Banks’ recovery and resolution directive: a new model for the management of banking crisis

Although not yet implemented in our jurisdiction, Directive 2014/59/EU enacted on last 15 May constitutes a remarkable step forward in the overhaul of the European framework concerning banking supervision. Indeed, such piece of legislation is part of the ambitious plan pursued by European Union’s institutions to build common rules on banking supervision for all Member States (so-called “Banking Union”).

In this view, purpose of Directive 2014/59/EU on banks’ recovery and resolution (“BRRD”) is to avoid in the future the need of extraordinary public financial support to save credit institutions and stabilize the financial system. The BRRD hence puts in place prearranged procedures to reduce, at an early stage, the likelihood of future crises and enhance the resilience of institutions to economic stress, whether caused by systemic disturbances or by events specific to the individual institution.

Such procedures will consist mainly in the obligations for banks and investment firms which fall under the application of the BRRD to draft appropriate recovery and resolution plans to be then submitted, from January 2015, with the competent supervision authorities (i.e. European Central Bank for banks with “significant” dimension[2]; national supervisory authorities for all the others). As concerns recovery plans, these shall include the modalities upon which the financial institutions intend to react in case of severe macroeconomic and financial distress; in very broad terms the necessary elements of the recovery plans shall be as it follows:

• a summary of the key elements of the recovery plan;
• information on corporate governance;
• a strategic analysis;
• a communication and disclosure plan;
• an analysis of preparatory measures.

Moreover, the plans shall assess a range of scenarios against which the suitability of the recovery tools and the adequacy of evaluations contained in the recovery plans shall be tested. At least three scenarios shall be addressed:

• a systemic-wide event (i.e. an event which poses serious consequences for the financial system or the real economy);
• an idiosyncratic event (i.e. an event which poses serious consequences for a single institution); and
• a combination of systemic-wide and idiosyncratic event.

Thus, having a strong recovery plan is a vital element in enabling the continued provision of banks’ critical services. Ensuring that credit institutions can continue to provide critical services as expected, even in times of extreme stress, is therefore central to financial stability.

[2] For the definition of “significant bank” please see Regulation No. 1022/2013.