The Bank Recovery and Resolution Order 2014

Conditions to be met when exercising bail-in option

21.  After section 12A insert—

“Bail-in: sequence of write-down and conversion of capital instruments and liabilities

12AA.— (1) When the Bank of England exercises the fourth stabilisation option, it must use the powers conferred by sections 12A, 48B to 48W and 48Z(1) and this section in a way which ensures that—

(a) existing Common Equity Tier 1 instruments of the bank are cancelled, transferred or diluted in accordance with the principle that losses should be borne first by the holders of such instruments,

(b) the principal amount of Additional Tier 1 instruments is reduced or converted (directly or indirectly) into Common Equity Tier 1 instruments (or both), to the extent of the capacity of the Additional Tier 1 instruments,

(c) the principal amount of Tier 2 instruments is reduced or converted (directly or indirectly) into Common Equity Tier 1 instruments (or both), to the extent of the capacity of the Tier 2 instruments,

(d) where the total of any reduction or conversion pursuant to paragraphs (b) and (c) is less than the shortfall amount, the principal amount of subordinated debt that is not within either of those paragraphs is—

(i) reduced or converted (directly or indirectly) into shares or other securities, or both reduced and so converted, in accordance with the hierarchy of claims in normal insolvency proceedings, by the difference or to the extent of the capacity of those instruments, whichever is lower, and

(ii) losses are born by the holders of shares of the bank that are not within paragraph (a), (b) or (c) in accordance with the hierarchy of claims in normal insolvency proceedings,

(e) where the total of any reduction or conversion pursuant to paragraphs (b), (c) and (d), and any reduction or conversion pursuant to subsection (6), is less than the shortfall amount, the principal amount of, or outstanding amount payable in respect of, the remaining eligible liabilities is reduced or converted (directly or indirectly) into shares or other securities, or both reduced and so converted, in accordance with the hierarchy of claims in normal insolvency proceedings, by the difference or to the extent of their capacity, whichever is lower.

(2) In this section—

“normal insolvency proceedings” has the meaning given by Article 2.1(47) of the resolution and recovery directive (and, in particular, includes the bank insolvency procedure and the bank administration procedure),

“the shortfall amount” means the sum of the amounts referred to in Article 47.3(b) and (c) of the resolution and recovery directive.

(3) Subsections (1) to (4) of section 6C apply for the purpose of this section as if references in those subsections to section 6B were references to subsection (1)(a) to (c) of this section.

(4) When complying with subsection (1)(d) and (e), the Bank of England must allocate the losses represented by the shortfall amount equally between eligible liabilities of the same rank by reducing the principal amount of, or outstanding amount payable in respect of, those eligible liabilities to the same extent in proportion to their value, except where a different allocation of losses amongst liabilities of the same rank is allowed by virtue of section 48B(10) and (11)(2).

(5) Subsection (4) does not prevent excluded liabilities (as defined by section 48B(7A)(3)) from receiving more favourable treatment than eligible liabilities which are of the same rank in normal insolvency proceedings.

(6) The Bank may take the action required by subsection (1)(e) only if it converts or reduces the principal amount of any instruments referred to in subsection (1)(d) which contain—

(a) terms that provide for the principal amount of the instrument to be reduced on the occurrence of any event that refers to the financial situation, solvency or levels of own funds of the bank, or

(b) terms that provide for the conversion of the instruments to shares on the occurrence of any such event,

in accordance with those terms.

(7) Where the principal amount of an instrument has been reduced, but not to zero, in accordance with terms of the kind referred to in subsection (6)(a) before the application of the bail-in option, the Bank must take the action required by subsection (1) in relation to the residual amount of that principal.

(8) When taking the action required by subsection (1), the Bank must not convert or reduce one class of liabilities while a class of liabilities that is subordinated to that class remains substantially unconverted or the principal amount of those liabilities is not reduced to nil.

(9) For the purpose of subsection (8), excluded liabilities within the meaning of section 48B(7A) are to be ignored.

(10) For the purposes of this section “existing” Common Equity Tier 1 instruments includes Common Equity Tier 1 instruments issued or conferred in the following circumstances—

(a) pursuant to conversion of debt instruments to Common Equity Tier 1 instruments in accordance with contractual terms of the original debt instruments on the occurrence of an event that preceded, or occurred at the same time as, the assessment by the Bank of England that the bank met the conditions in section 7;

(b) pursuant to any previous conversion of relevant capital instruments to Common Equity Tier 1 instruments in accordance with section 6B.”.

(1)

Section 48Z is inserted by article 62 of this Order.

(2)

Section 48B was inserted by Schedule 2 to the Financial Services (Banking Reform) Act 2013, paragraphs 1 and 4.

(3)

Subsection (7A) is inserted into section 48B by article 48 of this Order.