Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on amending Directive 2014/59/EU of the European Parliament and of the Council as regards the ranking of unsecured debt instruments in insolvency hierarchy
Date: 2016-11-23
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: aid for restructuring, company in difficulties, credit institution, economic stabilisation, financial aid, financial intervention, financial solvency, investment company

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   EUROPEAN COMMISSION  Brussels, 23.11.2016  COM(2016) 853 final 2016/0363 (COD)   Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on amending Directive 2014/59/EU of the European Parliament and of the Council as regards the ranking of unsecured debt instruments in insolvency hierarchy  (Text with EEA relevance) {SWD(2016) 377} {SWD(2016) 378}  
 
EXPLANATORY MEMORANDUM 

1. 

• 

CONTEXT OF THE PROPOSAL 

Reasons for and objectives of the proposal 

The  proposed  amendments  to  Directive  2014/59/EU  (the  Bank  Recovery  and  Resolution 
Directive  or  BRRD)  are  part  of  a  legislative  package  that  includes  also  amendments  to 
Regulation  (EU)  No  575/2013  (the  Capital  Requirements  Regulation  or  CRR),  to  Directive 
2013/36/EU (the Capital Requirements Directive or CRD) and to Regulation (EU) 806/2014 
(the Single Resolution Mechanism Regulation or SRMR). 

Over  the  past  years  the  EU  implemented  a  substantial  reform  of  the  financial  services 
regulatory  framework  to  enhance  the  resilience  of  financial  institutions  in  the  EU,  largely 
based  on  global  standards  agreed  with  the  EU’s  international  partners.  In  particular,  the 
reform package included Regulation (EU) No 575/2013 (the Capital Requirements Regulation 
or  CRR)  and  Directive  2013/36/EU  (the  Capital  Requirements  Directive  or  CRD),  on 
prudential  requirements for and supervision of institutions, Directive 2014/59/EU (the Bank 
Recovery and Resolution Directive or BRRD), on recovery and resolution of institutions and 
Regulation (EU) No 806/2014 on the Single Resolution Mechanism (SRM). 

These measures were taken in response to the financial crisis that unfolded in 2007-2008. The 
absence  of  adequate  crisis  management  and  resolution  frameworks  forced  governments 
around  the  world  to  rescue  banks  following  the  financial  crisis.    The  subsequent  impact  on 
public  finances  as  well  as  the  undesirable  incentive  of  socialising  the  costs  of  bank  failure 
have  underscored  that  a  different  approach  is  needed  to  manage  bank  crises  and  protect 
financial stability.  

Within the Union in line with the significant steps that have been taken in international fora, 
Directive  2014/59/EU  (Bank  Recovery  and  Resolution  Directive  (BRRD)1  and  Regulation 
(EU)  No  806/2014  (Single  Resolution  Mechanism  Regulation  (SRMR)2  have  established  a 
robust bank resolution framework to effectively manage bank crises and reduce their negative 
impact  on  financial  stability  and  public  finances.  A  cornerstone  tool  of  a  robust  resolution 
framework is the “bail-in” which consists of writing down debt or converting debt claims or 
other  liabilities  into  equity  according  to  a  pre-defined  hierarchy.    The  tool  can  be  used  to 
absorb losses of and internally recapitalise an institution that is failing or likely to fail, so that 
its  viability  is  restored.    Therefore,  shareholders  and  other  creditors  will  have  to  bear  the 
burden of an institution's failure instead of taxpayers.   

One of the key  objectives  of the BRRD is  to  facilitate private sector loss  absorbency in  the 
event of a bank crisis. To achieve this objective, all banks are required to meet a Minimum 
Requirement  for  Own  Funds  and  Eligible  Liabilities  ('MREL')  to  ensure  that  sufficient 
financial resources are available for write down or conversion into equity.  Under the BRRD, 
MREL does not generally require mandatory subordination of eligible instruments for MREL. 
This means, in practical terms, that a liability eligible for MREL may rank in insolvency at 

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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,  OJ  L  173, 
12.6.2014, p. 190. 
Regulation  (EU)  No  806/2014  of  the  European  Parliament  and  of  the  Council  of  15  July  2014 
establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain 
investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and 
amending Regulation (EU) No 1093/2010, OJ L 225, 30.7.2014, p. 1. 

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the  same  level  (pari  passu)  with  certain  other  liabilities  which  are  not  bail-inable  in 
accordance with the BRRD, such as operational liabilities like short-term inter-bank loans, or 
certain  other  liabilities  which  are  bail-inable,  but  could  be  excluded  from  bail-in  on  a 
discretionary  basis  if  the  resolution  authority  can  justify  that  they  are difficult  to  bail-in  for 
reasons of operational execution or systemic contagion risk (e.g. derivatives). This could lead 
to  situations  where  bailed-in  bondholders  may  claim  they  have  been  treated  worse  under 
resolution  than  under  a  hypothetical  insolvency.  In  such  case,  they  would  need  to  be 
compensated  by  financial  means  of  the  resolution  fund.  To  avoid  this  risk,  resolution 
authorities may decide that the MREL requirement should be met with instruments that rank 
in insolvency below other liabilities that are either not bail-inable by law or difficult to bail-in 
(“subordination requirement”).  

At the global level, the Financial Stability Board (FSB) has published on 9 November 2015 
the  Total  Loss-absorbing  Capacity  (TLAC)  Term  Sheet  ('the  TLAC  standard')  that  was 
adopted  a  week  later  at  the  G20  summit  in  Turkey3.  The  TLAC  standard  requires  global 
systemically important banks (G-SIBs), referred as global systemically important institutions 
(G-SIIs)  in  the  Union  legislation,  to  hold  a  sufficient  minimum  amount  of  highly  loss 
absorbing  (bail-inable)  liabilities  ('TLAC  minimum  requirement')  to  ensure  smooth  and  fast 
absorption of losses and recapitalisation in resolution. In its Communication of 24 November 
20154, the Commission committed to bring forward a legislative proposal by the end of this 
year so as the TLAC standard can be implemented by the agreed deadline of 2019.  

This  proposal  is  part  of  the  Commission's  efforts  to  implement  the  TLAC  standard  in  the 
Union together with a number of other proposals amending the existing Union recovery and 
resolution framework.  

The  proposal  covers  specifically  the  targeted  amendments  to  the  BRRD  related  to  the 
insolvency ranking of holders of debt instruments issued by Union banks for the purposes of 
complying  with  the  BRRD  and  TLAC  requirements  concerning  loss  absorption  and 
recapitalisation  capacity  of  banks.  In  order  to  enhance  the  operational  execution  and 
robustness of bail-in powers and to avoid legal uncertainty, the TLAC standard requires that 
liabilities  may  be  eligible  for  TLAC  only  if  they  are  subordinated  to  other  liabilities,  i.e.  if 
they absorb losses in insolvency or in resolution prior to other “preferred” liabilities that are 
explicitly  excluded  from  TLAC  eligibility,  such  as  derivatives,  covered  deposits  or  tax 
liabilities.  The TLAC standard provides, therefore, for a subordination requirement subject to 
certain exemptions, but it is not prescriptive on the way to achieve it.   

The  TLAC  requirement  to  hold  subordinated  instruments  combined  with  the  potential 
discretionary  request  by  Union  resolution  authorities  to  meet  the  MREL  also  with 
subordinated  instruments  have  driven  some  Member  States  to  re-assess  their  national 
insolvency  ranking.  A  number  of  Member  States  have  amended  (or  are  in  the  process  of 
amending)  the  insolvency  ranking  of  certain  bank  creditors  under  their  national  insolvency 
law to operationalise the possible application of the bail-in tool under the BRRD and to ensure 
that their G-SIIs comply with the “subordination requirement” of the TLAC standard.  Under 
some national approaches, the existing stock of unsecured senior debt have been subordinated 
with  immediate  effect  to  allow  banks  to  comply  with  any  subordination  requirement 

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FSB,  Principles on Loss-absorbing and Recapitalisation Capacity of Globally Systemically Important 
Banks (G-SIBs) in Resolution, Total Loss-absorbing Capacity (TLAC) Term sheet, 9.11.2015. 
Communication from the Commission to the European Parliament, the Council, the European Central 
Bank, the European Economic and Social Committee and the Committee of the Regions, "Towards the 
completion of the Banking Union", 24.11.2015, COM(2015) 587 final. 

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stemming from the BRRD or the TLAC standard. Under other approaches, banks would need 
to issue new debt, which meets the subordination criterion. As the national rules adopted so 
far diverge significantly, there is a broad agreement among stakeholders and Member States 
that  having  divergent  approaches  to  the  statutory  insolvency  ranking  of  bank  creditors 
provides uncertainty for issuers and investors alike and makes more difficult the application 
of  the  bail-in  tool  for  cross-border  institutions.  This  uncertainty  could  also  result  in 
competitive distortions in the sense that unsecured debt holders could be treated differently in 
different Member States and the costs to comply with the TLAC and MREL requirements for 
banks  may  be  different  from  Member  State  to  Member  State.  Additionally,  the  creditors  of 
banks  under  such  divergent  national  insolvency  regimes  would  be  treated  very  differently 
when  buying  debt  instruments  issued  by  banks  falling  under  different  national  creditor 
hierarchy regimes. 

For the above reasons, in its Report on Banking Union5, the European Parliament calls on the 
Commission  to  present  proposals  to  further  reduce  the  legal  risks  of  claims  under  the  no-
creditor-worse-off principle, and, in its conclusions of 17 June 20166, the ECOFIN invited the 
Commission  to  put  forward  a  proposal  on  a  common  approach  to  the  bank  creditors' 
hierarchy.  

A specific proposal on bank creditors' hierarchy is justified in view of the distinct nature of 
the  matters  concerned  and  the  urgency  of  harmonised  Union  rules  to  prevent  any  further 
competitive distortions on the internal market. .  

1.1. 

Consistency with existing policy provisions in the policy area 

The  existing  Union  bank  resolution  framework  already  requires  all  Union  banks  to  hold  a 
sufficient amount of highly loss absorbing (bail-inable) liabilities that should be bailed-in in 
bank resolution. By facilitating the execution of the bail-in tool through compliance with the 
subordination  requirement  under  the  BRRD  and  TLAC  standard,  the  proposal  will  improve 
the application of the existing rules and help implementing the TLAC standard in the Union. 
The proposal is, therefore, consistent with the overall objective of the Union bank resolution 
framework to reduce taxpayers' support in bank resolution. 

1.2. 

Consistency with other Union policies 

The proposal is part of a wider review of the Union financial legislation aiming at reducing 
risks in the financial sector while promoting sustainable financing of the economic activity. It 
is fully consistent with the EU's fundamental goals of promoting financial stability, reducing 
taxpayers' support in bank resolution as well as contributing to a sustainable financing of the 
economy. 

2. 

LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY 

2.1. 

Legal basis 

The  proposed  Directive  amends  an  existing  directive,  the  BRRD.  The  legal  basis  for  the 
proposal is the same as the legal basis of the BRRD, which is Article 114 of the TFEU. That 
provision allows the adoption of measures for the approximation of national provisions which 
have as their object the establishment and functioning of the internal market. 

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Report on Banking Union – Annual Report 2015 (2015/2221(INI)).   
Council  conclusions  of  17  June  2016  on  a  roadmap 
http://www.consilium.europa.eu/press-releases-pdf/2016/6/47244642837_en.pdf. 

to  complete 

the  Banking  Union: 

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The  proposal  harmonises  national  laws  on  recovery  and  resolution  of  credit  institutions  and 
investment firms, in  particular  as  regards their  loss-absorbency and  recapitalisation capacity 
in resolution, to the extent necessary to ensure that Member States and Union banks have the 
same tools and capacity to address bank failures in line with the agreed international standards 
(TLAC standard).  

By  establishing  harmonised  rules  in  the  internal  market  on  the  treatment  of  certain  bank 
creditors in resolution, the proposal reduces considerably the divergences in the national rules 
concerning  the  loss  absorbency  and  recapitalisation  capacity  of  banks,  which  could  distort 
competition in the internal market. The proposal has, therefore, as its object the establishment 
and functioning of the internal market. 

Article 114 of the TFEU is, therefore, the appropriate legal base. 

2.2. 

Subsidiarity  

Under the principle of subsidiarity set out in Article 5.3 of the TEU, in areas which do not fall 
within its exclusive competence, the Union should act only if and in so far as the objectives of 
the  proposed  action  cannot  be  sufficiently  achieved  by  the  Member  States,  either  at  central 
level  or  at  regional  and  local  level,  but  can  rather,  by  reason  of  the  scale  or  effects  of  the 
proposed action, be better achieved at Union level. 

The Union and its Member States are committed to implement the Union bank recovery and 
resolution  framework  in  line  with  the  international  standards.  In  the  absence  of  any  Union 
action, Member States would have needed to adopt themselves the rules on the treatment of 
bank creditors in resolution in order to facilitate the application of the bail-in tool under the 
BRRD and implement the internationally agreed TLAC standard. As a result of significantly 
diverging national rules, banks and their creditors (investors) face legal uncertainty, different 
and  potentially  higher  costs  in  comparison  with  what  would  be  the  situation  should  Union 
action be taken. Union action is, therefore, desirable to facilitate the application of the bail-in 
tool in a harmonised way in the line with the global TLAC standard so as to alleviate as much 
as  possible  the  compliance  costs  of  banks  and  their  creditors  while  ensuring  an  effective 
resolution in case of bank failures. 

2.3. 

Proportionality 

Under  the  principle  of  proportionality,  the  content  and  form  of  Union  action  should  not 
exceed what is necessary to achieve its objectives, consistent with the overall objectives of the 
Treaties.  The  proposal  would  not  materially  affect  the  burden  of  banks  to  comply  with  the 
existing  rules  on  loss  absorbency  and  recapitalisation  capacity  and  reduce  to  the  minimum 
their  costs  to  comply  with  the  TLAC  standard.  In  addition,  the  rights  of  bank  creditors  and 
investors as regards existing  stocks of bank debt  will  not be affected. The provisions  of the 
proposal are, therefore, proportionate to what is necessary to achieve its objectives. 

3. 

RESULTS OF IMPACT ASSESSMENTS 

3.1. 

Impact assessment 

Being  part  of  a  wider  review  package  of  the  Union  financial  legislation  aiming  at  reducing 
risks in the financial sector, the proposal has been subject to an extensive impact assessment. 
The draft impact assessment report was submitted on 7 September 2016 to the Commission's 

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Regulatory  Scrutiny  Board7.  The  Board  has  issued  first  a  negative  opinion.  After  the 
strengthening  the  evidenced  base  of  elements  of  the  review  package,  the  Board  issued  a 
positive opinion on 27 September 2016.  

In line with its "Better Regulation" policy, the Commission conducted an impact assessment 
of  several  policy  alternatives.  Policy  options  were  assessed  against  the  key  objectives  of 
enhancing  loss  absorbency  and  recapitalisation  capacity  of  banks  in  resolution  and  legal 
certainty  and  coherence  of  the  resolution  framework.  The  assessment  was  done  by 
considering  the  effectiveness  of  achieving  the  objectives  above  and  the  cost  efficiency  of 
implementing different policy options.  

The impact assessment dismisses the option of no policy change as regards bank insolvency 
creditor hierarchy in the Union since this option creates competitive distortions in the internal 
market  for  bank  senior  unsecured  debt  as  a  different  status  of  bank  debt  holders  across 
Member States may impact unevenly the funding costs of banks. In terms of harmonisation, 
several  sub-options  have  been  considered8  and  the  impact  assessment  concludes  that  the 
creation of a specific  'unpreferred' senior  class  for  unsecured debt  is the most  cost effective 
way to comply with the subordination requirement of the TLAC standard for G-SIIs and with 
the  case-by-case  request  of  resolution  authorities  to  request  compliance  with  the  MREL 
through  subordinated  debt.  Contrary  to  own  funds  instruments,  such  debt  instruments  could 
only  be  bailed-in  in  bank  resolution,  after  writing  down  or  converting  any  own  funds 
instruments and before bailing-in other senior liabilities. The main advantage of this option is 
that banks could continue to issue (less costly) senior debt for funding or operational reasons 
while the new class of debt could be used mainly for regulatory compliance with the rules on 
loss absorbency and recapitalisation capacity. 

3.2. 

Fundamental rights 

This proposal complies with the fundamental rights and observes the principles recognised in 
particular by the Charter of Fundamental Rights of the European Union, notably the rights to 
property  and  the  freedom  to  conduct  a  business,  and  has  to  be  applied  in  accordance  with 
those rights and principles. In particular, this Directive ensures that interference with property 
rights  of  bank  creditors  is  not  disproportionate.  It  will  ensure  that  affected  creditors  do  not 
incur  greater  losses  than  those  which  they  would  have  incurred  if  the  institution  had  been 
wound  up  under  normal  insolvency  proceedings  at  the  time  that  the  resolution  decision  is 
taken.  

4. 

BUDGETARY IMPLICATIONS 

The proposal does not have implications for the Union budget.   

5. 

OTHER ELEMENTS 

5.1. 

Implementation plans and monitoring, evaluation and reporting arrangements 

The  proposal  requires  Member  States  to  transpose  the  amendments  to  the  BRRD  in  their 
national laws by [June 2017] and requires banks to comply with the amended rules by [July 
2017]. 

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Link to Impact Assessment and to its summary. 
The three sub-options are: (i) statutory subordination of all unsecured debt with a retroactive effect; (ii) 
creation  of  a  non-preferred  senior  debt  category;  (iii)  statutory  preference  for  all  deposits  vis-à-vis 
senior debt. 

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5.2. 

Detailed explanation of the specific provisions of the proposal 

The  proposal  amends  Article  108  of  the  BRRD  by  partially  harmonising  bank  insolvency 
creditor  hierarchy  as  regards  the  priority  ranking  of  holders  of  bank  senior  unsecured  debt 
eligible  to  meet  the  BRRD  rules  and  the  TLAC  standard  on  loss  absorbency  and 
recapitalisation capacity for banks, in particular the 'subordination' requirement. 

The new provision keeps the existing class of senior debt while it creates a new asset class of 
'non-preferred'  senior  debt  that  should  only  be  bailed-in  in  resolution  after  other  capital 
instruments,  but  before  other  senior  liabilities.  Institutions  remain  free  to  issue  debt  in  both 
classes  while  only  the  'non-preferred'  senior  class  is  eligible  for  the  minimum  TLAC 
requirement or any subordination requirement that could be imposed by resolution authorities 
on a case-by-case basis. 

The proposed Directive should not affect the existing stocks of bank debt and their statutory 
ranking in insolvency and will be applied to any issuance of bank debt following its date of 
application. As regards debt instruments issued before the date of application of this Directive 
referred  to  in  Article  2(1)  [July  2017],  their  insolvency  ranking  should  be  governed  by  the 
national laws of Member States as they were adopted on [31 December 2016]. 

The proposed Directive requires Member State to transpose it by [June 2017] and its date of 
application is fixed for [July 2017]. 

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2016/0363 (COD) 

Proposal for a 

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

on amending Directive 2014/59/EU of the European Parliament and of the Council as 
regards the ranking of unsecured debt instruments in insolvency hierarchy  

(Text with EEA relevance) 

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 114 thereof, 

Having regard to the proposal from the European Commission, 

After transmission of the draft legislative act to the national parliaments, 

Having regard to the opinion of the European Central Bank9 

Having regard to the opinion of the European Economic and Social Committee10,  

Acting in accordance with the ordinary legislative procedure, 

Whereas: 

(1) 

(2) 

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10 
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12 

The  Financial  Stability  Board  (FSB)  published  the  Total  Loss-Absorbing  Capacity 
(TLAC) Term Sheet ('the TLAC standard') on 9 November 2015 which was endorsed 
by  the  G-20  in  November  2015.  The  TLAC  standard  requires  global  systemically 
important banks (G-SIBs), referred to as global systemically important institutions (G-
SIIs)  in  the  Union  framework,  to  hold  a  sufficient  minimum  amount  of  highly  loss 
absorbing (bail-in-able) liabilities to ensure smooth and fast absorption of losses and 
recapitalisation  in  resolution.    In  its  Communication  of  24  November  201511,  the 
Commission committed to bring forward a legislative proposal by the end of 2016 that 
would  enable  the  TLAC  standard  to  be  implemented  by  the  internationally  agreed 
deadline of 2019. 

The implementation of the TLAC standard in the Union needs to take account for the 
existing  institution-specific  minimum  requirement  for  own  funds  and  eligible 
liabilities ('MREL') applicable to all Union credit institutions and investment firms as 
laid down in Directive 2014/59/EU of the European Parliament and of the Council 12. 

OJ C , , p. . 
OJ C , , p. . 
Communication from the Commission to the European Parliament, the Council, the European Central 
Bank, the European Economic and Social Committee and the Committee of the Regions, "Towards the 
completion of the Banking Union", 24.11.2015, COM(2015) 587 final  
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, 

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As  TLAC  and  MREL  pursue  the  same  objective  of  ensuring  that  Union  credit 
institutions  and  investment  firms  have  sufficient  loss  absorbing  capacity,  the  two 
requirements  should  be  complementary  elements  of  a  common  framework. 
Operationally, the harmonised minimum level of the TLAC standard for G-SIIs ('the 
TLAC  minimum  requirement')  should  be  introduced  in  Union  legislation  through 
amendments to Regulation (EU) No 575/2013 of the European Parliament and of the 
Council 13, while the institution-specific add-on for G-SIIs and the institution-specific 
requirement  for  non-G-SIIs  should  be  addressed  through  targeted  amendments  to 
Directive 2014/59/EU and Regulation (EU) No 806/2014 of the European Parliament 
and of the Council14. The relevant provisions of this Directive as regards the ranking 
of unsecured debt instruments in insolvency hierarchy are complementary with those 
in the aforementioned pieces of legislation and in Directive 2013/36/EU15  

(3)  Member States should ensure that credit institutions and investment firms should have 
sufficient  loss-absorbing  and  recapitalisation  capacity  to  ensure  smooth  and  fast 
absorption  of  losses  and  recapitalisation  in  resolution  with  a  minimum  impact  on 
financial stability and taxpayers. This should be achieved through constant compliance 
by  credit  institutions  and  investment  firms  with  a  TLAC  minimum  requirement  as 
provided  in  Regulation  (EU)  No  575/2013  and    a  requirement  for  own  funds  and 
permissible liabilities as provided in Directive 2014/59/EU. 

(4) 

(5) 

(6) 

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15 

The TLAC standard, as implemented in Union law by Regulation (EU)  No 575/2013, 
requires  G-SIIs  to  meet  the  minimum  TLAC  requirement,  with  certain  exceptions, 
with  subordinated  liabilities  resulting  from  debt  instruments  that  rank  in  insolvency 
below  other  senior  liabilities  ('subordination  requirement').  Directive  2014/59/EU 
allows resolution authorities to request, on a case-by-case basis, that G-SIIs and other 
institutions meet their firm-specific requirement with subordinated liabilities so as to 
alleviate  the  risk  of  legal  challenge  by  creditors  on  the  basis  that  their  losses  in 
resolution  are  higher  than  the  losses  that  they  would  incur  under  normal  insolvency 
proceedings. 

A  number  of  Member  States  have  amended  or  are  in  the  process  of  amending  the 
insolvency  ranking  of  unsecured  senior  debt  under  their  national  insolvency  law  to 
allow their credit institutions and investment firms  to  comply with  the subordination 
requirement as provided in Regulation (EU) No 575/2013 and Directive 2014/59/EU.  

The  national  rules  adopted  so  far  diverge  significantly.  The  absence  of  harmonised 
Union  rules  creates  uncertainty  for  issuing  credit  institutions,  investment  firms  and 
investors  alike  and  makes  the  application  of  the  bail-in  tool  for  cross-border 
institutions  more  difficult.  This  also  results  in  competitive  distortions  on  the  internal 
market given that the costs for credit institutions and investment firms to comply with 

2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) 
No 648/2012, OJ L 173, 12.6.2014, p. 190 
Regulation  (EU)  No  575/2013  of  the  European  Parliament  and  of  the  Council  of  26  June  2013  on 
prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 
648/2012, OJ L 176, 27.6.2013, p.1 
Regulation  (EU)  No  806/2014  of  the  European  Parliament  and  of  the  Council  of  15  July  2014 
establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain 
investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and 
amending Regulation (EU) No 1093/2010, OJ L 225, 30.7.2014, p. 1 
Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the 
activity of credit institutions and the prudential supervision of credit institutions and investment firms, 
amending  Directive  2002/87/EC  and  repealing  Directives  2006/48/EC  and  2006/49/EC,  OJ  L  176, 
27.6.2013, p. 338 

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(7) 

(8) 

(9) 

the  subordination  requirement  established  in  Regulation  (EU)  No  575/2013  and 
Directive 2014/59/EU and the costs borne by investors when buying debt instruments 
issued  by  credit  institutions  and  investment  firms  may  differ  considerably  across  the 
Union.  

In its Report on Banking Union, the European Parliament called on the Commission to 
present  proposals  to  further  reduce  the  legal  risks  of  claims  under  the  no-creditor-
worse-off principle, and, in its conclusions of 17 June 201616, the Council invited the 
Commission to put forward a proposal on a common approach to the bank creditors' 
hierarchy to enhance legal certainty in case of resolution. 

It is, therefore, necessary to remove the significant obstacles in the functioning of the 
internal  market  and  avoid  distortions  of  competition  resulting  from  the  absence  of 
harmonised Union rules on bank creditors' hierarchy and to prevent such obstacles and 
distortions from arising in the future. Consequently, the appropriate legal basis for this 
Directive  should  be  Article  114  of  the  Treaty  on  the  Functioning  of  the  European 
Union (TFEU), as interpreted in accordance with the case law of the Court of Justice 
of the European Union. 

In  order  to  reduce  to  a  minimum  credit  institutions  and  investment  firms'  costs  of 
compliance  with  the  subordination  requirement  and  any  negative  impact  on  their 
funding costs, this Directive should allow Member States to keep the existing class of 
unsecured  senior  debt,  which  has  the  highest  insolvency  ranking  among  debt 
instruments and is less costly for credit institutions and investment firms to issue than 
any  other  subordinated  liabilities.  It  should,  nevertheless,  require  Member  States  to 
create  a  new  asset  class  of  'non-preferred'  senior  debt  that  should  only  be  bailed-in 
during  resolution  after  other  capital  instruments,  but  before  other  senior  liabilities. 
Credit  institutions  and  investment  firms  should  remain  free  to  issue  debt  in  both 
classes  while  only  the  'non-preferred'  senior  class  should  be  eligible  to  meet  the 
subordination  requirement  of  Regulation  (EU)  No  575/2013  and  of  Directive 
2014/59/EU. This should allow credit institutions and investment firms to use for their 
funding or any other operational reasons the less costly senior debt while issuing the 
new 'non-preferred' senior class for compliance with the subordination requirement.  

(10)  To  ensure  that  the  new  'non-preferred'  senior  class  of  debt  instruments  meet  the 
eligibility  criteria  of  Regulation  (EU)  No  575/2013  and  of  Directive  2014/59/EU, 
Member States should ensure that their initial contractual maturity spans one year, that 
they  have  no  derivative  features,  and  that  the  relevant  contractual  documentation 
related  to  their  issuance  explicitly  refers  to  their  ranking  under  normal  insolvency 
proceedings. 

(11)  To  enhance  legal  certainty  for  investors,  Member  States  should  ensure  that  standard 
senior debt instruments have a higher priority ranking in their national insolvency laws 
than the new 'non-preferred' senior class of debt instruments under normal insolvency 
proceedings.  Member  States  should  also  ensure  that  the  new  'non-preferred'  senior 
class  of  debt  instruments  have  a  higher  priority  ranking  than  the  priority  ranking  of 
own funds instruments or any other subordinated liabilities and that, contrary to such 
instruments  or  liabilities,  the  'non-preferred'  senior  class  of  debt  instruments  could 
only be bailed-in when the issuing institution is placed under resolution.   

16 

Council  conclusions  of  17  June  2016  on  a  roadmap 
http://www.consilium.europa.eu/press-releases-pdf/2016/6/47244642837_en.pdf 

to  complete 

the  Banking  Union: 

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(12)  Since  the  objectives  of  this  Directive,  namely  to  lay  down  uniform  rules  for  bank 
creditor  hierarchy  for the  purposes  of  the  Union  recovery and  resolution  framework, 
cannot be sufficiently achieved by the Member States and can therefore, by reason of 
the  scale  of  the  action,  be  better  achieved  at  Union  level,  the  Union  may  adopt 
measures, in accordance with the principle of subsidiarity as set out in Article 5 of the 
Treaty on European Union. In accordance with the principle of proportionality, as set 
out  in that Article, this Regulation does  not go beyond what is  necessary in  order to 
achieve those objectives. 

(13) 

It  is  appropriate  for  the  amendments  to  Directive  2014/59/EU  provided  for  in  this 
Directive  to  apply  to  liabilities  issued  on  or  after  the  date  of  application  of  this 
Directive and to liabilities still outstanding as of that date. However, for legal certainty 
purposes  and  to  mitigate  transitional  costs  in  as  much  as  possible,  Member  State 
should ensure that the treatment of all outstanding liabilities that credit institutions and 
investment firms have issued before that date is governed by the laws of the Member 
States  as  they  were  adopted  on  [31  December  2016].  Outstanding  liabilities  should 
thus  continue  to  be  subject  to  the  regulatory  requirements  set  out  in  Directive 
2014/59/EU  and  the  relevant  national  law  in  the  version  that  was  adopted  on  [31 
December 2016].  

HAVE ADOPED THIS DIRECTIVE: 

Article 1 

Amendments to Directive 2014/59/EU 

1. 

2. 

3. 

4. 

The words "of deposits" are deleted from the title of Article 108 and the word "non-
preferred" is deleted from point (a) of the first subparagraph of Article 108. 

The following paragraphs are added after the end of Article 108: 

"2.  Member  States  shall  ensure  that,  for  entities  referred  to  in  points  (a),  (b),  (c) 
and  (d)  of  Article  1(1),  ordinary  unsecured  claims  resulting  from  debt  instruments 
with the highest priority ranking among debt instruments in national law governing 
normal insolvency proceedings have a higher priority ranking than that of unsecured 
claims resulting from debt instruments which meet the following conditions: 

(a) 

(b) 

(c) 

the initial contractual maturity of debt instruments spans one year;  

they have no derivative features; 

the relevant contractual documentation related to the issuance explicitly refers 
to the ranking under this subparagraph. 

Member  States  shall  ensure  that  ordinary  unsecured  claims  resulting  from  debt 
instruments referred to in paragraph 2 shall have a higher priority ranking in national 
law  governing  normal  insolvency  proceedings  than  the  priority  ranking  of  claims 
resulting from instruments referred to in points (a) to (d) of Article 48(1).  

Member  States  shall  ensure  that  their  national  laws  governing  normal  insolvency 
proceedings  as  they  were  adopted  at  [31  December  2016]  apply  to  ordinary 
unsecured  claims  resulting  from  debt  instruments  issued  by  entities  referred  to  in 
points (a), (b), (c) and (d) of Article 1(1) prior to [date of application of this Directive 
– July 2017]."  

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Article 2 
Transposition 

1. 

2. 

3. 

Member  States  shall  adopt  and  publish  by  [June  2017]  the  laws,  regulations  and 
administrative  provisions  necessary  to  comply  with  this  Directive.  They  shall 
communicate the text of those measures to the Commission forthwith. 

Member States shall apply those measures from [July 2017]. 

When  Member  States  adopt  the  measures  referred  to  in  paragraph  1,  they  shall 
contain  a  reference to  this  Directive  or  be  accompanied  by  such  a  reference  on  the 
occasion  of  their  official  publication.  Member  States  shall  determine  how  such  a 
reference is to be made. 

Member  States  shall  communicate  the  text  of  the  main  provisions  of  national  law 
which  they  adopt  in  the  field  covered  by  this  Directive  to  the  Commission  and  to 
European Banking Authority. 

Article 3 
Entry into force 

This Directive shall enter into force on the twentieth day following that of its publication in 
the Official Journal of the European Union. 

Article 4 
Addressees 

This Directive is addressed to the Member States. 

Done at Brussels, 

For the European Parliament 
The President 

For the Council 
The President 

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