1. Subject matter

Pursuant to Article 48(6) of Directive 2014/59/EU, these guidelines address the interrelationship between Regulation (EU) No 575/2013 and Directive 2013/36/EU with Directive 2014/59/EU for the purposes of the sequence of writedown and conversion. The guidelines clarify this interrelationship for the purposes of Article 48 of Directive 2014/59/EU, which governs the sequence of writedown and conversion when the bail-in tool is applied. They are also relevant to Article 60 of Directive 2014/59/EU regarding the sequence of writedown and conversion of capital instruments at the point of non-viability (PONV). ‘Capital instruments’ for the purpose of these guidelines is taken to mean instruments which qualify as CET1, AT1 or T2 instruments for the purposes of Regulation (EU) No 575/2013.

Article 48 of Directive 2014/59/EU provides that Member States shall ensure that, when applying the bail-in tool, resolution authorities exercise the write down and conversion powers, subject to any exclusions under Article 44(2) and (3) of Directive 2014/59/EU, in the following order: CET1 items; then AT1 instruments; then T2 instruments; then other subordinated debt that is not AT1 or T2 instruments in accordance with the hierarchy of claims in normal insolvency law; then the rest of eligible liabilities in accordance with the hierarchy of claims in normal insolvency law.

Article 48(2) of Directive 2014/59/EU states that resolution authorities shall allocate the losses equally between shares or other instruments of ownership and eligible liabilities of the same rank except where discretionary exclusions from bail-in under Article 44(3) of Directive 2014/59/EU result in a different allocation of losses amongst liabilities of the same rank. In this case, the level of writedown or conversion applied to other eligible liabilities may be increased under Article 44(3), provided that the level of writedown and conversion complies with the no creditor worse off safeguard (NCWO) referred to in Article 34(1), (g) of that directive.

According to Article 48(3) of Directive 2014/59/EU, before applying the write down or conversion power to other eligible liabilities or liabilities ranking pari passu, resolution authorities shall convert or reduce the principal amount of AT1 and T2 instruments and of other subordinated liabilities when those liabilities have not already been converted and their terms provide for: (a) the principal amount of the instrument to be reduced on the occurrence of any event that refers to the financial situation, solvency or levels of own funds of the institution; or (b) the conversion of the instruments to shares or other instruments of ownership on the occurrence of any such event.

Article 48(4) of Directive 2014/59/EU provides that when resolution authorities reduce, but not to zero, the principal amount of an instrument according to paragraph 3 of that Article, they shall respect the creditor hierarchy and apply the write down and conversion powers to the residual amount of that principal in accordance with the regime of paragraph 1. Furthermore, Article 48(5) provides that when deciding on whether liabilities are to be written down or converted into equity, resolution authorities shall not convert one class of liabilities, while a class of liabilities that is subordinated to that class remains substantially unconverted into equity or not written down, unless otherwise permitted under Article 44(2) and (3) of Directive 2014/59/EU.

The provisions contained in Article 48, in particular the first paragraph thereof, create a number of interrelationships with the regime set forth in Regulation (EU) No 575/2013 and Directive 2014/59/EU that need to be clarified. In particular, this interrelationship concerns the capital instruments (in particular AT1 and T2 classes) for purposes of the sequence of writedown and conversion. Points (69), (73) and (74) of Article 2(1) of Directive 2014/59/EU define such instruments as those meeting the conditions laid down in Articles 52 and 63 of Regulation (EU) No 575/2013 but do not specify the treatment applicable to instruments of the same class or issuance, but under a different regime for the purposes of calculating the institution’s own funds.

2. Scope and level of application

These guidelines are addressed to resolution authorities when they are applying the bail-in tool or the power to write down or convert capital instruments at the point of non-viability to an institution or to an entity referred to in Article 1(1), (b), (c) or (d) of Directive 2014/59/EU.