Regulatory Capital Requirements and Bail in Mechanisms
57 Pages Posted: 31 Mar 2015
Date Written: March 29, 2015
With the introduction of the Capital Requirements Regulation (CRR) in the European Union, the qualitative requirements for bank regulatory capital have changed. These changes aim at implementing in Europe the Basel III principles for better bank capital that is able to absorb losses of banks, without hindering the continued operations of banks. The qualitative requirements introduced with effect from 1 January 2014 do not relate to the measures introduced in Europe for bank’s recovery and resolution nor do they relate to the additional capital requirements imposed on systematically important banks. They also are not related to the newest requirements to be introduced in respect of total loss-absorbing capacity (TLAC) capital to assist with resolution of the largest G-SIB’s. One of the topics researched in this contribution concerns the direct horizontal effect of European regulations. This topic is relevant to address the potential consequences of contractual provisions in bank capital instruments conflicting with the CRR rules and, similarly, conflicts with bank corporate organizational documents. We conclude that in view of the direct binding effect in European jurisdictions of regulations, the CRR provisions create direct binding effects between banks and their shareholders and bond investors. Another topic addressed in this contribution concerns the original concepts introduced by the Basel Committee on Banking Supervision as regards capital requirements for banks that are beyond a point of viability. The CRR qualitative requirements for bank’s regulatory capital assume the bank’s operations are continued on a going concern basis and therefore the bank’s business is still viable. Measures to be taken gone concern and potential bail in mechanisms applied in that respect are regulated in other parts of European law. We observe in this contribution that the relevant regulations in Europe are misaligned and therefore create considerable uncertainties for banks in Europe.
Keywords: Bank Regulatory Capital; Basel III; European Capital Requirements Regulation; European Bank Recovery and Resolution Directive, Bail In Debt, Contigent Capital Bonds
JEL Classification: E50, E60, G21, G28, K23, N20
Suggested Citation: Suggested Citation