Opinion of the European Central Bank of 23 February 2016 on the hierarchy of creditors of credit institutions (CON/2016/7)
Date: 2016-02-23
Institutions: European Central Bank
Subjects: France, claim, credit institution, debt, financial stability

EN 

ECB-PUBLIC 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 23 February 2016  

on the hierarchy of creditors of credit institutions 

(CON/2016/7) 

Introduction and legal basis 

On  21  January  2016  the  European  Central  Bank  (ECB)  received  a  request  from  the  French  Ministry  of 

Finance  and  Public  Accounts  for  an  opinion  on  draft  provisions  on  the  hierarchy  of  creditors  of  credit 
institutions (hereinafter the ‘draft provisions’)1. 

The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the 
Functioning of the European Union and the sixth indent of Article 2(1) of Council Decision 98/415/EC 2, as 

the  draft  provisions  relate  to  rules  applicable  to  financial  institutions  insofar  as  they  materially  influence 

the  stability  of  financial  institutions  and  markets.  In  accordance  with  the  first  sentence  of  Article  17.5  of 

the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion. 

1.  

Purpose of the draft provisions  

1.1  The  purpose  of  the  draft  provisions  is  to  introduce  a  new  category  in  the  ranking  of  creditors  of 

credit institutions under French insolvency law, in order to facilitate the implementation of resolution 

procedures,  as  provided  for  in  Directive  2014/59/EU  of  the  European  Parliament  and  of  the 
Council3, by creating legal certainty about the loss absorbing capacity of a newly created class of 

senior  unsecured  debt  securities  or  instruments  (hereinafter  referred  to  as  ‘senior  non-preferred 

debt instruments’).  

1.2  More  precisely,  the  draft  provisions  amend  Article  L.  613-30-3  of  the  French  Monetary  and 

Financial  Code,  which  are  applicable  if  a  liquidation  proceeding  is  brought  against  a  credit 

institution.  In  particular,  the  draft  provisions  introduce  in  the  existing  insolvency  hierarchy  of 

creditors  of  a  credit  institution  the  new  category  of  senior  non-preferred  debt  instruments.  These 

senior non-preferred debt instruments consist of debt securities or instruments with characteristics 

similar  to  debt  securities  other  than  structured  debt  securities.  A  decree  by  the  State  Council 

(Conseil  d’Etat)  will  specify  the  conditions  under  which  an  instrument  is  considered  not  to  be 

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The  draft  provisions  will  be  inserted  in  the  draft  law  on  the  prevention  of  corruption  and  the  promotion  of  the 
transparency of the economy. 
Council  Decision  98/415/EC  of  29 June  1998  on  the  consultation  of  the  European  Central  Bank  by  national 
authorities regarding draft legislative provisions (OJ L 189, 3.7.1998, p. 42). 
Directive 2014/59/EU of the European Parliament and of the Council of 15 May  2014 establishing a framework for 
the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, 
and  Directives  2001/24/EC,  2002/47/EC,  2004/25/EC,  2005/56/EC,  2007/36/EC,  2011/35/EU,  2012/30/EU  and 
2013/36/EU,  and  Regulations  (EU)  No  1093/2010  and  (EU)  No  648/2012,  of  the  European  Parliament  and  of  the 
Council ( OJ L 173,  12.6.2014, p.190). 

 
 
 
 
                                                 
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structured. The original maturity date of senior non-preferred debt instruments will be not less than 

one  year  but  the  decree  to  be  issued  may  provide  for  a  minimum  maturity  date  of  longer  than  a 

year.  Finally,  the  contract  of  issuance  for  senior  non-preferred  debt  instruments  is  required  to 

provide that the owner or holder is unsecured within the meaning of this specific provision creating 

this new category of senior non-preferred debt instruments.  

1.3 

In  the  hierarchy  of  creditors,  owners  of  senior  non-preferred  debt  instruments  will  rank  before 

creditors  holding  subordinated  debt  and  after  the  following  categories  of  creditors,  respectively: 

(1) certain specified preferential or secured creditors; (2) creditors in respect of the portion of their 

deposits covered by the Deposit Guarantee Scheme (DGS); (3) certain other specified depositors, 

comprising  natural  persons  and  micro,  small  and  medium-sized  enterprises  either  (a)  for  the 

portion  of  their  deposits  that  are  eligible  for  coverage  under  the  DGS  and  which  exceed  the 

coverage level of EUR 100,000 or (b) for the deposits which would be eligible for coverage under 

the DGS if they had not been made with branches of a credit institution located in a country which 

is not  a Member State of the European Union or the  European Economic Area;  and (4) creditors 

other  than  owners  of  senior  non-preferred  debt  instruments  (hereinafter  referred  to  as  ‘senior 

preferred debt’). The draft provisions also specify that the  new  provisions do not have retroactive 

effect and will apply only to insolvency proceedings that commenced following the entry into force 

of the law that will contain the draft provisions.  

2. 

General observations 

2.1  The ECB welcomes that the draft law aims to increase the resolvability of banks, by creating legal 

certainty about the loss-absorbing capacity of the newly created class of senior non-preferred debt 

instruments. 

2.2  The ECB notes that the creation of a new category of senior non-preferred debt instruments in the 

insolvency  ranking  of  unsecured  claims  against  French  credit  institutions,  subordinated  to  senior 

preferred debt, is proposed to be achieved by establishing a statutory basis for the issuance of debt 

instruments, which include contractual subordination arrangements.  

2.3  A common framework at Union level on the degree of subordination of senior unsecured bank debt 

instruments  to  other  senior  unsecured  bank  liabilities  in  bank  resolution  and/or  insolvency 

proceedings,  would  avoid  the  fragmentation  of  the  market  within  the  Union  for  these  instruments 

and  also  avoid  complicating  the  tasks  of  the  ECB  with  regard  to  supervision  within  the  Single 

Supervisory Mechanism (SSM). 

3. 

Specific observations 

3.1  Effects on loss-absorbing capacity in resolution and TLAC requirement 

Changing the statutory creditor hierarchy in bank insolvency proceedings is expected to enhance 

the  loss-absorbing  capacity  of  banks  in  resolution,  to  the  extent  that  they  issue  debt  instruments 

belonging  to  this  new  category  of  senior  non-preferred  debt  instruments.  By  means  of  the 

subordination of any new senior non-preferred debt instruments issued, which would be achieved 

contractually,  the  resolution  authority  may  allocate  losses  in  resolution  to  these  senior  non-

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preferred debt instruments prior to senior preferred debt, which would include operational liabilities 

such  as  corporate  deposits  and  derivatives.  The  clear  distinction  in  the  insolvency  ranking  that 

results  from  the  establishment  of  a  statutory  basis  for  the  issuance  of  debt  instruments,  which 

include contractual subordination arrangements, will increase legal certainty regarding the ability of 

senior  non-preferred  debt  instruments  to  absorb  losses  and,  hence,  help  to  minimise  the  risk  of 

compensation claims under the ‘no-creditor-worse-off-than-in-insolvency’ principle. Imposing losses 

on such senior non-preferred debt instruments is regarded as carrying a lower contagion risk than 

that of operational liabilities included within senior preferred debt, which is why the loss absorbency 

of  senior  non-preferred  debt  instruments  is  likely  to  be  more  effective  and  credible  to  market 

participants.  To  the  extent  that  French  credit  institutions  will  issue  senior  non-preferred  debt 

instruments,  it  will  be  possible  to  allocate  losses  in  resolution  to  the  holders  of  such  instruments, 

who would bear losses ahead of senior preferred debt. Depending on how substantial the layer of 

new senior non-preferred debt instruments will be in a given bank,  this has the potential to foster 

effective  resolution  action  and  reduce  the  need  to  have  recourse  to  the  resolution  fund,  which  is 

expected  to  promote  adequate  pricing  of  risk  for  investors.  The  facilitation  of  such  contractual 

subordination  is  therefore  expected  to  improve  the  resolvability  of  credit  institutions  under  the 

Union resolution regime and enhance market discipline. 

3.2 

In  addition,  the  establishment  of  a  statutory  basis  for  the  issuance  of  debt  instruments,  which 

include contractual subordination arrangements, may, to some extent, facilitate the implementation 

of  the  FSB’s  standard  for  a  minimum  Total  Loss-Absorbing  Capacity  (TLAC)  requirement  for 

globally  systemically  important  banks  (G-SIBs)  which,  in  particular,  requires  TLAC-eligible  debt 
instruments to be contractually, statutorily or structurally subordinated to operational liabilities 4. The 

creation of a statutory basis for the issuance of senior non-preferred debt instruments gives French 

G-SIBs  an  additional  option  to  meet  their  TLAC  requirement  through  the  issuance  of  new  debt 

instruments belonging to the category  of  senior non-preferred debt. However, the draft provisions 

will not change the ranking of debt instruments that have already been issued and it still requires all 

newly issued debt instruments to contain an explicit contractual clause in order to be subordinated. 

Thus,  French  banks  will  still  be  required  to  issue  new  debt  instruments  in  order  to  meet  the 

required amount of TLAC-eligible debt instruments within the remaining timeframe.  

3.3  Effects on eligibility of debt instruments as collateral for Eurosystem credit operations 

Guideline  (EU)  2015/510  of  the  European  Central  Bank  (ECB/2014/60) 5  sets  out  a  single 

framework that applies in the Eurosystem for assets that can be submitted as eligible collateral for 

the purpose of participating in Eurosystem monetary operations. In order to be eligible as collateral 

for such operations, marketable assets must be debt instruments fulfilling the eligibility criteria laid 

down  in  Guideline  (EU)  2015/510  (ECB/2014/60).  In  accordance  with  Article  64  of  Guideline 

(EU) 2015/510 (ECB/2014/60), eligible  debt instruments  will  not  give rise to rights to the principal 

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Minimum TLAC must be at least 16 % of the resolution group’s Risk Weighted Assets (“TLAC RWA Minimum”) as 
from 1 January 2019 and at least 18 % as from 1 January 2022. Minimum TLAC must also be at least 6 % of the 
Basel  III  leverage  ratio  denominator  (“TLAC  linear  rational  expectation  minimum”)  as  from  1  January  2019  and  at 
least 6.75 % as from 1 January 2022. 
Guideline  (EU)  2015/510  of  the  European  Central  Bank  of  19  December  2014  on  the  implementation  of  the 
Eurosystem monetary policy framework (ECB/2014/60) (OJ L 91, 2.4.2015, p. 3). 

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and/or  the  interest  that  are  subordinated  to  the  rights  of  holders  of  other  debt  instruments  of  the 

same issuer. Due to the subordination of senior non-preferred debt instruments to senior preferred 

debt, senior non-preferred debt instruments would not be eligible as collateral for Eurosystem credit 

operations.  

This opinion will be published on the ECB’s website.  

Done at Frankfurt am Main, 23 February 2016. 

[signed] 

The President of the ECB 

Mario DRAGHI 

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