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Erscheinung:02.03.2017, Stand:updated on 16.11.2018 | Topic Recovery/resolution Overview of the liability cascade in bank resolution

Please note: This is a non-binding convenience translation provided for information purposes only.

If the viability of a credit institution or a financial group is at risk, and in order to achieve the resolution objectives, such as e.g. financial stability, it is not possible to open regular insolvency proceedings, the resolution tools set out in the German Recovery and Resolution Act (Sanierungs- und AbwicklungsgesetzSAG) and in Regulation (EU) No. 806/2014 (SRM Regulation) are applied. These include the write-down and conversion powers.

(As at: 21 July 2018)

The first instruments to be used for loss absorption and recapitalisation are regulatory own funds instruments (see table items 1-3). Next, the liabilities which are subject to write-down and conversion into equity (eligible liabilities) are liable in the reverse order from their priority in regular insolvency proceedings. This is in order to keep to the principle that the losses to be borne by the capital providers in a resolution must not be higher than they would be under the sequence of priority in regular insolvency proceedings (so-called "no creditor worse off" principle).

The following sequence applies for the liability of owners and creditors:

INSTRUMENTS OF CREDIT INSTITUTIONS WHICH ARE SUBJECT TO WRITE-DOWN AND CONVERSION IN RESOLUTION
InstrumentExamples
1. Shares and other Common Equity Tier 1 instruments (CET1)Shares, equity investments in a GmbH, KG or cooperative bank
2. Additional Tier 1 instruments (AT1)
(with its nominal or outstanding amount, i.e. inclusive of any amounts which ceased to be recognised for prudential purposes pursuant to Art. 484 ff CRR (Limits for grandfathering))
Unsecured, perpetual subordinated debt securities with a conversion or write-down clause
3. Tier 2 instruments (T2)
(with its nominal or outstanding amount, i.e. inclusive of any amounts which ceased to be recognised for prudential purposes pursuant to Art. 64 CRR (Amortisation of Tier 2 instruments) or pursuant to Art. 484 ff CRR (Limits for grandfathering))
Subordinated
- loans,
- silent partnerships,
- participation rights
4. Unsecured subordinated liabilities Subordinated
- loans,
- bearer bonds,
- participation rights,
which do not meet the requirements for AT1 or T2 instruments
5. Liabilities from unsecured non-subordinated (cf. section 38 of the German Insolvency Code InsolvenzordnungInsO) and non-structured debt instruments (section 46f (6) and (9) of the German Banking Act KreditwesengesetzKWG) - „Non-preferred-senior-bonds“

Non-subordinated and non-structured debt instruments, which meet the requirements pursuant to section 46f (6) and (9) KWG, i. e. in particular

Bearer bonds and order bonds which were issued before 21 July 2018 and which are not money-market instruments or structured products

Bearer bonds and order bonds issued since 21 July 2018, which have a contractual maturity of at least one year, are not structured products and point out in their contractual terms and in case of an obligation to publish a prospectus also in the prospectus the lower rank in insolvency proceedings pursuant to section 46f (5) KWG

Promissory note loans (Schuldscheindarlehen) and registered bonds (Namensschuldverschreibungen), which meet the conditions for bearer bonds and order bonds as mentioned above, as far as these (promissory note loans and registered bonds) do not qualify as preferred deposits according to no. 7 or are excluded from write-down and conversion as covered deposits (cf. no. 1 of the subsequent table for instruments which are excluded from write-down and conversion)

6. Unsecured non-subordinated (cf. section 38 InsO) liabilities (not debt instruments within the meaning of section 46f (6) KWG; cf. section 46f (6) sentence 3 and section 46f (7) KWG)

Bearer bonds and order bonds issued since 21 July 2018 with a contractual maturity of at least one year, which are not structured products, provided that in their contractual terms and in case of an obligation to publish a prospectus also in the prospectus a lower rank in insolvency proceedings pursuant to section 46f (5) KWG is not pointed out

Money-market instruments

Structured debt instruments (i.e. bonds with a derivative component, in which the repayment or interest payment is dependent on an uncertain future event, e.g. index certificates)

Debt instruments of institutions under public law which cannot become insolvent

Futures contracts, options, swaps

Deposits which are not “covered deposits" (for “covered deposits” see no. 1 of the subsequent table for instruments which are excluded from write-down and conversion) and not “preferred deposits” pursuant to no. 7 (as long as they are not promissory note loans or registered bonds, in which case they fall under no. 5):
- deposit amounts exceeding 100,000 euros from large corporate undertakings,
- non-refundable deposits pursuant to section 6 of the German Act on Deposit Protection (Einlagensicherungsgesetz - EinSiG) (e.g. deposits from public bodies, insurance undertakings, financial institutions and credit institutions, as far as the latter do not fall under no. 5 of the subsequent table for instruments which are excluded from write-down and conversion).

Liabilities to customers from the banks’ lending business, for example from guarantee business, documentary credit transactions or credit business.

7. Preferred depositsDeposits from private individuals, micro-entities and small and medium-sized entities, in respect of amounts, which are not “covered” (for “covered” amounts see no. 1 of the subsequent table for instruments which are excluded from write-down and conversion), i.e. amounts exceeding 100,000 euros.
INSTRUMENTS OF CREDIT INSTITUTIONS WHICH ARE EXEMPT FROM WRITE-DOWN AND CONVERSION (SECTION 91 (2) SAG, ART. 27 (3) SRM REGULATION) IN RESOLUTION
InstrumentExamples
1. Covered deposits Deposits (including time and notice deposits and savings account deposits) for amounts of up to 100,000 euros
2. Secured liabilities Covered bonds, in particular Pfandbriefe, secured loans or derivatives
3. Liabilities resulting from the safekeeping of client assets or client money Assets of private and corporate customers managed or held for investment purposes.
4. Liabilities resulting from a fiduciary relationship Pass-through loans, syndicate business
5. Liabilities owed to other credit institutions, with an original term of less than seven daysInterbank refinancing operations
6. Liabilities with a remaining maturity of less than seven days, owed to payment systems, securities delivery and settlement systems or to operators and other participants of such systems, if those liabilities result from the participation in the system
Liabilities owed to the payment and settlement systems of Eurex and Clearstream Banking and to Target and Euro-1
7. Liabilities owed to:
- employees, for accrued salary, pension benefits,
- commercial or trade creditors arising from the provision to the institution or group entity of goods or services that are critical to the ongoing functioning of its operations
- deposit guarantee schemes based on contribution obligations
Liabilities from contracts of employment, trade payables, liabilities from rental contracts, contribution obligations relating to deposit guarantee schemes.

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