Insights

This article was first published in The Times (26th October, 2015).

The European Bank Recovery & Resolution Directive (BRRD) might appear to be that kind of legislative instrument best left to the dark Victorian desks of some large law-firms, but, lo and behold, one should note that the BRRD does have a significant impact even on retail depositors, bondholders and shareholders, such as yourself.  This brief article is not intended to explain the nitty-gritty of the BRRD, but rather to highlight, in what I hope should be simple terms, the relevance to you as a potential depositor or holder of shares or bonds in a Maltese bank.

For starters, the BRRD was transposed into Maltese law through a series of legislative interventions, the more important being amendments to the Malta Financial Services Authority Act and the enactment of the new Recovery and Resolution Regulations, 2015 (the Resolution Regulations).  Malta now boasts of yet another authority, the Resolution Authority, although the day to day functions of this authority are carried out by a so-called Resolution Committee.

The Resolution Committee has been given a new set of tools to intervene sufficiently early and quickly in an unsound or failing bank so as to ensure the continuity of the bank’s critical financial and economic functions, while minimizing the impact of an institution’s failure on the economy and financial system.

General Powers to take Control

One of the main themes of the BRRD is that in the event of a bank failing or likely to fail, the Resolution Committee will intervene through a raft of powers and tools in relation to the failing bank.  Just by way of flavour, the Resolution Committee has the power to take control of the failing bank and exercise all the rights and powers conferred upon the shareholders and the board of directors of the bank.  It would also have the power to transfer to another entity, rights, assets or liabilities of the bank.

You as a shareholder in a Maltese bank

The long and short of the BRRD is that in the event of a bank which is failing or is likely to fail, as a shareholder, you will bear losses first, before any other creditors.  The days of a Government bail-out (as happened in certain jurisdictions during the financial crisis) are over and now EU technocrats speak of ‘bail-ins’.  In layman’s terms, a shareholder in a bank runs the risk of having his entire value of the shares wiped out.

You as a holder of bonds in a Maltese bank

As a bondholder, much depends on whether the bonds are secured or not.  Broadly speaking, any secured bonds issued by a bank are generally exempt from a bail-in.  However, unsecured bonds, be they senior or subordinated, will be the next to bear the bank’s losses after shareholders.  In addition, as is noted below, there is a change to creditor hierarchy, such that unsecured bonds are statutorily subordinated to most bank deposits.  One important safeguard of relevance is that, in the case of a bail-in, no creditor (including you as bondholder) should incur greater losses than he would have incurred if the institution had been wound up under normal insolvency proceedings in accordance with a ‘no creditor worse off’ principle.

In layman’s terms, unsecured bonds issued by banks now carry greater risks.

You as a depositor in a Maltese bank

As a depositor in a Maltese bank you stand to gain from the provisions of the BRRD.

You must not forget that under the Maltese Depositor Compensation Scheme, the first EUR 100,000 per eligible depositor (certain corporates are excluded from this cover) is covered by law through the depositor compensation scheme.  Prior to the BRRD, any amount in excess of EUR 100,000 would be lost by a depositor in the event of an insolvency of a bank (this is exactly what happened in Cyprus a few years ago).  The Resolution Regulations have now added a provision to the effect that any amount in excess of the EUR 100,000 per eligible depositor (subject to some exceptions) will enjoy a preferential ranking above ordinary, unsecured creditors (such as unsecured bondholders).

So, in brief, the creditor’s hierarchy in the insolvency of a bank would be as follows:

1. Secured Debt
2. Covered Deposits (up to EUR100,000 per depositor);
3. Eligible deposits exceeding EUR100k from individuals and SMEs;
4. Ordinary, unsecured and non-preferred creditors.

To sum up, in a few words, deposits in banks are better off and depositors will now enjoy a preferential status above other unsecured creditors.  Investors in shares and unsecured bonds should, in contrast, be aware of heightened risks.