Simplified bail-in implementation process

In a previously published explanatory memorandum (pdf, 91 kB), the CNB indicated that in the case of complex and systemically important institutions or their groups, it considers bail-in to be the primary resolution tool for addressing their potential failure. With regard to the structure of the Czech banking sector, bail-in is thus the preferred or variant resolution tool for institutions managing the absolute majority of banking assets in the Czech Republic.

Using the bail-in tool as such consists in the write-down and conversion of capital and liabilities that are not compulsorily excluded under Section 122 of the Act No. 374/2015 Coll., on Recovery and Resolution in the Financial Market (RRA), to the extent sufficient to restore regulatory capital to the level necessary for continuation of the activities for which the institution is authorised (in particular identified critical functions) and to maintain sufficient market confidence. The bail-in tool as such is implementable on the basis of a decision issued by the CNB, in its role as a national resolution authority, and must respect the order in which creditors from the affected instruments would be satisfied in normal insolvency proceedings.

If resolution proceedings using the bail-in tool are to achieve their objectives as set out in Section 75 RRA, the tool must be implemented in a credible and transparent manner. This requires both sufficient preparation on the part of active participants in the process (i.e. the failing institution, the CNB, central securities depositories, or other persons keeping records of affected instruments, and organisers of regulated markets) and the ability of market participants to anticipate each step taken throughout the resolution process.

In order to enhance the transparency and predictability of actions to apply the bail-in tool, the CNB is publishing this simplified bail-in implementation process which it expects to be followed. When preparing this simplified process, the CNB mainly relied on the applicable legal framework and the Principles on Bail-in Execution^[1] issued by the Financial Stability Board, and worked in a close cooperation with the Central Securities Depository Prague, the Prague Stock Exchange and the CNB’s organisational units supervising and overseeing these financial market infrastructures (“FMIs”). The proposed process uses the existing procedures, technologies and conventions of the above-mentioned FMIs to the maximum extent possible and takes into account the possible involvement of international central securities depositories (“ICSDs”), although these are covered in more detail in the Guidance on bail-in for International Debt Securities^[2] published by the Single Resolution Board.

In relation to the above text, the CNB considers it appropriate to point out that, although the process deals with the implementation of the bail-in tool, the CNB intends, where appropriate, to proceed by analogy with the implementation of resolution powers and tools other than bail-in, e.g. write-down and conversion of capital instruments and eligible liabilities pursuant Section 59 RRA (“WDC”).

Step / Action	Responsibility	Description of step / action
1	CNB	Before taking resolution action, the CNB will ensure that a fair, prudent and realistic valuation of the assets and liabilities of the institution is carried out, to provide information necessary to: decide whether the conditions for resolution are met (“Valuation 1”) determine the appropriate type and extent of resolution action to be taken in respect of the institution (“Valuation 2”) Pursuant to the requirements of EU Regulation 2016/1075, the valuation must be carried out by a person who has sufficient experience and knowledge in valuing institutions and who is independent of the CNB, any other relevant public authority and the failing institution (“the independent valuation”). Where, due to urgency or other serious circumstances, it is not possible to conduct an independent valuation, the CNB will ensure that a provisional valuation of the institution’s assets and liabilities is carried out, with the independent valuation to be conducted as soon as possible. In relation to the central guiding principle of the resolution framework that no creditor shall incur greater losses than would have been incurred if the institution had been wound up under normal insolvency proceedings, the CNB will ensure that an independent valuation providing information on compliance with that principle (“Valuation 3”) is carried out. On the basis of Valuation 3, the CNB, no later than 1 year after the application of the resolution measure, will decide on any potential compensation in order to comply with the above principle. Creditors who registered^[3] their claims with the CNB within 6 months after the bail-in decision became enforceable are the only creditors entitled to compensation.
A	CNB	Based on the information from Valuation 1, the CNB will decide whether the institution is failing or likely to fail (“FLTF”). Subsequently, the CNB will assess whether the conditions for resolution set out in Section 78 RRA have been met. Depending on the timing and circumstances of the institution becoming FLTF, the CNB may consider it beneficial to suspend the institution’s payment and delivery obligations (i.e. to introduce a moratorium pursuant Section 83 RRA) for a maximum period of 2 business days. The moratorium must not be imposed on obligations to payment and settlement systems with settlement finality, and operators of these systems, central counterparties and central banks.
2	CNB	If the CNB finds it expedient, especially with regard to the requirements applying to members of the institution’s governing bodies and the foreseeable changes in the institution’s shareholder structure, the CNB may introduce resolution administration in accordance with Section 86 RRA. In line with the requirements set out in RRA, resolution administration may be performed either by the CNB directly or by a special administrator. By virtue of the imposition of resolution administration, the exercise of the powers of the management body and of the supreme body of the liable entity is suspended and their responsibilities are exercised by the administrator. Where resolution administration has been established as part of the resolution process, the CNB will not decide on its termination before at least 50 % of the shares of the institution have been issued to persons whose voting rights are not restricted by any relevant legislation or in any other way.
3	CNB	In the event of the failure of an institution whose instruments subject to bail-in (“the instruments concerned”) are admitted to trading on a regulated market, the CNB will inform the relevant regulated market operator without delay. Depending on the situation, the CNB will require the regulated market operator to suspend, delist or remove the instruments concerned from trading on the relevant regulated market. In order to enable the settlement of unsettled transactions in the instruments concerned that were traded before their suspension, delisting or removal from trading (“in-flight transactions”), the transferability of the instruments concerned will not be limited in any way (i.e. settlement, including suspended settlement, will be governed by the rules and procedures of the relevant (I)CSD or settlement system operator).
B	Regulated market operator	Based on the obligation imposed by the CNB, the regulated market operator, applying its internal procedures, will suspend, delist or remove the instruments concerned from trading on the relevant regulated market for the time necessary for the implementation of the bail-in tool.
4	CNB	The CNB will select an institution with adequate technical, procedural and governance capabilities and entrust it with administering the implementation of the bail-in tool (“the bail-in agent”). Depending on the scope of the bail-in implementation and on practical experience, in particular in the field of securities processing, settlement and custody services, the role of bail-in agent may also be entrusted to the institution subject to the bail-in implementation, i.e. the institution determined as being FLTF, meaning that the bail-in agent and the FLTF bank are one and the same institution.
C	CNB	Based on the information from Valuation 2, the CNB will issue a decision, or a measure of a general nature, implementing the bail-in tool (“the bail-in decision”). The bail-in decision contains in particular the identification of instruments against which the bail-in tool is to be applied and conversion rates determined in accordance with EBA Guidelines EBA/GL/2017/03. When setting the conversion rates, the CNB will make sure that no creditor will receive treatment which is worse than the treatment they would have received if the institution had entered national insolvency proceedings, and that all creditors within the same insolvency class are treated equally. The implementation of the bail-in tool may lead to a situation where creditors of a particular insolvency class contribute to the institution’s loss absorption and recapitalisation at the same time, i.e. the market value of shares received in conversion is lower than the receivable from the instruments concerned. Therefore, if the bail-in tool is to be implemented on the basis of a provisional Valuation 2, the CNB may deem it appropriate to distribute to such creditors, along with shares, also securities that can be converted into shares or debt instruments issued by the institution (“certificates of entitlement”), so that the losses to be borne by these creditors correspond to the outcomes of the independent Valuation 2.
5	CNB	Straight after the bail-in decision is issued, the CNB will inform the failing institution, the Central Securities Depository Prague (“CDCP”) and other (I)CSDs where applicable about its relevant attributes. The CNB’s communication will contain, but is not limited to, information on: the instruments subject to the bail-in tool implementation, including the treatment each instrument is to receive; the parameters of the instruments to be issued in the process of bail-in implementation (e.g. type, quantity and face value); the conversion rates per instrument and insolvency class, i.e. the rate to be used for conversion into shares of the institution. Where the bail-in implementation process requires new shares to be issued by the institution, these will be issued and registered at the CDCP. If the CNB requires the institution to issue certificates of entitlement, these will be issued and registered primarily at the CDCP, and their transferability will not be limited.
6	Failing institution	Based on the information on the scope and process of the bail-in implementation, the failing institution will prepare all the necessary information and documents, which will then be made available to the bail-in agent.
7	Bail-in agent	The bail-in agent will process the information and documents prepared by the failing institution into electronic instructions, which will be transmitted to the CDCP and, where relevant, to the (I)CSD or other persons maintaining registers of the instruments concerned.
D	CDCP	The CDCP, on the basis of the electronic instructions received, will process the write-down and conversion of the instruments concerned, as a result of which: the original instruments (whether shares or instruments representing institution’s debt): will be cancelled: where these instruments are no longer needed for the successful completion of the bail-in process; or their face value will be reduced accordingly: where part of the instruments are to remain issued either at the time of the bail-in implementation or as a result of compensation according to the independent Valuation 2 shares and, where applicable, certificates of entitlement will be distributed to the creditors affected by the implementation of the bail-in tool. For instruments registered in the CDCP, the CDCP will, in accordance with the instructions received, exchange these instruments for an appropriate number of shares and, where relevant, also certificates of entitlement directly on the owners’ accounts where the original instruments are registered at the time just before the bail-in execution. For instruments registered in the ICSD, the CDCP will, in accordance with the instructions received, credit the corresponding number of shares and, where relevant, also certificates of entitlement to the owner’s account of the relevant ICSD. For instruments registered in other records or registers, the CDCP will, in accordance with the instructions received, credit the corresponding number of shares and, where relevant, also certificates of entitlement to the designated owner’s account of the bail-in agent. Where certificates of entitlement have been used, these will be converted into shares or instruments representing the debt of the institution using the conversion rates corresponding to the outcomes of the independent Valuation 2. The conversion will be performed by the CDCP, in accordance with the instructions received, directly on the owners’ accounts where the certificates of entitlement were registered just before the exchange.
E	ICSD	ICSD, on the basis of the electronic instructions received, will process the write-down of the instruments concerned, as a result of which: the original instruments: will be cancelled: where these instruments are no longer needed for the successful completion of the bail-in process; or their face value will be reduced accordingly: where part of the instruments are to remain issued at the time of the bail-in implementation; the corresponding number of shares and, where relevant, the certificates of entitlement will be credited to the owners’ accounts in the follow-up records maintained by the ICSD
8	CDCP/ICSD/ Custodian	The CDCP, using the standard means of communication, will inform the owners’ accounts’ beneficiaries about all the transactions that took place on all the relevant owner’s accounts with the CDCP. The owners’ accounts’ beneficiaries will inform their clients where applicable.
F	Bail-in agent	The bail-in agent, based on information and documents from the failing institution, will maintain a list of real owners of the shares and, where applicable, the certificates of entitlement that have been credited to the dedicated bail-in agent’s owner’s account with the CDCP. The bail-in agent will inform the real owners from the list above and invite them to provide instructions according to which these securities can be transferred to the corresponding owners’ accounts (held either directly with the CDCP or in the follow-up records maintained by a CDCP`s participant).
9	Shareholders	Beneficiaries of securities that are held on a bail-in agent’s owner’s account will instruct the bail-in agent to transfer the corresponding amount of securities to the owners’ accounts of their choice.

^[1] Available online at https://www.fsb.org/2018/06/principles-on-bail-in-execution-2/

^[2] Available online at https://srb.europa.eu/en/content/guidance-bail-international-debt-securities

^[3] The CNB, no later than on the day of the publication of the decision on the execution of the bail-in tool, will publish on its website a call for claims for compensation pursuant to Section 177 RRA.