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Institutions Failing or Likely to Fail – New European Banking Association (EBA) Guidelines

The European Banking Association (EBA) issued Guidelines on 26 May 2015 regarding the circumstances under which an institution is considered to be failing or likely to fail according to Article 32(6) of Directive  2014/59/EU.  Such Guidelines take effect on 1 January 2016 and were issued pursuant to Article 32(6), which directed the EBA to issue these Guidelines in accordance with Article 16 of Regulation (EU) No 1093/2010 to promote the convergence and consistent approach of supervisory and resolution practices, especially in relation to cross border groups.

Generally, the aim of the Guidelines is to help the respective authorities in the Member States interpreting outcomes of the assessment that an institution is failing or likely to fail when being consulted following the provisions of Article 32(1)(a) of Directive 2014/59/EU. While such decision remains the discretionary judgement of the relevant authority, the Guidelines reveal elements on the basis of which this judgment should be based.

Article 32(4) of Directive 2014/59/EU states that the determination that an institution is failing or likely to fail should be based on the following factors:

  • a current or likely infringement of the requirements for continuing banking authorization in a way that would justify the withdrawal of authorization to operate as a bank, including but not limited to because it has incurred or is likely to incur losses that will deplete all or a significant amount of its own funds (Article 32(4)(a) of Directive 2014/59/EU);

  • the institution assets are currently lower or likely to be lower than liabilities (Article 32(4)(b) of Directive 2014/59/EU);

  • a current or likely inability to pay debts or other liabilities as they fall due (Article 32(4)(c) of Directive 2014/59/EU);

  • a need for extraordinary public financial support, subject to exceptions specified in the Directive 2014/59/EU (Article 32(4)(d) of Directive 2014/59/EU);

Further, for the purposes of making a determination as to whether an institution is failing or likely to fail, the supervisory authority or the resolution authority, as the case may be, should assess the objective requirements or measures o relating to the following areas as further specified in Title II of the Guidelines:

  • the capital position of an institution;

  • the liquidity position of an institution; and

  • any other requirements for continuing authorization (including governance arrangements and operational capacity).

It should be noted that the determination of whether an institution is failing or likely to fail constitutes only one of the three cumulative conditions determining whether the supervisory authority and the resolution authority should take resolution actions. Consequently, , the Guidelines must be read not separately but in conjunction with the conditions set forth in Article 32(1)(b) and (c) of Directive 2014/59/EU, which state  the other two requirements that need to be met before taking any resolution action, namely (1) that there are no reasonable alternative private sector or supervisory measures, including early intervention measures or the write down or conversion of relevant capital instruments, which would prevent the failure of the institution within a reasonable timeframe  and (2) the determination that resolution action is necessary in  the public interest pursuant Article 32 (5) of Directive 2014/59/EU.  Ultimately, the Guidelines leave the determination of whether the conditions for resolution are fulfilled to the discretion of the authorities, based on the facts and circumstances of each specific case.

Further, the Guidelines are addressed to both the competent authority (e, g, in Germany to the Bundesanstalt für Finanzdienstleistungsaufsicht), as defined in Article 4(2)(i) of Regulation (EU) No 1093/2010 establishing the EBA, and to the resolution authoritiy (e.g. in Germany, to the Bundesanstalt für Finanzmarktstabilisierung ), as defined in Article 4(2)(iv) of Regulation (EU) No 1093/201, with the aim of assisting the authorities with their assessment as to whether an institution is failing or likely to fail  according to Article 32(1)(a) of Directive 2014/59/EU as applicable.

As contemplated in Article 32 (2) of Directive 2014/59/EU Germany has opted for the two authority approach so that under German law the determination that the institution is failing or likely to fail under point (a) of paragraph 1 can be made either by the BaFin as the competent authority after consulting with the FMSA as the resolution authority, or the FMSA after consulting with BaFin.

For a better understanding and interpretation of the Guidelines, EBA has provided examples  which describe situations in which an institution could be considered as failing or likely to fail by the competent authority and/or the resolution authority.

Finally, the Guidelines should be read in conjunction with other regulatory guidelines and standards  issued by the EBA, and in particular:

  • the EBA regulatory technical standards developed pursuant to Article 81(1) of Directive 2014/59/EU, specifying, among other things, the procedures, content and conditions related to the notification that an institution is failing or likely to fail;

  • the EBA guidelines on types of tests, reviews and exercises developed pursuant to Article 32(4)(d) of Directive 2014/59/EU;

  • the EBA guidelines on triggers to apply early intervention measures developed pursuant to Article 27(5) of Directive 2014/59/EU;

  • the EBA regulatory technical standards on valuation developed pursuant to Article 36 of Directive 2014/59/EU;

  • the EBA guidelines on the common procedures and methodologies for the SREP (means supervisory review and evaluation process as defined in Article 97 of Directive 2013/36/EU and further specified in the SREP Guidelines) developed pursuant to Article 107 of Directive 2013/36/EU.

© Copyright 2020 Squire Patton Boggs (US) LLPNational Law Review, Volume V, Number 219


About this Author

Andreas Fillman Lawyer Squire Patton Boggs Frankfort

Dr. Andreas Fillmann’s practice focuses on corporate finance, financial regulatory, compliance including data protection, banking and capital markets. The quality of his work is consistently mentioned in the JUVE Handbook of German Corporate and Commercial Law Firms and in the Nomos HandbookChambers Global has listed Andreas as a leading individual for banking and finance matters in Germany since 2012. 

He is a member of the European Finance Association, International Banking Federation, SAFE, International Bankers...

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