EU Framework for bank recovery and resolution

The high profile national and cross-border bank failures in the last few years revealed serious shortcomings in the existing tools available to authorities for preventing or tackling failures of credit institutions that are linked to the wider economy, and which play a central role in the financial markets. The ability of governments to support institutions which are “too big to fail” with public finances has become unsustainable. Therefore, a clear and comprehensive bank recovery and resolution regime that covers both national and cross-border bank failures has been necessary to prevent widespread disruption to the financial markets and economy, while ensuring long term financial and economic stability, and reducing the potential public cost of possible future financial crises.Until the crisis, many felt that bank failures could be dealt with at a national level through normal insolvency proceedings. However, the experience from the different banking crises indicates that insolvency laws are not capable of dealing efficiently with the failure of financial institutions. Therefore, a resolution regime that replaces normal insolvency proceedings for banks, safeguards financial stability, and protects taxpayers has been developed.

The Bank Recovery and Resolution Directive (2014/59/ EU) (BRRD) establishes an EU-wide framework of rules that provides authorities with a set of tools to intervene early and quickly in an unsound or failing institution, so as to ensure the continuity of the institution’s critical financial and economic functions, while minimising the impact of an institution’s failure on the economy and financial system. It foresees a phased approach to supporting unsound banks, encompassing precautionary, early intervention and measures designed to prevent bank failures. Where failure is unavoidable, the BRRD aims to ensure orderly resolutions, even for banks operating across national borders.

According to the so-called “no creditor worse off” principle provided for in BRRD, the regime shall ensure that shareholders bear losses first and that creditors bear losses after shareholders, provided that no creditor incurs greater losses than it would have incurred if the institution had been wound up in normal insolvency proceedings.  All these objectives should help avoid destabilising financial markets, and minimise the costs for taxpayers.

Transposition of the bRRD into Austrian law

The Austrian Bank Recovery and Resolution Act (Bundesgesetz über die Sanierung und Abwicklung von Banken) (BaSAG) transposes the BRRD into Austrian  law. BaSAG came into force on 1 January 2015 – including the bail-in provisions – and repealed the Austrian Banking Intervention and Restructuring Act (Bankeninterventions- und Restrukturierungsgesetz); (BIRG).

Generally speaking, whenever new legislative action is planned in Austria, a certain legislative process has to be strictly followed. The legislative process has to be fair and transparent and it has to make sure that the general public is adequately informed. In the majority of cases, legislative initiative comes from the individual government ministries rather than from the national parliament.

The draft of BaSAG (the so-called “ministerial proposal”) was formulated by the Austrian Ministry of Finance on 12 June 2014. The most important feature of the ministerial proposal was that its initial wording was de facto identical to the wording of the BRRD. In the following stage, the ministerial proposal was circulated to expert groups for review, whereby certain interest groups, authorities and organisations presented their views and criticisms thereon. Afterwards, the ministerial proposal was modified by the Austrian Ministry of Finance according to the opinions and statements of the various expert groups. The modified proposal was then introduced as a government bill dated 18 November 2014 and distributed to the members of the Austrian National Council. The bill was adopted by the National Council on 11 December 2014, after which the Federal Council as the upper house consented thereto as well. Consequently, BaSAG was authenticated by the Federal President of Austria and was published in the Federal Law Gazette as of 29 December 2014.

Does Heta Asset Resolution AG fall within the scope of baSAG?

The legal entities that fall within the scope of BaSAG are listed in section 1 (1) of BaSAG. Accordingly, BaSAG applies to (i) institutions that are established in the EU (i.e. credit institutions and investment firms within the meaning of the Capital Requirements Regulation ((EU) No 575/2013)), (ii) financial institutions and (iii) financial holding companies.

Since 3 November 2014, Hypo Alpe-Adria-Bank International AG (Hypo Alpe Adria) has been operating pursuant to the Austrian Act on Creation of a Wind-Down Entity (Bundesgesetz zur Schaffung einer Abbaueinheit); (GSA) as a wind-down entity under the name Heta Asset Resolution AG (Heta), fully owned by the Republic of Austria. Pursuant to section 2 of GSA, Heta is no longer allowed to undertake deposit transactions or to hold any qualified participations in credit institutions or financial securities firms. The licence to conduct banking activities granted to Hypo Alpe Adria in accordance with the Austrian Banking Act (Bankwesengesetz); (BWG) was terminated on 30 October 2014.

Pursuant to section 3 of GSA, the statutory task of Heta is to manage its assets to ensure an effective and active disposition on the best terms possible. Thus, Heta may conduct only such activities that are necessary with regard to the fulfillment of its statutory task.

Accordingly, Heta (due to the fact it is not an institution according to the definition of section 1 of BaSAG) would not be subject to BaSAG. However, at the final stage of the parliamentary process the legislator introduced section 162 (6) of BaSAG which provides for the explicit expansion of the resolution mechanism of BaSAG to Heta.

What are the available remedies against baSAG under Austrian law and EU law?

Recital 10 of the BRRD explicitly states that the BRRD sets out a minimum harmonised set of tools and powers. This means that Member States may adopt or maintain additional rules at national level that are stricter or additional to those laid down in the BRRD in order to deal with crises, provided that they do not conflict with the BRRD and they are compatible with the objectives and principles set out therein.

In response to the numerous recent bank failings, prior  to the adoption of the BRRD a number of Member States already had in place mechanisms at a national level to resolve failing banks. This was also the case in Austria, where the national legislator adopted a set of statutes as a reaction to the Hypo Alpe Adria crisis, with GSA providing the legal basis for the creation of Heta as part of the legislative package.

It is important to emphasise that initially, BaSAG may not have been intended to apply to Heta (the initial ministerial proposal did not entail any provision to that effect). However, subsequently, the aforementioned section 162 (6) was added and became part of the government bill, stipulating that the 4th part of BaSAG shall be applicable to Heta being a wind-down entity created under GSA. The Federal Government stated in its explanations to the government bill of 18 November 2014 that the applicability of the resolution tools on wind-down entities is compatible with the objectives of the BRRD. Since the BRRD provides for a minimum harmonisation regime as described above, it should doubtlessly be permitted to provide for an extended application of BaSAG in the course of implementing the BRRD into Austrian law. A final decision on the legality of BaSAG and its conformity with the BRDD is however reserved to the national courts and the European Court of Justice.

Considering the remedies available, should it be determined from the perspective of EU law that BaSAG goes beyond the scope of the BRRD, the initiation of an infringement procedure pursuant to Article 258 of the Treaty on the Functioning of the European Union (TFEU) against a Member State that has failed to comply with EU Law may be considered. In such infringement proceedings, the European Commission may take actions against the Republic of Austria for an incomplete, incorrect or improper implementation of the BRRD into Austrian law.

In addition, from the perspective of Austrian law, the initiation of a judicial review by the Austrian Constitutional Court (Verfassungsgerichthof ) pursuant to article 140 of the Austrian Federal Constitution Act (Bundesverfassungsgesetz); (B-VG) may be considered, provided that any provision of BaSAG does not conform with the Austrian constitution.

Generally speaking, the constitutionality of a statute may also be challenged by an individual or an entity by way of the so-called “individual petition”, subject to the fulfillment of certain requirements. Namely, the person concerned must claim that one or several of its constitutionally guaranteed rights, such as the right of ownership or the right to equal treatment, have been directly violated. In addition, the person concerned must claim that the unconstitutionality of the statute has taken effect for that person, without a decision having been rendered by a court or an administrative body, and that such decision may not be rendered by reasonable means. Given the subsidiary character of the individual petition, the Austrian Constitutional Court applies very strict criteria in deciding on its admissibility.

An additional remedy under Austrian law for parties whose constitutionally guaranteed rights have been infringed has been introduced and came into effect on 1 January 2015. Accordingly, a person who is the addressee of a court decision rendered in the course of ordinary court proceedings may appeal against a first-instance decision to the Austrian Constitutional Court pursuant to article 140 of B-VG. This is comparable to the individual petition, but without the necessity to fulfill further specific requirements with the exception of ongoing court proceedings, in that a person may claim the infringement of its constitutionally guaranteed rights due to the application of an unconstitutional statute.

What is the legal position under baSaG of persons holding guaranteed bonds issued by Heta?

Under BaSAG, creditors holding bonds issued by an institution to be resolved may be subject to the so-called “bail-in tool”.

Bail-in is one of the four resolution tools that gives authorities statutory power, exercisable when an institution meets the trigger conditions for entry into resolution, to (i) write down eligible liabilities of the institution towards the creditors in order to ensure that the net asset value of the institution under resolution is equal to zero or (ii) convert eligible liabilities into shares of the institution.

The bail-in tool constitutes a legal mechanism that allows the allocation of losses on creditors to the extent that  such losses would not be worse than the losses which the creditors would have suffered in normal insolvency proceedings.

In comparison to normal insolvency proceedings, the bail-in tool is intended to help banks to be resolved in an orderly, quick and efficient manner, avoiding undue disruption to the bank’s activities and to the rest of the financial system, and minimising the cost and length of the proceedings.

BaSAG stipulates that generally all liabilities may be subject to the bail-in tool, except those specified in section 86 (2) of the BaSAG. It is considered that a broad scope is preferable to make the tool efficient and avoid any circumvention. In this respect, exemptions are strictly limited to those liabilities that are necessary to ensure the proper functioning of credit markets or to underpin financial stability. For example, certain short-term liabilities are excluded from the bail-in tool to ensure the uninterrupted flow of liquidity funding and continuity of banking services. Also, secured or collateralised transactions are exempt (e.g. covered bonds).

In order to protect creditor rights, the bail-in tool is subject to certain safeguards. Section 106 (2) of BaSAG explicitly stipulates the “no creditor worse off” principle, stating that where the resolution authority applies the bail-in tool, the creditors whose claims have been written- down or converted shall not incur greater loss than they would have incurred if the institution under resolution had been wound up under normal insolvency proceedings. For the purpose of assessing whether creditors would have received better treatment if the institution under resolution had entered into normal insolvency proceedings, a valuation of difference in treatment may be carried out pursuant to section 107 of BaSAG by an independent person as soon as the resolution action has been effected. Should the valuation carried out under section 107 of BaSAG determine that a creditor has incurred greater losses than it would have incurred in normal insolvency proceedings, such creditor is entitled pursuant to section 108 of BaSAG to payment of the difference from the resolution financing arrangement.

To conclude – many legal aspects under the BaSAG remain unsolved and will be resolved judicially or by settlement between parties involved. Due to the EU law framework, they will set relevant and important precedents across the EU.