A new bank insolvency law for Europe
The European legislator has responded to the financial crisis with a host of new measures, including a legislative framework for bank recovery and resolution and a single resolution mechanism. The bank recovery and resolution framework applies to the entire EU, has the form of a Directive (“BRRD”) and must therefore be implemented into the national laws of the Member States. The single resolution mechanism applies to the Eurozone, has the form of a Regulation (“SRMR”) and therefore applies directly.
The BRRD aims to enable authorities to intervene in an early stage of bank failure, thus mitigating the risk of insolvency. The Directive also gives these authorities broad powers to liquidate a failing bank, while safeguarding functions that are of critical importance to the financial system. This could be achieved, e.g., by transferring consumer deposits to a third party or bridge bank. The SRMR sets out the institutional framework so that the rules of the BRRD are applied uniformly across the Eurozone countries.
A new bank insolvency law for the Netherlands
The BRRD had to be implemented into the Member States national laws as of 1 January 2015, but the Dutch legislator has not yet completed the implementation process. On 21 November 2014 the Ministry of Finance published a consultation document containing a draft bill and the public was invited to react. The Leiden Hazelhoff Centre for Financial Law seized this opportunity to set forth some of its concerns and offered some advice. In the following, a summary of our most important comments is given. The full Hazelhoff reaction can be read here (Dutch only). At the moment of writing, no official draft bill has been published.
First, the draft bill refers in many instances to the BRRD and SRMR. This means that reading the bill without also reading the BRRD and SRMR will never suffice to understand it. Also, it blurs the difference between a Directive (which should be implemented) and a Regulation (which applies directly) and it raises difficult issues of interpretation.
Second, one of the most important and heavily debated elements of the BRRD is the ‘bail-in’ instrument: the power of authorities to write down a failing bank’s shares and debt, or to convert debt into shares. The BRRD allows for implementation of bail-in as of 1 January 2015 or 2016. Germany and the UK have already implemented it. The Dutch draft bill does not clarify when the Netherlands will do so. Uncertainty about this could lead to market disturbance and higher funding costs for Dutch banks. We therefore advise that clarity should soon be provided.
Third, the existing Dutch bank insolvency regime also applies to insurance companies, as many Dutch financial conglomerates perform both banking and insurance activities. The draft bill however, applies only to banks which will result in a complex differentiated regime. We would advise the creation of a single regime for banks and insurance companies.
Fourth, under the current Dutch regime, the Minister of Finance is empowered to nationalise any Dutch financial undertaking. The BRRD imposes strict conditions on such national crisis measures, but the draft bill is silent on the issue. We would therefore advise that it be clarified soon whether the BRRD’s conditions will apply and how the Minister’s power will relate to the new powers conferred on the Dutch Central Bank as a resolution authority.
Fifth, under the current Dutch regime and prior to formal bankruptcy, banks and insurance companies can be made subject to ‘emergency proceedings’ (noodregeling). Under these proceedings, an administrator is empowered to transfer assets of the failing institution to a third party or to liquidate it. The draft bill proposes the retention of the emergency proceedings. Yet the new European bank insolvency regime is intended to be comprehensive. Under this regime, authorities may intervene in an early stage and are empowered to appoint a temporary administrator to replace or assist the management of a troubled institution. We therefore question whether the Dutch emergency proceedings should be retained.