Recovery and resolution planning for German banks

Article 5 BRRD and section 12 of the Sanierungs- und Abwicklungsgesetz require an institution to draw up and maintain a recovery plan, approved by the management body and reviewed at least annually and after any change that affects it. The plan sets out the measures the bank could take to restore its financial position after a significant deterioration, without assuming extraordinary public support.

Its working parts are the indicators and the escalation ladder. Indicators cover capital, liquidity, profitability, asset quality, market conditions and macroeconomic variables, each with a threshold. Crossing one triggers an assessment and a decision at a named level, not an automatic action, and the plan says who decides and how fast. The measures themselves have to be credible: a capital increase has to be plausible in the scenario in which it would be needed, and a disposal of a business line needs an estimated timeline and a buyer universe.

Institutions with simplified obligations exist. BaFin may reduce the content and frequency for a bank whose failure would not have a significant effect, which covers much of the German small-bank sector, and the institutional protection schemes of the savings banks and cooperative banks change the picture further.

Articles 10 and 15 BRRD put the resolution plan with the resolution authority, which draws it up after consulting the supervisor and the institution. The plan sets the resolution strategy: whether the group would be resolved at a single point of entry through its parent, or at multiple points, and which of the resolution tools would be applied.

Inside the plan sits the resolvability assessment, which asks whether the strategy could actually be executed. The authority identifies impediments and can require the bank to remove them, including changes to its legal structure, its funding arrangements, its service contracts and its information systems. That power is the reason resolution planning generates work inside a bank even though the plan belongs to someone else: the bank supplies the data and then implements the fixes.

The split follows supervision. The Single Resolution Board in Brussels is the resolution authority for significant institutions in the banking union and for cross-border groups, and it draws up their resolution plans in cooperation with the national authorities. BaFin acts as the national resolution authority for the remaining German institutions, the less significant ones, and executes decisions the SRB takes for the banks in its remit.

Germany reorganized this once already: resolution sat in the Bundesanstalt für Finanzmarktstabilisierung until its tasks moved to BaFin, which now holds both supervision and national resolution with internal separation between them. For a bank the practical question is which authority writes its plan, sets its MREL and runs its resolvability dialogue, and the answer follows directly from its supervisory classification.

MREL is the minimum requirement for own funds and eligible liabilities, set per institution by the resolution authority under Regulation (EU) 806/2014 and the BRRD. It has two components: a loss absorption amount, broadly the bank's capital requirement, and a recapitalization amount, enough to restore the bank to the requirements it would need after resolution and to maintain market confidence. It is expressed both against risk-weighted assets and against the leverage exposure measure, and the binding figure is whichever bites.

Eligibility is strict. An instrument counts only if it is issued and paid up, has a remaining maturity of at least one year, is not a deposit with preference, is not a derivative and is not funded by the institution itself. The SRB's MREL policy also sets a subordination requirement, so that a portion of MREL sits below ordinary senior liabilities in the creditor hierarchy. For a subsidiary the authority sets internal MREL, which is issued to the parent so that losses travel up the group to the resolution entity without the subsidiary itself entering resolution.

This is where the German senior non-preferred instrument comes from: a bank needs liabilities that can take losses before operating liabilities and deposits, so it issues debt that sits in a defined rank for exactly that purpose.

Bail-in means writing down or converting liabilities so that the bank's own creditors absorb the loss, replacing the taxpayer-funded rescues of the financial crisis. The order is fixed: common equity first, then Additional Tier 1, then Tier 2, then subordinated debt that is not regulatory capital, then senior liabilities in their statutory rank.

Section 46f of the Kreditwesengesetz sets the German rank among senior liabilities. Senior non-preferred debt instruments, meaning unsecured bonds that meet the criteria in that provision, rank below other senior unsecured claims and are bailed in before them. Deposits enjoy a further preference, with covered deposits protected by the guarantee scheme and certain deposits of natural persons and small enterprises ranking above other senior claims. Derivatives, secured liabilities and short-dated interbank liabilities are excluded or treated separately.

Knowing the rank of your own holding is therefore the practical question for a treasury or a fund that buys bank debt, because two bonds from the same issuer with the same coupon can sit on opposite sides of a bail-in line.

Article 37 BRRD gives the authority four. The sale of business tool transfers shares or assets to a private purchaser without shareholder consent. The bridge institution tool moves the viable parts into an entity controlled by the authority until a buyer is found. The asset separation tool moves impaired assets into an asset management vehicle, and it may be used only together with another tool. The bail-in tool writes down and converts liabilities as described above.

The tools can be combined and are chosen to meet the resolution objectives: continuity of critical functions, financial stability, protection of public funds, and protection of covered depositors and client assets. A resolution decision also has to respect the principle that no creditor ends worse off than it would have been in normal insolvency proceedings, which is why a valuation sits at the center of any real case.

The SRB's Expectations for Banks describe the capabilities a bank needs for its resolution strategy to be executable, across six areas. Governance, meaning the decision-making and escalation that would run a resolution. Loss absorption and recapitalization capacity, meaning MREL and its internal distribution. Liquidity and funding in resolution, meaning the ability to measure and report liquidity positions at short notice and to identify collateral. Operational continuity, meaning a mapping of the services that support critical functions and contracts that survive a resolution. Access to financial market infrastructures, meaning payment, clearing and settlement arrangements that do not terminate. And information systems and management information, meaning the ability to produce a valuation data set on demand.

Operational continuity and the service mapping are the ones that reach deepest into the bank, because they require an inventory of internal and external services per critical function, with the contract, the cost and the substitutability of each. A bank that outsources a core function with a contract that terminates on insolvency has an impediment the authority will ask it to remove, which connects this work to the ICT third-party rules under DORA.