The Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020

CHAPTER 2 Power to prohibit distributions

Power to prohibit distributions

91.—(1) This regulation applies where a relevant person—

(a) meets the combined buffer requirement, but

(b) would not do so but for reliance upon own funds and eligible liabilities that are relied upon also for the purposes of meeting the requirement under section 3A(4) of the Banking Act 2009.

(2) In this regulation—

“Additional Tier 1 instruments” has the meaning given in section 3(1) of the Banking Act 2009;

“bank” has the meaning given in section 2 of the Banking Act 2009;

“combined buffer requirement” has the meaning given in regulation 2(1) of the Capital Requirements (Capital Buffers and Macro-prudential Measures) Regulations 2014(1);

“Common Equity Tier 1 instruments” has the meaning given in section 3(1) of the Banking Act 2009;

“competent authority” has the meaning given in article 2(1) of the Bank Recovery and Resolution (No 2) Order 2014;

“eligible liabilities” has the meaning given in section 3(1) of the Banking Act 2009;

“failure” means an occurrence of this regulation applying;

“group” has the meaning given in section 3(2)(b) of the Banking Act 2009;

“own funds” has the meaning given in section 3(1) of the Banking Act 2009;

“recovery and resolution directive” has the meaning given in section 3(1) of the Banking Act 2009;

“relevant person” has the meaning given in section 3A of the Banking Act 2009;

“resolvability” means the subject matter of assessment under Part 6 of the Bank Recovery and Resolution (No.2) Order 2014.

(3) The relevant person must notify the Bank of England without delay that this regulation applies.

(4) The Bank of England may prohibit the relevant person from distributing more than the maximum distributable amount through any of the following actions—

(a) making a distribution in connection with Common Equity Tier 1 instruments;

(b) creating an obligation to pay variable remuneration or discretionary pension benefits, or to pay variable remuneration if the obligation to pay was created at a time when the relevant person failed to meet the combined buffer requirement; or

(c) make payments on Additional Tier 1 instruments.

(5) Before exercising the power under paragraph (4) the Bank of England must—

(a) consult the competent authority;

(b) carry out an assessment of—

(i) the reasons for, and the duration and magnitude of, the failure, and its impact on the resolvability of the relevant person;

(ii) the development of the relevant person’s financial situation and the likelihood of Condition 1 provided for in section 7 of the Banking Act 2009 being fulfilled in relation to it, or a bank in the same group, in the foreseeable future;

(iii) the prospect that the relevant person will within a reasonable time frame be able to meet the combined buffer requirement without relying upon own funds and eligible liabilities that it relies upon also for the purposes of meeting the requirement under section 3A(4) of the Banking Act 2009;

(iv) where the relevant person is unable to replace liabilities that no longer meet the eligibility or maturity criteria laid down in Articles 72b and 72c of Regulation (EU) No 575/2013, whether that inability is idiosyncratic or is due to market wide disturbance;

(v) whether the exercise of the power under paragraph (4) is the most adequate and proportionate means of addressing the situation of the relevant person, including consideration of the potential impact on both the financing conditions and resolvability of the relevant person.

(6) The Bank must repeat its assessment under paragraph (5)(b) at intervals of no more than one month until the failure ends.

(7) If—

(a) failure continues for nine months after notification is given under paragraph (3); and

(b) not more than one of the conditions specified in paragraph (8) is met;

(c) the Bank of England must exercise its power under paragraph (4).

(8) The conditions are that the Bank of England assesses that—

(a) the failure is due to a serious disturbance to the functioning of financial markets which leads to broad-based market stress across more than one segment of financial markets;

(b) the disturbance not only results in the increased price volatility of the own funds and eligible liabilities of the relevant person or increased costs for the entity, but also leads to a full or partial closure of markets which prevents the relevant person from issuing own funds and eligible liabilities on those markets;

(c) the closure of markets is observed not only for the relevant person, but also for at least several other entities;

(d) the disturbance prevents the relevant person from issuing sufficient own funds and eligible liabilities to end the failure;

(e) exercise of the power would lead to negative spill-over effects for at least one part of the banking sector, thereby potentially undermining financial stability.

(9) Where at least two of the conditions specified in paragraph (8) are met the Bank of England must—

(a) notify the competent authority and explain its assessment in writing;

(b) review its assessment under paragraph (8) at intervals of no more than one month.

(10) When the Bank of England is satisfied that the failure has ended the Bank of England must without delay notify the relevant person that the prohibition under paragraph (4) has ceased to have effect.

(11) For the purposes of paragraph (4) the maximum distributable amount is to be calculated by multiplying the sum calculated in accordance with paragraph (12) by the factor determined in accordance with paragraph (13).

(12) The sum referred to in paragraph (11) is A + B – C, where—

“A” is any interim profits not included in Common Equity Tier 1 instruments pursuant to Article 26(2) of Regulation (EU) No 575/2013, net of any distribution of profits or any payment resulting from the actions referred to in paragraph (4);

“B” is any year-end profits not included in Common Equity Tier 1 instruments pursuant to Article 26(2) of Regulation (EU) No 575/2013, net of any such distribution of profits or payment;

“C” is amounts which would be payable by tax if A and B were to be retained.

(13) The factor referred to in paragraph (11) is determined as follows—

(a) where the Common Equity Tier 1 instruments maintained by the relevant person which are not used to meet any of the requirements set out in Article 92a of Regulation (EU) No 575/2013 and under section 3A(4) of the Banking Act 2009, expressed as a percentage of the total risk exposure amount calculated in accordance with Article 92(3) of Regulation (EU) No 575/2013, are within the first (that is, the lowest) quartile of the combined buffer requirement, the factor shall be 0;

(b) where the Common Equity Tier 1 instruments maintained by the relevant person which are not used to meet any such requirements are within the second quartile of the combined buffer requirement, the factor shall be 0.2;

(c) where the Common Equity Tier 1 instruments maintained by the relevant person which are not used to meet any such requirements are within the third quartile of the combined buffer requirement, the factor shall be 0.4;

(d) the Common Equity Tier 1 instruments maintained by the relevant person which are not used to meet any such requirements are within the fourth (that is, the highest) quartile of the combined buffer requirement, the factor shall be 0.6.

(14) For the purposes of paragraph (13) the lower bound of quartile and upper bound of quartile are calculated as follows—

Where—

• ‘Q_n’ is the ordinal number of the quartile concerned.

(15) The maximum distributable amount is not reduced by any amount resulting from any of the actions referred to in paragraph (4).

(1)

S.I. 2014/894.