Whether you as a creditor are affected by the bail-in resolution measure depends on the scope of the ordered measure and on which category your financial instrument or receivable falls. Within the framework of a bail-in, financial instruments and liabilities are divided into different categories and held liable in accordance with a statutory ranking order (so-called liability cascade).
For the shareholders and creditors of the respective categories to be affected, the following principles apply: Only if a category of liabilities has been drawn upon in full and this is insufficient to compensate for losses to an extent that the bank is stabilised may the following category in the liability cascade be written down or converted.
Certain types of financial instruments and liabilities are legally exempted from bail-in. These include deposits of up to EUR 100,000 covered by the statutory deposit protection scheme and secured liabilities (e.g. covered bonds).
In the liability cascade of a bank located in Germany the following categories are to be distinguished as follows:
(1) The resolution measures first apply to the Common Equity Tier 1 capital and thus the bank’s shareholders.
(2) Then, the creditors of Additional Tier 1 capital are called upon (holders of unsecured, subordinated perpetual bonds and silent partnerships with conversion or write-down clauses that are subordinated to instruments of Tier 2 capital).
(3) This is followed by Tier 2 capital. This applies to creditors of subordinated liabilities (e.g. owners of subordinated loans).
(4) In the liability cascade, unsecured subordinated financial instruments and liabilities that do not meet the Additional Tier 1 capital or Tier 2 capital requirements come next.
(5) These are followed by unsecured non-subordinated and non-structured debt instruments 1).
In this category, debt instruments are only drawn upon if either (a) they were issued before 21 July 2018 and are not money market instruments or structured products or (b) they have been issued since 21 July 2018, have a contractual maturity of at least one year, are not structured products and where explicit reference to their lower ranking compared to the liabilities of the following category (6) is made in their contractual terms and conditions and, in the case of an obligation to publish a prospectus, also in said prospectus.
This category is also referred to as senior non-preferred.
1) Debt instruments are bearer bonds, negotiable registered order bonds and similar rights which by their nature are tradable on the capital market as well as registered bonds and promissory note loans, insofar as these do not fall into category (6) as preferred deposits or are exempt from write-down and conversion as covered deposits.
(6) The next step of the liability cascade are the following unsecured non-subordinated liabilities
- Debt instruments which do not fall into category (5), for example debt instruments that have been issued since 21 July 2018 and do not have the indication of lower ranking required for classification in category (5).
- Structured, unsecured financial instruments and liabilities (such as certificates on stock indices or liabilities from derivatives). In these cases, the amount of the repayment or interest payment depends on an uncertain future event or is settled by means other than cash payment.
Furthermore, this also includes deposits exceeding EUR 100,000 of companies that do not fall into category (7).
In contrast to category (5), this category is also referred to as senior preferred.
(7) Finally, deposits held by natural persons, micro-enterprises or small and medium-sized enterprises can also be drawn upon if they exceed the statutory deposit guarantee of generally EUR 100,000 (“other preferred deposits”).
The simplified liability cascade shown on the last page thus applies (starting in the direction of the arrow with Common Equity Tier 1), whereby a lower category is only used for the absorption of losses if the higher categories are insufficient to compensate for losses (see figure on the last page).
The resolution authority may deviate from this general principle in individual cases.