In the 2008 financial crisis, banks around the world had to be supported with taxpayers’ money. The government rescue packages are remembered as bail-outs. In learning the lessons from the crisis, the G20 first laid the groundwork for a bank resolution regime aimed at eliminating the need for such intervention in the future. European and German legislators built on this groundwork.

The key tenet of the resolution regime is that, in future, losses incurred by banks must not be offloaded onto taxpayers. This is to prevent moral hazard and ensure that banks are not tempted to take excessive risks. It must also be possible for banks to exit the market without jeopardising financial stability or negatively affecting the real economy.

The bail-in is a key instrument in the resolution regime. The term was deliberately chosen to contrast with a bail-out: instead of taxpayers footing the bill, owners and creditors are to bear a bank's losses. From a legal viewpoint in the EU, a bail-in comprises two tools: the “write-down and conversion of relevant capital instruments” and the “bail-in of eligible liabilities.”

Uniform basic requirements

BaFin’s requirements for banks in Germany concerning the preparation of a potential bail-in in the context of a resolution action have, to date, been formulated only on an institution-specific basis in the course of individual resolution planning. By publishing the “Minimum Requirements for Implementing a Bail-in” (Mindestanforderungen zur Umsetzbarkeit des Bail-in – MaBail-in), BaFin is laying the first uniform foundation for these requirements. BaFin's MaBail-in consultation ended on 1 March 2019.

The standardised provisions of the MaBail-in are aimed at increasing the resolvability of banks in respect of applying a bail-in and at the same time improving the transparency and comparability of resolution planning.

For this purpose, the MaBail-in lays down minimum requirements for the information to be provided and the technical and organisational resources of those institutions to which it applies. In line with the principle of proportionality, the MaBail-in is limited to those requirements that must be fulfilled to ensure that the bail-in meets its objectives effectively.

Bail-in – objectives and mechanism

A bail-in pursues two objectives that reflect the principles of the resolution regime: firstly, it seeks to prevent moral hazard resulting from the possibility of passing on losses, in particular, to the state and taxpayers. Secondly, a bail-in is aimed at recapitalising those functions of a bank that are of significance to financial stability or the real economy, thus enabling their continued operation.

To achieve both objectives, a bail-in usually comprises two successive steps.

• In the first, shares in the bank are cancelled and, if necessary, its liabilities are written down. The shares and liabilities are reduced without compensation or consideration until the bank's assets equal its liabilities. This ensures that owners and creditors bear the consequences of the bank's actions instead of shifting losses to taxpayers. Moral hazard is prevented in an effective manner.
• In the second step, the bank's liabilities can be converted into equity instruments. The conversion can be viewed as a reduction of a creditor's claims with a simultaneous compensation through an appropriate amount of equity instruments. The conversion is to be calculated so that the amount of capital created enables those functions of significance to financial stability or the real economy to continue operating.

MaBail-in to improve resolvability

To successfully complete both steps of the bail-in and thus achieve the resolution objectives, the bail-in must not only be designed as precisely as possible but also be implemented reliably and swiftly. The provisions of the MaBail-in guarantee this. With respect to data requirements and technical and organisational resources, a bank that meets the requirements of the MaBail-in can be viewed as resolvable for the purposes of a bail-in.

The data management systems commonly available at banks today date from the time before the resolution regime was introduced. The data required to precisely structure a bail-in is often not available on an ad hoc basis. The same is true of the technical and organisational resources needed to implement a bail-in.

Currently, a lack of data and IT systems means that BaFin can only guarantee the success of a resolution action by applying safety buffers and highly conservative assumptions. This runs counter to the interests of taxpayers and the resolution authority, which have an interest in resolving a bank as efficiently and effectively as possible. Nor is it in the interests of the bank's owners and creditors, who, as a result of safety buffers and conservative assumptions, could be forced to bear unnecessarily high losses in the event of a resolution. Ultimately, it is also detrimental to the bank if, in view of this risk, investors expect higher interest payments, thereby increasing its borrowing costs. It is in the interests of all parties involved to ensure that banks are adequately prepared for a potential bail-in.

The provisions of the MaBail-in encompass all the information and the technical and organisational resources necessary to ensure that a bail-in is arranged and executed precisely, reliably and swiftly. The information to be provided must give an up-to-date, accurate and complete view of the institution's liabilities in the event of resolution. To avoid delays in implementation, this information must be available at short notice and be sufficiently standardised to allow for rapid processing. Banks must also have the technical and organisational resources to guarantee that a bail-in can be executed quickly and reliably. Both aspects – information and technical and organisational resources – are critical to achieving the bail-in objectives in an efficient and effective manner.

Required information

The information to be provided by the banks in question can be subdivided into specific information on liabilities and other information relevant to implementation.

• Specific information on liabilities: in a resolution scenario, this information enables BaFin to make the calculations and carry out the impact analyses necessary for the bail-in. It constitutes the core of the data requirement and as such must be of appropriate quality, up-to-date and highly granular. The specific information on liabilities must furthermore be sufficiently standardised to ensure that it can be used reliably, even in a resolution situation characterised by time pressure, rapidly changing circumstances and uncertainty.
• Other information relevant to implementation: this mainly includes information on accounting and the calculation of own funds. It is used to assess the wider impact of the bail-in. In accordance with the principle of proportionality, this information is not standardised in the MaBail-in.

To avoid delays, the information to be provided as per a pre-defined reporting date must be submitted within 24 hours of BaFin's request to do so.

Technical and organisational resources

In addition to ensuring that the required information is provided in a timely manner, the provisions of the MaBail-in with respect to technical and organisational resources of the institution serve a further two purposes: internal analysis and practical implementation of the bail-in.

• Internal impact analyses: these are aimed at enabling banks to model the results of the resolution valuation and the impact of the envisaged bail-in. The main relevant aspects are the effects on own funds and accounting. The objective is to identify this impact as precisely as possible. To cope with the time constraints in a resolution situation, banks should be able to conduct such impact analyses within 12 hours of BaFin's request to do so.
• Practical implementation of the bail-in: this covers firstly the institution's internal implementation and secondly preparations for external implementation via financial market infrastructures. Both should be completed within 24 hours of the resolution order being published. For this purpose, the MaBail-in envisages the creation of processes, systems and technical resources necessary for the institution's internal implementation and certain preparations for external implementation. Internally, implementation primarily means recognising the bail-in in the bank's technical systems and accounting. For the affected banks, preparing for external implementation involves in particular transposing the resolution order into technical instructions for the financial market infrastructures involved in implementing the bail-in.

MaBail-in – a proportionate approach

For banks within the scope of the MaBail-in, improved resolvability with respect to bail-in and its improved effectiveness comes at a price: adjusting internal systems, processes and technical resources to meet the requirements of the MaBail-in will require additional resources and expenses. Recognising this trade-off, the MaBail-in provides for a proportionate and graduated approach limited to the necessary requirements.

As a rule, only those banks whose resolution strategies include the bail-in and/or write-down and conversion of relevant capital instruments will be required to comply with the provisions of the MaBail-in. With respect to providing information, the MaBail-in is limited to the necessary level of granularity and standardisation. In particular, requests for specific information on liabilities are at present mainly limited to the first five levels of the hierarchy of creditors (liability cascade). Where possible, BaFin draws on information already requested. In addition, the MaBail-in does not introduce regular reporting requirements. BaFin has also built leeway into the MaBail-in for institution-specific interpretations, such as individual deadlines for completion, or governance or simplifications.

Positive impact on financial stability

The provisions of the MaBail-in are necessary to ensure effective resolution. The Minimum Requirements for Implementing a Bail-in are commensurate with the significance of the resolution regime and at the same time place great emphasis on the proportionality of the requirements. In the medium term, complying with the MaBail-in will be just as beneficial for banks as it will be for taxpayers. Likewise, it will have a positive effect on financial stability in Germany.

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