If an institution is facing difficulties and if the conditions for resolution are met, one potential resolution strategy is to order the application of different resolution tools on their own or in combination in order to address the crisis. One of these is the bail-in. It consists of the write-down and conversion of relevant capital instruments and the bail-in tool. The institution’s losses are borne by cancelling shares or reducing the nominal amount or outstanding amount of liabilities, and the institution is recapitalised by converting liabilities into new shares. This allows functions that are important for the financial

A bail-in becomes legally effective with the issuance of the resolution order. This is an administrative decision in the form of a general administrative act. Following this, the institution concerned and the financial market infrastructures must implement it rapidly in their systems in order to create transparency and security for the institution itself and for market participants. There is an internal and an external side to technical implementation of a bail-in (see info box “Implementing a bail-in internally and externally”).

Implementing a bail-in in the context of MaBail-in

BaFin issued its Minimum requirements for implementing a bail in (MaBail in) on 4 July 2019, thereby creating a consistent framework. In the MaBail-in, BaFin sets out what it expects in terms of the information to be provided and cooperation by the institutions (see expert article on the BaFin website dated 18 March 2019). The MaBail in is a circular that describes the minimum requirements for information to be provided and the technical and organisational resources of the institutions in a five-step process (see info box “Five steps for a bail-in in the event of a crisis”

Whereas steps 1, 3 and 5 must be implemented and prepared by the institution itself, responsibility for preparing and implementing steps 2 and 4 lies with the resolution authority. It factors in the results of the valuation for the purposes of resolution under sections 69 to 75 of the Recovery and Resolution Act (Sanierungs- und Abwicklungsgesetz – SAG). The MaBail-in sets out the minimum requirements that must be satisfied in terms of information to be provided by the institutions to enable the calculation (step 2) and the preparation of the resolution order (step 4) to be performed correctly.

The MaBail-in only stipulates the timing of the internal and external implementation of the bail-in (step 5), because internal implementation is specific to the institution and other, external parties are involved in external implementation. To enable the processes and the exchange of information for the external implementation of the bail-in between all parties involved to run as efficiently as possible, BaFin developed the Guidance Notice on external implementation of a bail-in with the participation of Clearstream Banking Frankfurt (CBF), WM Datenservice and the Frankfurt Stock Exchange. It is designed to help the institutions to translate the MaBail-in into an efficient, coordinated procedure in order to minimise the individual additional effort.

Consistent framework for external implementation

The objective of the Guidance Notice corresponds to the objective of the MaBail-in: to enhance the resolvability of the banks in relation to a bail-in. The Guidance Notice describes potential processes and information requirements so that the institution can implement the bail-in together with the financial market infrastructures as effectively and efficiently as possible (see info box “Addressees of the Guidance Notice”).

Current Guidance Notice covers default case scenario

The Guidance Notice describes the overall process of the external bail-in implementation and the information requirements in the Federal Republic of Germany that BaFin and the other parties involved so far in preparing the Guidance Notice (CBF, WM Datenservice and Frankfurt Stock Exchange) consider to be the most efficient.

The Guidance Notice currently addresses a default case scenario that BaFin will successively expand by adding further levels of complexity.

In order to implement a bail-in externally as effectively and efficiently as possible, the institution must be in a position to transfer without delay all the necessary information into a format that can be processed automatically and provide it to the financial market infrastructures. It must also ensure that the process defined for technical implementation is as precise and reliable as possible. If the institution follows the Guidance Notice, it will ensure optimum coordination with the financial market infrastructures on the basis of standardised procedures derived from day-to-day business operations. The Guidance Notice supplements MaBail-in by expanding on the data requirements, processes and technical and organisational resources in the final step of the overall process: implementing the bail-in externally.

Information requirements for implementing a bail-in externally

The resolution authority and the institution make all the necessary information available to enable the financial market infrastructures to implement the bail-in externally.

The resolution order stipulates the information that must be provided by the resolution authority. It constitutes the legal basis for technical implementation. For a bail-in, it includes information about cancelling shares, for example, the write-down and conversion percentages to be applied, the conversion rates per liability category, information about the creation of new shares and, if applicable, an order suspending trading on the regulated market.

BaFin publishes the resolution order on its website and also sends it to the central securities depository, the stock exchange and the national ISIN/WKN issuing agency (the National Numbering Agency). In Germany, WM Datenservice issues the International Securities Identification Number (ISIN) and the German securities identification number (WKN). Additionally, if suspension of trading on the regulated market is scheduled for the same day, the stock exchange must receive the necessary information at least one hour before the market opens.

To ensure the further technical implementation by the central securities depository and WM Datenservice as quickly as possible, the institution must convert the resolution order into a technically agreed format and append supplementary information. The documents include the instruction letter, technical guidelines and a list of instruments with detailed information.

Institution provides key documents

The institution uses the instruction letter to instruct the central securities depository to implement the bail-in on the basis of the resolution order. The bank sends the instruction letter and the attachments directly to the central securities depository, with copies to the National Numbering Agency. The resolution order is legally binding and the bail-in must be implemented in accordance with it by all parties involved, but the necessary instruction of the central securities depository by the institution requires receipt of the instruction letter.

The technical guidelines summarise the technical measures to be applied in respect of the affected liabilities. The institution and the National Numbering Agency are responsible for publishing the technical guidelines. This allows all market participants to be informed about the effects on the instruments concerned and means that they all have the same level of information.

The detailed lists contain information for each instrument about the bail-in actions that affect it and how they must be technically implemented. The format enables the central securities depository and the National Numbering Agency to automate the bail-in to the greatest extent possible.

Steps for implementing a bail-in externally

In a textbook case, the overall process of implementing a bail-in externally is divided into twenty operational steps and takes five working days. The Guidance Notice summarises the process steps starting on page 18, together with the related communication interfaces and information about the exchange of information.

Day of the publication of the resolution order

(1) Announcement of the resolution order: BaFin prepares the resolution order on the basis of the calculations performed. It publishes the order on its website and also sends it to the central securities depository, the stock exchange and the National Numbering Agency. The resolution order may contain an order suspending trading of the securities issued by the institution on the regulated market.

Day 1 after publication of the resolution order

(2) Suspension of trading: If ordered, the stock exchange suspends trading of the securities quoted on the regulated market without undue delay following receipt of the resolution order. Trading in these instruments on the regulated market is then no longer possible. The stock exchange tells the National Numbering Agency about the suspension of trading and also publishes the information on its website.

(3) Settlement blocking: If necessary, the central securities depository can decide to impose settlement blocking for the instruments affected by the bail-in. Open transactions in these instruments will then no longer be concluded.

(4) Suspension of trading in the data stock and ISIN generation: The National Numbering Agency adjusts the status of the affected securities in the data stock and also generates the ISIN/WKN for the new shares resulting from the conversion of liabilities into shares.

(5) Generation of instruction letter: Based on the resolution order and in consultation with the central securities depository and the National Numbering Agency, the institution generates and transmits the documents needed by the financial market infrastructures to implement the bail-in externally.
Day 2 after publication of the resolution order

(6) Adjusting the data stock: Based on the information received from the resolution authority and the institution, the National Numbering Agency adjusts the data stock for the securities affected by the bail-in. The National Numbering Agency forwards the adjusted data in particular to the central securities depository and the stock exchange.

(7) Preparations for technical implementation: The systems of the central securities depository are prepared on the basis of the available data stock.

(8) Notification of the features of new shares: For the issuance of new shares, BaFin prepares a brief notification to inform the stock exchange about the features of the new shares to be introduced (e.g. ISIN, type and class).

(9) Listing of the new shares: Based on the notification by BaFin, the stock exchange initiates the listing process for the new shares in the trading systems and hence prepares them for trading.

(10) Creation of a global note: Although the new shares have been created legally, a global note is necessary for technical creation of the shares at the central securities depository. The institution is responsible for creating the global note.

Days 3 to 4 after publication of the resolution order

(11) Technical implementation: The central securities depository implements the bail-in in its systems using predefined technical scenarios. This involves the technical cancellation of old shares, the reduction of the nominal amount of the affected securities and the technical creation of new shares.
Day 5 after publication of the resolution order

(12) Custodian banks: Following technical implementation, the central securities depository records the bail-in in the securities accounts of its customers (custodian banks of the affected creditors and shareholders).

(13) Conversion of instruments not held by central securities depositories: Because the central securities depository does not keep any information in its own systems about the holders of these instruments (e.g. borrower's note loans), the new shares resulting from conversion cannot be recorded directly in the corresponding securities accounts. Instead, the shares are entered in a transit account that is managed either by the institution itself or by an administrator. The administrator’s job is to record the new shares resulting from conversion of the affected instruments in accordance with a list containing the securities account details of the relevant holders that has to be prepared by the institution.

(14) Recording by custodian banks I: Triggered by the recording of the bail-in by the central securities depository in the securities accounts of its participants (custodian banks), the custodian banks in turn record the bail-in in the securities accounts of their customers (i.e. the affected shareholders and creditors).

(15) List with securities account details: The institution forwards the list of holders of affected borrower's note loans and registered bonds to the administrator of the transit account (this step is not necessary if the institution administers the transit account itself).

(16) Alllocation of new shares held in the transit account: Following this, the administrator of the transit account arranges the allocation of the new shares to the securities accounts of the affected holders of borrower's note loans and registered bonds.

(17) Recording by custodian banks II: The custodian banks of the affected holders of borrower's note loans and registered bonds inform their customers about the bail-in and record the new shares in their securities accounts.

(18) Order to resume trading: If suspension of trading was previously ordered, the resolution authority separately orders trading to be resumed.

(19) Resumption of trading: Based on this, the stock exchange resumes trading in the instruments previously affected by the suspension of trading. The quotation process for the new shares commences at the same time, allowing them to be traded on the stock exchange.

(20) Arrangements for fractional amounts: If conversion results in fractional shares, arrangements for adjusting for them can be implemented. These arrangements serve to minimise the number of fractions by allocating matching buy and selling orders by the new shareholders.

Proportionate approach in the Guidance Notice

Although the default case scenario does not cover the full spectrum of all possible cases, it nevertheless describes the starting point for implementing a bail-in externally and thus establishes a consistent basis for all institutions that will be familiar to the corresponding financial market infrastructures and market participants.

As a matter of principle, the Guidance Notice and the higher-level MaBail-in follow a proportionate approach: the basic framework is provided consistently and centrally for all institutions, but has to be specified in greater detail and supplemented by further, institution-specific aspects, where this is necessary.