On December 11, the European Parliament and EU Member States agreed on the long awaited Bank Recovery and Resolution Directive (RRD).
The RRD is considered as one of the major steps in developing Banking Union and the Single Resolution Mechanism. It is dedicated to prevent new costs for tax payers and to restore confidence in the European financial sector by ensuring that failing banks can be reorganized in a predictable and efficient way with minimum recourse to public money.
Cornerstone and main legal instrument of the RRD, the bail-in (debt write down) tool applying at the point of non-viability of a bank will enable resolution authorities to impose the write down or conversion into equity of the claims of the shareholders and creditors of institutions which are failing or likely to fail. In this regard, certain debts will be entirely excluded such as insured deposits (up to EUR 100,000) as well as liabilities with an original maturity of less than one month (in order to maintain inter-bank funding), whereas deposits of natural persons and small and medium enterprises will benefit from a preferential treatment. The bail-in tool will apply as from 1 January 2016, bringing forward the date from what had been reached in the Council in June.
Furthermore, the final trilogue discussions ended with the decision to establish resolution funds in each Member State financed by the banks themselves and funded up to a level of 1% of covered deposits within 10 years, resulting from the need for banks to develop sufficient capacity to allocate losses to their shareholders and creditors.
The political agreement reached between the European Parliament and EU Member States is still subject to technical finalization and formal approval. The RRD should enter into force in 2015.