Given the effectiveness of the Bank Recovery and Resolution Directive (BRRD) for EU member states, many issuers of structured products have now added the requisite disclosures to their offering materials and program documents.
As a reminder, the BRRD addresses the resolution of a failed bank and attempts to do so through an orderly process designed to, among other things, avoid disruption to the financial system as a whole, minimize contagion risk, protect depositors and avoid a taxpayer injection of support. In order to advance these objectives, the BRRD equips regulators with a number of prudential and supervisory tools. If a resolution authority has determined that an institution is failing or likely to fail, then the resolution authority may use its “bail-in” authority and impose losses on losses on liabilities owed by a financial institution (other than specified excluded liabilities) where such liabilities would not, by their terms, be required to absorb such losses. For example, a debt security can be converted into common equity.
In order to comply with the resolution regime, issuers subject to these requirements have: added prominent disclosures in their offering materials regarding the possibility of bail-in, and holders must agree to be bound by the terms of a bail-in.
The “bail-in” tool is different from and should not be confused with the requirement for certain systemically important institutions to maintain minimum levels of total loss absorbing capital, or TLAC. As discussed in our last issue of this newsletter, TLAC is intended to provide “buffer” capital for an institution such that it can withstand stress scenarios and avoid failure and resolution.