The Bank Recovery and Resolution (No. 2) Order 2014

CHAPTER 1 U.K. Determination of minimum requirement for an institution

Interpretation of Chapter 1 U.K.

121.—(1) In this Chapter—

[F1 “covered bond” means a regulated covered bond within the meaning of regulation 1(2) of the Regulated Covered Bonds Regulations 2008; and;]

“relevant institution” means an institution, other than a mortgage credit institution, which is authorised by the PRA or FCA and is not part of a group subject to supervision on a consolidated basis in accordance with [F2 the capital requirements regulation and CRR rules].

(2) “Mortgage credit institution” means an institution—

(a) which does not have permission under Part 4A of FSMA to carry on the regulated activity of accepting deposits (within the meaning given by section 22 of that Act, read with Schedule 2 and any order under section 22); and

(b) whose lending—

(i) relates to an agreement under which the obligation of the borrower to repay is secured, or is to be secured, by a legal mortgage on land; and

(ii) is financed by covered bonds M1 .

Textual Amendments

F1 Words in art. 121(1) inserted (31.12.2020) by The Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 (S.I. 2018/1394), reg. 1(2), Sch. 3 para. 66(a); 2020 c. 1, Sch. 5 para. 1(1)

F2 Words in art. 121(1) substituted (1.1.2022) by The Financial Services Act 2021 (Prudential Regulation of Credit Institutions and Investment Firms) (Consequential Amendments and Miscellaneous Provisions) Regulations 2021 (S.I. 2021/1376), regs. 1(3), 19(8)

Marginal Citations

M1 For the meaning of “covered bond” see the recovery and resolution directive, Article 2.1, point (96).

Duties of the Bank in relation to minimum requirement U.K.

122.—(1) The Bank must exercise the powers conferred by section 3A of the Banking Act 2009 M2 (removal of impediments to the exercise of stabilisation powers etc)—

(a) to ensure that a relevant institution is required at all times to maintain a minimum requirement for own funds and eligible liabilities F3 ...; and

(b) with the object of ensuring that at all times the institution meets the minimum requirement specified in a direction given for that purpose.

F4 (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F3 Words in art. 122(1)(a) omitted (28.12.2020) by virtue of The Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020 (S.I. 2020/1350), regs. 1(2), 45

F4 Art. 122(2) omitted (31.12.2020) by virtue of The Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 (S.I. 2018/1394), reg. 1(2), Sch. 3 para. 67; 2020 c. 1, Sch. 5 para. 1(1)

Marginal Citations

M2 Section 3A was inserted by S.I. 2014/3329.

Determination of minimum requirement U.K.

123.—(1) This article applies for the purpose of the determination by the Bank of the minimum requirement for own funds and eligible liabilities.

(2) The amount of the relevant institution's total liabilities must include total liabilities under any derivative contracts held by the institution.

(3) An assessment of total liabilities under a derivative contract must take account of the rights of the parties to the contract to set off or net under a title transfer collateral arrangement, set-off arrangement or netting arrangement (within the meaning given by section 48(1)(b), (c) and (d) of the Banking Act 2009).

(4) [F5 An eligible liability must be excluded] from the amount of the relevant institution's [F6 own funds and eligible liabilities] if—

(a) the instrument that creates the liability is not issued or fully paid up;

(b) the liability is owed to, or secured or guaranteed by, the institution itself;

(c) the purchase of the instrument that creates the liability was funded directly or indirectly by the institution itself;

(d) the liability has a remaining maturity of less than one year;

(e) the liability arises from a derivative contract held by the institution;

(f) the liability arises from a deposit in respect of which the depositor's rights, in any proceedings relating to the insolvency of the institution, would be preferred to the rights of other creditors; or

(g) the instrument that creates the liability is governed by the law of a third country and the Bank is not satisfied that a decision by the Bank to convert or write down the liability would be effective under that law.

(5) For the purpose of paragraph (4)(d), where the instrument that creates the liability confers on a party to the instrument a right to the repayment of a sum before maturity, the maturity date is the first date on which that party would become entitled to repayment if the right were exercised.

(6) The determination must be based on an assessment of the [F7 following criteria—

(a) the need to ensure that the relevant institution can be resolved by the application of the resolution tools including, where appropriate, by making special bail-in provision within the meaning of section 48B of the Banking Act 2009, in a way that meets the special resolution objectives;

(b) the need to ensure, in appropriate cases, that the relevant institution has sufficient eligible liabilities to ensure that, if mandatory reduction provision within the meaning of section 6B of the Banking Act 2009 or special bail-in provision were made—

(i) losses could be absorbed; and

(ii) the capital ratio and, as applicable, the leverage ratio, of the relevant institution could be restored,

to a level necessary to enable it to continue to comply with the conditions for authorisation under Part 4A of FSMA and to continue to carry out the activities for which it is authorised;

(c) the need to ensure that, if the resolution plan anticipates that certain classes of eligible liabilities might be excluded from bail-in under section 48B(10) of the Banking Act 2009 or that certain classes of eligible liabilities might be transferred to a recipient in full under a partial transfer—

(i) the relevant institution has sufficient other eligible liabilities or own funds to ensure that losses could be absorbed; and

(ii) the capital ratio and, as applicable, the leverage ratio, of the relevant institution could be restored,

to the level necessary to enable it to continue to comply with the conditions for authorisation under Part 4A of FSMA and to continue to carry out the activities for which it is authorised;

(d) the size, the business model, the funding model and the risk profile of the relevant institution; F8 ...

(e) the extent to which the failure of the relevant institution would have adverse effects on financial stability, including, due to its interconnectedness with other institutions or entities or with the rest of the financial system, through contagion to other institutions or entities;] [F9 and

(f) relevant assessment criteria specified in any Commission Regulation containing regulatory technical standards adopted by the European Commission under Article 45.2 of the recovery and resolution directive, so far as they are retained EU law.]

(7) The Bank must make that assessment in consultation with the appropriate regulator.

[F10 (8) The Bank may make technical standards relating to assessment criteria upon which it must base a determination of the minimum requirement for own funds and eligible liabilities under this article, article 126 or article 135.]

Textual Amendments

F5 Words in art. 123(4) substituted (16.12.2016) by The Bank Recovery and Resolution Order 2016 (S.I. 2016/1239), arts. 1(2), 41(14)(a)

F6 Words in art. 123(4) substituted (16.12.2016) by The Bank Recovery and Resolution Order 2016 (S.I. 2016/1239), arts. 1(2), 41(14)(b)

F7 Words in art. 123(6) substituted (28.12.2020) by The Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020 (S.I. 2020/1350), regs. 1(2), 46

F8 Word in art. 123(6)(d) omitted (31.12.2020) by virtue of S.I. 2018/1394, Sch. 3 para. 68(2)(a) (as substituted by The Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020 (S.I. 2020/1350), regs. 1(2), 77(4)(a))

F9 Art. 123(6)(f) and word inserted by S.I. 2018/1394, Sch. 3 para. 68(2)(b) (as substituted) by The Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020 (S.I. 2020/1350), regs. 1(2), 77(4)(a))

F10 Art. 123(8) inserted (31.12.2020) by The Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 (S.I. 2018/1394), reg. 1(2), Sch. 3 para. 68(3); 2020 c. 1, Sch. 5 para. 1(1)

Review of minimum requirement U.K.

124.—(1) The Bank must review the minimum requirement for own funds and eligible liabilities when, in accordance with Chapter 4 of Part 5, it reviews the resolution plan (within the meaning given in Chapter 1 or 3 of that Part) adopted for the relevant institution.

(2) Article 123 applies for the purpose of the review, but paragraph (6) of that article has effect for that purpose as if the reference to the determination (of the minimum requirement for own funds and eligible liabilities) were a reference to the re-determination of the requirement on review.