory framework for resolving institutions at an EU level and establishes that resolutions should be primarily and almost exclusively financed by private resources.
The need for extraordinary public support is identified by the BRRD as an indicator that an institution is failing or likely to fail. However, such support would not necessarily trigger resolution in exceptional cases where a specific list of elements and conditions set in the BRRD is met. Among these elements and conditions, the BRRD refers to public injections of own funds or purchase of capital instruments to address a capital shortfall resulting from a test, review or exercise.
The proposed guidelines specify the types of tests, reviews and exercises and provide details of the main features of such measures. These features include a timeline, a scope, a time horizon and reference date, a quality review process, a common methodology and, where relevant, a macro-economic scenario and hurdle rates, and a timeframe to address the shortfall.
The consultation runs until 9 August 2014