On November 11, 2014, the EBA published two consultation papers that include draft guidelines under the Bank Recovery and Resolution Directive (“BRRD”) on: (i) the treatment of shareholders in bail-in or the write-down and conversion of capital instruments; and (ii) the rate of conversion of debt to equity in bail-in. The draft guidelines describe how the bail-in power should be applied and their aim is for the bail-in powers of resolution authorities to be an effective way of absorbing losses and recapitalizing banks in resolution.

The draft guidelines on the treatment of shareholders in bail-in or the write-down and conversion of capital instruments mainly describe the distinction that should be made when applying the bail-in power. A choice can be made by resolution authorities to: (i) cancel existing shares or other instruments of ownership, or transfer them to bailed-in creditors; and/or (ii) dilute holdings of existing shareholders and holders of other instruments as a result of the conversion of relevant capital instruments or eligible liabilities to equity. The BRRD states that dilution should only take place when the firm under resolution has a positive net asset value, and if this is not the case, shares should be transferred or cancelled. This means that losses would not be imposed on other creditors of an institution in resolution until shareholders absorb the maximum loss that is possible.

The draft guidelines on the rate of conversion of debt to equity in bail-in state how different conversion rates from debt to equity should be applied for different types of liability. The guidelines set out two main principles for resolution authorities to set conversion rates: (i) no shareholder or creditor should receive a worse  treatment than in insolvency; and (ii) differential conversion rates should only be set to respect other principles under the BRRD. Both consultations close on February, 6 2015.

The consultations are available at:

http://www.eba.europa.eu/documents/10180/890569/EBA-CP-2014-40+CP+on+GL+on+shareholders+treatment+in+bail-in.pdf     

and

http://www.eba.europa.eu/documents/10180/890758/EBA-CP-2014-39+CP+on+GL+on+conversion+rates.pdf.