What is a BAIL-IN
THE NEW EUROPEAN RULES ON THE MANAGEMENT OF BANK CRISES
Directive 2014/59/EU BRRD (Bank Recovery and Resolution Directive) of the European Parliament introduces harmonised rules in all European countries to prevent and manage potential bank crises.
In response to this directive, the European Central Bank (ECB) continuously monitors the soundness of the banking system as a whole and of the individual supervised banks in order to limit the costs to the community.
Banca Akros belongs to the BPM Group, which has capital resources in excess of those required by the European Central Bank. In September 2015, the Group’s key equity ratios were as follows:
- Common Equity Tier 1 ratio: 11.44%
- Total Capital Ratio (TCR): 14.36%
In particular, the Common Equity Tier 1 ratio (11.44%) is higher than the 9% required by the ECB following the 2015 evaluation process of the BPM Group. The capital surplus with respect to the minimum regulatory requirement is higher than the average of the main Italian banks. The soundness of the BPM Group is also qualified by the lowest capital requirement (9%) required by the ECB for Italian commercial banks under direct supervision.
WHAT IS A “BAIL-IN”
Bail-in (literally “internal bailout”) is an instrument that allows Resolution Authorities to order, in the event of a bank crisis, the reduction of the value of shares and some receivables or their conversion into shares in order to absorb losses and recapitalise adequately. Shareholders and creditors may also be involved to bear the relevant losses in order to minimise the impact on the community.
The “involvement” of shareholders and creditors of the bank being terminated takes place in a hierarchical order, the logic being that those who invest in riskier financial instruments bear any losses or conversion into shares before the others; then, the next category is turned to only after all the resources of the riskier category have been used.
The hierarchy of financial instruments issued by the bank to support losses is as follows:
- shares and equity instruments
- subordinated securities
- bonds and other eligible liabilities
- deposits by natural persons and small and medium-sized enterprises for the part exceeding €100,000
- Shareholders and creditors cannot, under any circumstances, suffer greater losses than they would in the event of the bank’s liquidation under normal procedures.
- The following are always excluded from bail-in: (i) deposits up to €100,000 (protected by the Interbank Deposit Protection Fund: current accounts, savings books, certificates of deposit); (ii) guaranteed liabilities (e.g. covered bonds); (iii) liabilities arising from the holding of customer assets or by virtue of a fiduciary relationship (e.g. the contents of safety deposit boxes or securities held in a special account); and (iv) liabilities to employees, tax authorities, social security institutions and suppliers.
- The guarantee on deposits is per depositor, so a current account with two account holders is protected up to €200,000; a depositor with several current accounts with the same bank or banks in the same banking group is always guaranteed up to a maximum of €100,000.
- Deposits by natural persons and small and medium-sized enterprises also receive preferential treatment for the portion exceeding €100,000. In particular, they would only bear a sacrifice if the bail-in of all instruments with a lower degree of protection in the bankruptcy hierarchy was not sufficient to cover losses and restore an adequate level of capital.