A new report, published today as part of Scope Ratings’ ‘Q&A for the Thoughtful Bank Investor’ series, summarises and comments on the recommendations advanced by the ECB in its opinion, published last week, on the European Commission’s (EC) November 2016 proposals to amend Article 108 of BRRD with respect to the ranking in insolvency/resolution of EU banks’ senior unsecured debt.

The ECB’s recommendations are viewed positively by Scope. The most notable of them is the introduction of a general depositor preference across the EU, which the agency believes would give more credibility and predictability to the bail-in of senior unsecured debt in resolution.

Specifically, the ECB is proposing the introduction of a third priority ranking in Article 108 of BRRD (besides covered and ‘preferred’ deposits) for other deposits, such as from large corporates, funds, credit institutions, etc. This category would rank in resolution ahead of senior unsecured debt (even those not eligible for MREL/TLAC). “Separating senior unsecured debt (a non-risk-free asset class sought by professional institutional investors) from all deposits (operational liabilities enabling bank clients to carry out their activities) inherently provides more credibility to the bail-in process, if needed beyond MREL/TLAC”, notes Sam Theodore, Scope bank analyst and author of the report.

The report also highlights and comments positively on the ECB’s other recommendations, such as the possibility of issuing short-term liabilities eligible for bail-in, treating Tier 2 differently to other subordinated debt in insolvency/resolution, and the need for the newly issued ‘non-preferred’ senior debt to specifically rank pari passu with existing senior debt with statutory subordination in insolvency/resolution (e.g. in Germany).

Download the full report: ‘The ECB Recommends General Depositor Protection Across the EU: A Valuable Proposition’.