The European Commission (EC) published amendments to its Bank Recovery and Resolution Directive (BRRD 2) at the end of last year that are intended to harmonize the use of moratoria powers by resolution authorities in the European Union. But these amendments – which propose to introduce two new moratoria powers – will put European financial institutions at a severe competitive disadvantage globally, pose significant challenges to
financial stability, and introduce new levels of uncertainty into the recovery and resolution process.
By introducing new moratoria that could significantly extend the period in which obligations are not performed and institutions are prevented from terminating, closing out and netting for nonperformance, the proposed rules would have several key consequences:
- Put institutions subject to the BRRD at a competitive disadvantage, as end users would be less likely to transact with an entity if they can’t terminate for failure to satisfy payment and delivery obligations for a lengthy and potentially indeterminate period.
- Undermine the careful balance between promoting recovery and resolution and ensuring financial stability, and put the bank resolution regime in Europe at odds with the Financial Stability Board’s (FSB) carefully negotiated recommendation for a two business-day limitation on stays.
- Challenge the effectiveness of crucial financial netting and collateral arrangements, by removing the protection provided to them by the Financial Collateral Directive against the effects of national moratoria.
- Result in significant capital and margin increases for institutions subject to the BRRD to cover potential exposures during the longer stay period.
- Trigger opt-out provisions in certain of the ISDA resolution stay protocols – threatening a global industry and regulatory effort to ensure the effective recognition of resolution actions on a crossborder basis.
- Potentially result in disruptive and costly calibrations to the ISDA Standard Initial Margin Model (ISDA SIMM), an industry wide methodology for calculating initial margin for noncleared derivatives.
- Run contrary to the principal objective of the BRRD, as a lengthy freeze on making and receiving payments increases the risk of a bank and its counterparties failing.