NORDIC & EUROPEAN COMPANY LAW

LSN Research Paper Series

No. 15‐04

The Recovery Framework in the BRRD and its Effectiveness

By Hu Chen Chen, University of Copenhagen

Consortium members:

Department of Law, Aarhus BSS, Aarhus University, Denmark

FOCOFIMA ‐ Faculty of Law ‐ University of Copenhagen, Denmark
Department of Commercial Law ‐ Jönköping International Business School, Sweden
Department of Private Law ‐ Faculty of Law, University of Oslo, Norway
Faculty of Law ‐ University of Turku, Finland
Department of Law – University of Southern Denmark, Denmark

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 The Recovery Framework in the BRRD and Its Effectiveness
By HU CHEN CHEN
University of Copenhagen

Abstract: the EU has made great endeavors in establishing a bank resolution

procedure after the global financial crisis (GFC). In April 2014 the directive on
establishing a framework for the recovery and resolution of credit institutions and
investment firms (referred to as The Bank Recovery and Resolution Directive, the
BRRD) was finally adopted, which set up the basic framework for the resolution
regime in the EU. The BRRD includes a three‐step resolution framework: recovery
and resolution planning, the early intervention, and the resolution. This article
analyses the effectiveness of the pre‐resolution recovery framework, including the
intra‐group support, recovery and resolution planning, and the early intervention in
the wake of bank failures, such as Lehman Brothers fall. It aims at assessing to
which extent the new recovery framework enhances the resilience of banks and
facilitates orderly resolution procedure of failing banks.

Keywords: intra‐group support, recovery and resolution planning, early

intervention

Introduction
The banking sector is supposed to provide intermediation services to the
development of the substantial economy. But before the global financial crisis in
2008, the size and scope of business activities carried out by this sector has grown
at an unprecedentedly irrational speed, which was, to a certain extent, in excess of
the need real economy. For instance, statistics reveal that the size of the EU banking
sector by total bank assets was € 42.9 trillion in 2010, which is 349% of the total
GDP of the EU, with the total assets of top 10 banks accounted for 122% of the
overall European Union(EU) GDP. In comparison, the overall size of the US banks
was $ 8.6 trillion, which was about 78% of the size of the country’s total GDP, with
the top 10 banks equate to 44% of the country’s whole GDP.1 Activities of many
banks in the EU have developed from being only traditional deposit taking banks to
so‐called universal banks, providing one‐stop shop services to its customers.2 The

1
European Commission, COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT
Accompanying the document Proposal for a Regulation of the European Parliament and of the Council on
structural measures improving the resilience of EU Credit Institutions and the Proposal for a Regulation of
the European Parliament and of the Council on reporting and transparency of securities financing
transactions, SWD/2014/030 final. (Jan 29,2014), p. 8.
2
The universal banks basically referred to banks engaging not only in deposit taking activities, but also
investment banking activities and trading activates that reserved by investment banks and securities firms.
This banking model emerged gradually after the enactment of the Second Banking Directive, 89/646/EEC

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traditional banks have evolved from providing only core banking services to large,
complex and interconnected banking group carrying out an all‐encompassing set of
activities. These new activities include not only the core banking services, such as
taking deposits and providing credit, but also investment banking, asset and wealth
management services, market making services, brokerage services, trading activities,
securitization, investing and sponsoring private equity fund and hedge funds etc.3

This article focuses on the problems relating to the universal banking model ‐ the
lack of resolvability of banks. The prevalence of the universal banking model within
the EU has contributed to the problems of banks becoming ‘too big to fail’ (TBTF),
“too complex to fail” and “too interconnected to fail”.4 That means banks tend to
take more risk and grow bigger and bigger, regardless of market risks and financial
market fluctuation. When risks taken by the banks materialize, regulators seem
hesitant to let the banks go bankrupt, because they worry about the so‐called
spillover effect, which mainly originate from the size and interconnectedness of the
entire financial industry.

From the perspective of size, it is difficult for any regulator to be determined to

liquidate systemically important financial institutions (SIFIs) due to their enormous
size, many of them are even bigger than the entire GDP of a single Member State of
the EU. 5 In addition, the formidability of a failing large bank stems mainly from the
interconnectedness of the banking industry.6 Firstly, it is because of the intra‐group
link, which includes cross‐shareholdings, trading operations, where one group
entity deal with another group entity, guarantee and commitment, and liquidation
management within the group etc. Secondly, it is because of inter‐bank borrowing.
Banking groups have becoming highly interconnected and dependent on inter‐bank
lending and wholesale funding to fund their extremely fast expansion in different
business activities. In contrast, the taking of deposit as a funding source for banks
has becoming less and less significant7.

On the resolvability problem, this article mainly focuses on the recovery framework
before a resolution procedure is actually triggered. Despite the fact that there have
been the unprecedented activities development and cross border expansion of
banks, the supervision and regulation including resolution mechanisms remain at
the Member States level, where almost all of them still lack efficient resolution
proceedings for banks, especially the TBTF banks.

[1989] OJ L 386/1. See Emilios Avgouleas, THE REFORM OF ‘TOO-BIG-TO-FAIL’BANK A NEW

REGULATORY MODEL FOR THE INSTITUTIONAL SEPARATION OF ‘CASINO’FROM
‘UTILITY’BANKING (2010), p. 14.
3
Liikanen Erkki, ‘High-level Expert Group on reforming the structure of the EU banking sector’ 2 Final
Report, Brussels, p. 13.
4
FSB, ‘2013 update of group of global systemically important banks(G-SIBs)’
<http://www.financialstabilityboard.org/wp-content/uploads/r_131111.pdf?page_moved=1> accessed 25
Febuary 2015.
5
Liikanen Erkki, p. 13.
6
European Commission, p. 11.
7
Liikanen Erkki, pp. 14-15.

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In 2010, the European Commission proposed a EU framework for a bank resolution
fund. According to the proposal, the resolution power is still left in the Member
States’ mandate, but it made a progress to the extent that the common tools used by
member state authorities should be conducted in a coordinated manner to allow
prompt and efficient action in the event of major banking failures, to protect the
overall financial system, and to ensure a level playing field.8 Different from any
other member state resolution reforms, or reforms in other jurisdictions, the
European Commission have to fight for the cross‐border bank resolution at a union
level. The reluctance of member states to give up their sovereignty in bank
resolution to the EU, forces the Commission to fight merely for more coordination
and harmonization in resolution premised on the consensus that the basic
resolution powers should still be reserved within member states’ mandate.9 The
Commission has been pushing through a legislative project to harmonize resolution
powers across the EU Member States at a slow pace. Finally, the BRRD was adopted
in April 2014, which set up the basic framework for the resolution regime.10

This article starts with analyzing the special challenges in dealing with failing banks
and therefore making a case for a resolution mechanism in Part I. Following that, a
detailed analysis is given of all the relevant steps before a real resolution under the
BRRD in part II‐IV: intra‐group support, recovery and resolution planning, and early
intervention. It concludes that, the recovery mechanism would definitely enhance
the resolvability of the EU banks and make a contribution for the coordination of
potential bank resolution in the EU. But as a set of rules aims at harmonization and
approximation of the member‐state‐based resolution regime, its sufficiency can still
be doubted in reality due to lack of political resolution from the member states and
the existence of various practical challenges.

I Challenges to resolvability and the need for resolution

In September 2008, Lehman Brothers Holdings, Inc. filed the chapter 11 protections,
which made the largest bankruptcy proceeding in the US history. With $ 639 billion
in assets, as well as $ 613 billion in debts, and 25,000 employees around the world,
it was the fourth largest investment bank in the US. Its failure triggered the
worldwide terror and ignited the crisis. 11
8
European Commission, Communication from the Commission to the European Parliament, the Council,
the European Economic and Social Committee and the European Central Bank: Bank Resolution Funds,
COM(2010) 254 final. (26 May 2010).
9
Ibid.
10
Council of European Union, Council adopts rules on bank recovery and resolution ( 6 May 2014).
DIRECTIVE 2014/59/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 15 May
2014, establishing a framework for the recovery and resolution of credit institutions and investment firms
and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC,
2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010
and (EU) No 648/2012, of the European Parliament and of the Council [2014] L 173/190/1.(BRRD).
11
Rosalind Z Wiggins, Thomas Piontek and Andrew Metrick, ‘The Lehman Brothers Bankruptcy A’, p. 2.

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Lehman’s bankruptcy posed several challenges to the resolvability of banks and
demonstrated that it is difficult and impractical to use normal bankruptcy or
liquidation procedures to tackle such a large‐scale bankruptcy. Firstly, the
worldwide spill‐over effect of banks’ failure made the lack of regulatory
coordination even more severe12. The news of its failure and file of bankruptcy,
spread instantly to all subsidiaries under Lehman Brothers Holding Inc. Lehman
Brothers Holding Inc., just like other financial consortium or conglomerates, had
sort of centralized management model either for domestic branches or cross‐border
branches.13 That is to say, Lehman Brothers Holding Inc. had central cash and
funding for the financial group as a whole and the failure of the hub triggered the
failure of other branches. Thus, many overseas subsidiaries of Lehman Brothers
Holding Inc., such as branches in Australia, Japan and the United Kingdom, initiated
the bankruptcy proceedings according to different regional rules and regulations.
Besides, due to the interconnectedness of the banking sector as referred above, the
spill‐over effect did not limit within its own group, rather the entire global banking
sector. The normally protracted bankruptcy procedure has no possibility of dealing
with such urgent case to avoid the spill‐over effect.

Secondly, another challenge to the resolvability is the susceptibility of short‐term

credit and derivatives to run. Except for interconnectedness, vulnerability to a bank
run is another reason that caused unprecedented spill‐over effect. With the fall of
Lehman, a run on AIG’s credit default swap followed instantly, and AIG apparently
didn’t have capacity to freeze the run for a single moment. 14

The third challenge to the resolvability is the uncertainty with regard to the
intervention of the regulators in the situation of a crisis. As market environment
deteriorated, Lehman Brothers Holding Inc. was continually searching for various
potential bidders but it did not work, partly due to the uncertainty mentioned. In
2008, it desperately contacted Warren E. Buffett, who turned down its proposal in a
despicable way asserting the frenzy risk piled up in securitization business after
recalling how unnerved he had been in his disappointing $900million investment in
Salomon15. Besides, a consortium of Korean bank as well as Korean Development
Bank also showed interest and originally preferred an cooperation of “clean Lehman”
by spinning off the risky asset from the group, but the two parties didn’t work out a
deal partly because of the risk behind the deal for bidders, and also partly because
of the hesitation of the Lehman management group in the hope of government
intervention, following the precedence of Bear Sterns.

12
The spill-over effect referred to the phenomenon of the failure of one bank brings about contagion effect
to the entire banking industry. See Liikanen Erkki, pp. 4-8.
13
Ibid, pp.52-54.
14
David A Skeel, ‘Single Point of Entry and the Bankruptcy Alternative’ Across the Great Divide: New
Perspectives on the Financial Crisis 14, p. 6.
15
Andrew Ross Sorkin, Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to
Save the FinancialSystem--and Themselves (Penguin 2010), pp. 52-57.

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Fourthly, there are no available resolution tools and powers to deal with a failure
like Lehman. What can be seen from the liquidation proceedings of Lehman
Brothers Holding Inc. was the disorderly liquidation process; unsettling creditors,
shareholders and stakeholders; the chaotic market investors at large; and
subsequently colossal market volatility; which have adversely influenced the
appropriate liquidation entity and depleted large proportion of assets value in the
liquidation entity.16 All of this could have been avoided if the process had been
conducted and managed better.

That said, there have been theoretical and practical debates on the options of
intervention, such as bail out, bankruptcy and resolution. To some extent, these
factors and challenges make bankruptcy less favorable, because when dealing with
failing banks, the bankruptcy has at least two defects which make it difficult to take
on the task: (i) lack of powers and tools; (ii) lack of speed and efficiency to avoid
spill‐over effect in the financial industry.17 A well‐tailored special resolution regime,
however, could show more effectiveness and efficiency than bankruptcy. Under the
BRRD framework, the recovery framework is no doubt a critical part among others
in the three‐step special resolution regime (preparation, early intervention, and
resolution). (See Figure 1). In carrying out the BRRD framework, the above
challenges would test the effectiveness of the recovery framework as well as the
resolution step.
Figure 1

3 Resolution(equity Insolvency (equity

1 Recovery and
Intra‐group support 2 Early intervention level below mininmal level below zero)
resolution planning
level)

II the intra‐group financial support and effectiveness

1 the financial support mechanism

The collapse of Lehman Brothers, to a certain extent, is a telling story indicating the
importance of restricting the intra‐group fund transfer and reducing
interconnectedness to avoid the contagion effect when financial deterioration
actually happen. Be that as it may, it is undeniable that even intra‐group fund could
be a catalyst of contagion in crisis, well managed intra‐group fund transfer could be
of help for the efficient operation of banks and financial groups. Admittedly, the
nature of bank and its business lines determine that it relies its operation on

16
FDIC, The orderly liquidation of Lehman Brothers Holdings Inc. under the Dodd-Frank Act (2011).
17
Kenneth Ayotte and David A Skeel Jr, ‘Bankruptcy or bailouts’ 35 J Corp L 469.

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maturity transformation, which would inevitably increase the leverage ratio of a
bank and cause the desperate need of every funding possibility, including the intra‐
group fund transfer.18 Besides it is convinced that the intra‐group finance could be
of significant importance to some extent when there is liquidity crisis or events alike,
so it is esteemed as an alternative for problem bank recovery19.

In the EU, the regulatory authorities have been considering and debating this issue
very seriously and intensively over the resolution reform before the adoption of the
BRRD and the Single Resolution Mechanism (SRM).20 The problem is how to reach a
balance between preservation of financial stability and restricting intra‐group
financial arrangement to prevent interconnectedness and spill‐over effect. The
Commission had made several proposals with regard to this problem, in the January
2011 proposal; there are provisions on the conditions under which the intra‐group
financial arrangement would be allowed and how to be triggered:21

(1) Reasonable prospect that the support will redress the financial difficulties of
the entity receiving the support;
(2) The objective of support provision is preserving or restoring the financial
stability of the group as a whole;
(3) The financial support should be provided for consideration given to the
entity providing the support by the entity that receives it;22
(4) The financial support can only be provided if it is reasonably certain to
expect reimbursement or the consideration will be paid by the entity
receiving the support;
(5) The provision of financial support does not jeopardize the liquidity or
solvency of the entity providing the support;
(6) The entity providing the support is in compliance when the support is
granted and will continue to be in compliance with at the least the capital
requirements of Directive 2006/48/EC.

Thus, according to this suggestion, in the decision making of intra‐group fund

transfer, the management body of the financial arrangement provider should justify
that the financing provision would for the best interest of itself, with sufficient
consideration in return, and the provision should be sufficiently enough to address
the liquidity distress in the financial arrangement acceptance entity.

18
The fact is that in order to keep functioning continuously, the mass maturity transformation should rely
on a constant short-term funding and efficient market for the sales of assets whenever necessary to
counterweight the ubiquitous market volatility and risks, however, that could not be guaranteed, especially
in the times of crisis. See Emilios Avgouleas, Governance of global financial markets: the law, the
economics, the politics (Cambridge University Press 2012), p.100.
19
DG Internal Market and Services WORKING DOCUMENT, TECHNICAL DETAILS OF A POSSIBLE
EU FRAMEWORK FOR BANK RECOVERY AND RESOLUTION (Jan 6, 2011).
20
European Commission, An EU Framework for Crisis Management in the Financial Sector (October 20,
2010).
21
DG Internal Market and Services , art C4.
22
Avgouleas, Governance of global financial markets: the law, the economics, the politics, p.100, pp.398-
399.

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In the 2014 newly enacted BRRD, there are more detailed provisions about the
intra‐group resolution plan, including the conditions under which the intra‐group
finance would be allowed and triggered, how a joint decision‐making process is to
be carried out,23 how should the proposed agreement be approved,24 and the
detailed procedure to implement an approved agreement.25 Specifically, to make the
group more resilient, the directive requires that a parent institution in any member
state may enter into agreements to provide financial support to the counterparty on
an intra‐group basis if it meets the required condition set26:

(1) A reasonable basis that the financial support it provides to largely address
the financial distress of the receiving entity;
(2) The provision of a better off deal, from both the perspective that it intent to
restore the continuity of the receiving entity as well as to the interest of the
providing party;
(3) The financial provision is on sufficient consideration and there is reasonable
basis to believe that the consideration would be paid;
(4) The provision would neither bring distress to the providing firm, nor create
any market instability;
(5) The provision would not compromise the ability of the providing firm to
meet with prudential regulatory requirement such as capital requirement;
(6) The provision would not undermine the resolvability of the providing entity.

Except the substantial conditions, to limit the intra‐group funding and financing to
be overused or be abused, there is also a procedural requirement. It has to be both
reviewed by the consolidating supervisor and competent authorities involved and
approved by the shareholders meeting27. The general procedure is the following:28

(1) Union parent institution should hand in an application for the initiative of
intra‐group financial arrangement, to the consolidated supervisor, which
should include the proposed agreement and the potential entities who would
be parties in the agreement.
(2) The consolidating supervisor should forward without delay to National
Competent Authorities (NCAs) of the proposed parties, in searching for a
joint decision with regard to the proposed agreement.

23
BRRD, art 20.
24
BRRD, art 21.
25
BRRD, art 24-25.
26
BRRD, art 23.
27
BRRD, art 20. A group financial support agreement shall be valid in respect of a group entity only if its
shareholders have authorized the management body of that group entity to make a decision that the group
entity shall provide or receive financial support in accordance with the terms of the agreement and in
accordance with the conditions laid down in this Chapter and that shareholder authorization has not been
revoked
28
ibid.

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 (3) The consolidating supervisor would, according to the abovementioned
conditions, decide granting or prohibiting the intra‐group financial
arrangement, the competent authorities would also, according to potential
impact of the arrangement on the group as well as the entity, try to make a
joint decision with the consolidated authorities.
(4) Should the joint decision be absent, the consolidate supervisor could make its
own decision irrespective of the competent supervisors’ opinion.
(5) However, the competent supervisor could refer a disagreement to EBA,
whose decision is to be deferred by the consolidated supervisor anyway.

Both the provider as well as the receiver need the decision of the management body
(shareholders) of the respective entities. When it comes to the carrying out of the
agreement, the competent authorities still have the right to eventually oppose it.29
The support could be up‐stream, down‐stream, or cross‐stream according to the
BRRD.30

It appears that the existence of these procedural requirements and substantive

requirements, are all because of the widely accepted belief that the transfer of assets,
especially at the cross‐border level in financial institutions in the absence of group
interest as well as compelling financial stability benefit and business reason, could
be very dangerous and risky. But are these requirements being too restrictive?

2 the group support deficiencies

As discussed above with regard to group support control, the decision making of
intra‐group support is still a joint decision mechanism, seeking for approval by the
consolidating supervisor and joint decision among the involved (NCAs). That makes
it quite likely that the efficiency would be compromised in reality due to practical
reasons. The process seems to be both very protracted and extremely inefficient,
especially in the context of using intra‐group support in the hope of restoring
market confidence31. Imagine the scenarios of fire sale in any confidence crisis in the
GFC; each entity would give a second thought of whether interconnectedness with
others would undermine its own robustness both in financial and structural terms32.
With that in mind, at least the following weakness would be prominent.

Firstly, with regard to the structural separation reform in the EU, there are also
limits to intra‐group support in the Commission’s proposal. The current suggestion

29
BRRD, art 25.
30
BRRD, art 19(5).
31
Michael. Schillig, ‘'Bank Resolution Regimes in Europe: Recovery and Resolution Planning, Early
Intervention, Resolution Tools and Powers'’ vol 24, no. 6 EUROPEAN BUSINESS LAW REVIEW pp.
751, pp. 25-27.
32
In the pre-crisis era, the interconnectedness of banks in the structures of EU banks’ balance sheet was
characterized as one the most important reason in the run up of crisis. Hence, how to keep them from the
contagion effect is a major concern with regard to the intra-group support proposal for all banks. See
Liikanen Erkki, pp. 14-16.

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is that the Core Credit Institutions (CCIs) shall not incur an intra‐group exposure
that exceeds 25% of the CCI eligible capital to an entity that does not belong to same
sub‐group as the CCI.33 In the British Independent Commission on Banking (ICB)
proposal, the intra‐group relationship is restricted to the extent all transactions
should be allowed and conduced on arm length basis34. This will make an extra
restriction to the operation of intra‐group support. Given that the structural reform
is still only a proposal, it is still to be seen to which extent it will restrict the
operation of intra‐group support.

In addition, after the financial crisis, the regulation of banks has been tightened,
both from prudential supervision and structural reform perspective,35 so there does
not seem to be much incentive for these firms to really sign an intra‐group support
agreement in the risk of suffering contagion effect in an adverse market situation.

Secondly, the threshold is very high for the intra‐group support mechanism to be
really triggered. One of the very material one is the group interest condition. The
support is required to be in the best interest of the group entity, and also be helpful
to preserve the financial stability of the group as a whole36. Compared with the
original Commission’s proposal, which focuses on the group interest as a whole on
this matter, the adopted text focuses equally on the interest of support provider37.
Therefore, the group interest would not pre‐empt the group entity ‐ at least, that
would make the decision very complicated. In practice, it is difficult to say to which
extent the proposed support plan should benefit the group entity and the group as a
whole.38 To delineate the balance of group entity interest and the group stability in
practice is really like a consideration of art rather than mere matter of law, which
would require more details and delimitations.

Thirdly, there are many other extra constraints regarding the process of carrying
out of the intra‐group support, such as the capital requirements, risk exposure,
structural requirements etc. 39 These specific rules and requirements need to
conform before an intra‐group support is granted in accordance with the (capital
requirements directive IV) CRD IV and (capital requirements regulation) CRR40.

33
European Commission, Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF
THE COUNCIL on structural measures improving the resilience of EU credit institutions,COM/2014/043
final. (Jan 29, 2014), art 14.
34
Independent Commission on Banking, ‘Final Report , Recommendations.’, p.12 and p. 68.
35
Ever since the proposal in the de Larosiere Report, both the Union authorities and member states
authorities have been adopting more stringent rules on prudential requirement, see generally CRR, Basil
III, see also Jacques De Larosière, The High-Level Group on financial supervision in the EU: report
(European Commission 2009).
36
BRRD, art 23(1)(b).
37
DG Internal Market and Services , art C4.
38
Valia Babis, ‘European bank recovery and resolution directive, recovery proceedings for cross-border
banking groups.’ University of Cambridge Faculty of Law Legal Studies Research Paper Series, PAPER
NO 49/2013.
39
BRRD, art 23(1)(g)-(h).
40
See CRD IV and CRR generally with regard to capital requirements, risk exposure etc.

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Many of them are not strictly applicable rules entangled with member states
disparity and coordination difficulties, for example member state can adopt higher‐
level capital requirements. So, theoretically it is possible that these comparatively
flexible requirements could easily be used to block some potential support.

Fourthly, the competent authorities have the objection right in the implementation
of the intra‐group support, which means, to some extent, they have the final say in
the whole process.41As discussed above, in the aftermath of the GFC, the competent
authorities might be reluctant and lack incentive to actually come into any scheme
of intra‐group support. The lack of incentive and prisoner’ dilemma would possibly
endanger the safety and soundness of the banking sector as a whole against the
backdrop of overwhelming crisis42. Eventually, be mindful that the unpredictability
of the future scenarios, even the firms and entities are strongly encouraged to
overcome the prisoners’ dilemma, the unpredictability of the future risks would still
make them hesitate before any decision to be made.

III The recovery and resolution plan

1 preparing recovery plans and resolution plans

According to the BRRD, the banks in the EU are required to prepare the so‐called
‘living wills’ as an ex‐ante mechanism to tackle with potential risks in banking
segment. Banks are required to prepare both recovery and resolution plan in the EU.
To make a basic delimitation, the recovery plan is basically made by the firm itself,
both at the institution level and the group level, to provide ex‐ante accessible
measures to restore its financial position in case of a significant financial
deterioration.43 That is different from the resolution plan. Actually, the resolution
authorities, either the group resolution authority (together with resolution
authorities of subsidiaries) or the institution resolution authority (in consultation
with relevant supervisors) would prepare the resolution plan to provide resolution
measures that could be taken when the resolution conditions are met.44

Bank institutions are required to maintain a recovery plan providing measures to be

taken to restore financial position following any of its financial deterioration. The
recovery plan will be reviewed and assessed by the NCAs. It could demand the
institutions to submit a revised plan demonstrating how the deficiencies as well as
the impediments to the plan could be addressed. The authority may direct the group
to make specific changes to the plan where the revised plan has not address the

41
BRRD, art 24-25.
42
Ronald Harry Coase, ‘Problem of social cost, the’ 3 JL & econ 1. The prisoner’s dilemma referred to
phenomenon of the difficulties in the choice of private interest and social interest to actually make the
society better off.
43
BRRD, art 5 and art 7.
44
BRRD, art 10 and art 12.

10

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deficiency and impediment to it45. It also has the powers of directing the institutions
to identify changes within a timeframe or take any necessary measure such as
reducing risk profile46.

As referred to above, the recovery plan is both required for institutions as well as
groups to secure the safety and soundness restoring function in case of a distress.47
The group recovery plan would identify all measures, which might be required to be
implemented for the union parent undertaking as well as each individual subsidiary.
In drawing up the plan, the following elements might be critical:48

(1) It should not presume any access to public financial support;

(2) Address clearly how and when, under the relevant conditions in the plan
could they use the central bank facilities;
(3) The available measures when the early intervention is needed;
(4) Clearly define the conditions and procedure by which the recovery process
could be implemented without impediment;49
(5) The plan should contemplate a series of scenarios of severe macroeconomic
and financial distress that would be relevant to the financial condition of the
group.

The plan drafted by the union parent undertaking itself would have to be assessed
by the consolidated supervisor, competent supervisors for subsidiaries, and the
competent supervisors for the significant branches. The assessment and evaluation
is a complicated process, in which the following factors must to be considered50:

(1) The implementation of the measure would be reasonably likely to restore

and maintain the financial position and the practical viability of the firm;
(2) The implementation of arrangement within the group would be reasonably
likely to be quickly and effectively enough to address the financial situation
and avoid to the largest extent the adverse effect that have been predicted in
the plan and all those scenarios;
(3) The assessment should take the capital and funding structure of the firm into
consideration;
(4) Identifying any action in the recovery plan that might have adverse effect.

45
BRRD, art 5-6.
46
ibid.
47
BRRD, art 7(1).
48
BRRD, art 6.
49
Member States shall require that recovery plans include appropriate conditions and procedures to ensure
the timely implementation of recovery actions as well as a wide range of recovery options. Member States
shall require that recovery plans contemplate a range of scenarios of severe macroeconomic and financial
stress relevant to the institution’s specific conditions including system-wide events and stress specific to
individual legal persons and to groups. See BRRD, art 5.
50
BRRD, art 6(2)-(4).

11

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The relevant supervisors have a wide range of powers in the assessment process, as
referred above about the NCAs’ power on assessing institutions’ recovery plan.51 It
could demand the group to submit a revised plan demonstrating how the
deficiencies and the impediments in the plan could be addressed. The authority may
direct the group to make specific changes to the plan where the revised plan has not
addressed the deficiency and impediment to it. If deficiencies still remain or
resubmission fails, the authorities should require the group within a time frame to
identify changes that could be made to its business to address it. If identification
fails, the authorities could also direct the group to make any changes possible to
address the deficiency and impediments. In addition, the group might be required
by the consolidated authorities and the competent authorities to make specific
changes to address deficiencies, for instance, reduce risk profile, recapitalization of
the group, make changes to the funding structure and the capital structure of the
firm.52

The assessment result is decided based on joint decision between a consolidated

supervisor and a relevant NCA, in the absence of which, the consolidated supervisor
can decide the group recovery plan by itself, subject to referral to EBA by other
supervisors. 53 Similarly, the supervisors of individual group subsidiaries or
institutions can also decide by themselves, subject referral to EBA by other
supervisors.54 The above assessment should take into consideration the potential
impact of the recovery plan on the financial stability of all related member states.

As to the preparation of resolution plan, resolution authorities, consulting

competent supervisory authorities, are supposed to prepare resolution plan for
each institution. By doing that it provides the resolution actions with measures
which resolution authorities may take where the institution meets the conditions
for resolution.55

Group resolution authorities and the resolution authorities of subsidiaries, after

consulting the resolution authorities of significant branches should draw up group
resolution plan including both a plan for parent level resolution and resolution
plans for subsidiaries56. The decision of group resolution plan is based on the joint
decision between group resolution authority and other relevant resolution
authorities.

Similarly to the assessment procedure for group recovery, if there is no joint

decision, the group resolution authority would make its own decision subject to EBA
upon request by other authorities57. At the same time, a subsidiary resolution

51
BRRD, art 6(5)-(6).
52
BRRD, art 6(5)-(6).
53
BRRD, art 8.
54
Ibid.
55
BRRD, art 10.
56
BRRD, art 12.
57
BRRD, art 13.

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authority would also make its own decision in the absence of the joint decision as to
the recovery plan for subsidiary under its mandate, subjecting to the EBA upon
request by other resolution authorities58. In order to prepare resolution plans,
resolution authorities may require institutions to provide them with the necessary
information.

2 The RRP deficiencies and its challenges

(a) Weaknesses of the assessment procedure. With regard to the recovery plan
and resolution plan, the noteworthy point is the assessment process. Take the group
recovery plan as the example, and this analysis applies to group resolution plan
similarly. It requires joint decision by the consolidated supervisor and the
competent supervisors59. That does not sound like an efficient decision making
process. It has at least two disadvantages. Firstly, there is the risk of lacking
coordination. The bright side of the group recovery plan is that it also represents the
paradigm shift to coordinated regulation and supervision at the group level to tackle
regulatory problems encountered in the crisis. However, deficiencies still exist. The
group level recovery measures require joint decision, in which the competent
supervisors have great control. Therefore, the lack of coordination and cooperation
still persists.60 In the absence of joint decision, every subsidiary could have its own
recovery plan as well as measures, which might to some extent undermine a real
coordinating recovery plan. However, even when a joint decision is made, it is still
very likely that the plan might lack details in a really coordinated manner, or the
coordinating nature would be compromised in the process of reaching a joint
decision.61

Secondly, the supervision mechanism might not be able to strongly support the
preparation of the plan. The aforementioned group recovery plan as well as its
decision making process obviously rely on the effectiveness of the supervisory
mechanism, which is the Single Supervisory Mechanism (SSM) in the EU. The bright
side about the SSM is that, for bank groups covered by the European Central Bank
(ECB), it could streamline the recovery plan as well as implementation if
necessary.62 Nevertheless, deficiencies still exist due to its scope of application.63 In
terms of scope of application, the SSM excludes application in some institutions in
the first place. There are entities that are not within the SSM, which would make
lacking coordination problem even worse. 64 The fact of sorting out the “less
58
Ibid.
59
BRRD, art 8.
60
Another general concern with regard to the recovery plan is also pointed out that the contemplate
scenarios about possible financial distress and macroeconomic stress could probably be inaccurate in reality,
which could make the recovery plan not efficient at all.
61
Emilios Avgouleas, Charles Goodhart and Dirk Schoenmaker, ‘Bank Resolution Plans as a catalyst for
global financial reform’ 9 Journal of Financial Stability 210, pp. 215-216.
62
SSM regulation, art 4.
63
Eilis Ferran and Valia SG Babis, ‘The European single supervisory mechanism’ University of Cambridge
Faculty of Law Research Paper, pp. 4-6.
64
SSM regulation, art 6(4).

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significant institutions” and keep them within the ambit of national competent
authorities is that they are not significantly enough to the market. However, as
indicated above regarding the special case of bank failing (relating to
interconnectedness and contagion effect), it is undeniable that the outburst of
systemic risk didn’t happened due to risks in SIFIs alone.65

Furthermore, the tension between the ECB and NCAs still persists. Given the subtle
and complicated relationship between the ECB and the member states,
inconsistency could still be evident even within the SSM66. The SSM regulation
specifically points out that single supervision should be carried out without
prejudice to the responsibilities and tasks of the competent authorities that are not
conferred on the ECB.67

(b) Challenges. Except for the weakness of the assessment procedure for plan
making, the implementation of Recovery and Resolution Plan (RRP) might face
many challenges, among which two are obvious, the complexity of banks and
vulnerable political resolution.

Bank institutions are “perhaps the most depiction‐difficult corporations” 68 .

According to professor Hu, highly complex objective reality, which needs to be
depicted in recovery plan and resolution plan, includes two aspects: “true
misunderstanding” and “functional misunderstanding”.69 The former is about the
financial innovation itself, modeling, cognitive bias, mathematical calculation etc.
The latter comes from the complexities of an institution’s organization, size etc. Our
depiction tools might be too limited to capture these complexities, even though they
consist of language, accounting, and many other tools. In addition to the depiction
tools limitation, much of the assessment will depend on whether the requested and
provided data is sufficiently granular and the models used to process these data are
adequate. No one can give a confident answer to this question. So the accuracy of
recovery and resolution planning based on this inaccurate depiction could be
doubted.

In addition, the regulatory agencies in member states do not necessarily have strong
enough incentive to carry out these plans due to competition consideration. The
application of such rules requires an assessment of difficult financial and business
65
The problem of complexity, the market homogeneity and exposure of risk to each other make the
whole banking sector vulnerable, not only the SIFIs. See Iman Anabtawi and Steven L Schwarcz,
‘Regulating Systemic Risk: Towards an Analytical Framework’ 86 Notre Dame L Rev 1349.
66
See Wymeersch Eddy, ‘The Single Supervisory Mechanism or 'SSM', Part One of the Banking
Union(2014) . ’ European Corporate Governance Institute (ECGI) ‐ Law Working Paper No 240/2014
<Available at SSRN: http://ssrn.com/abstract=2397800 or http://dx.doi.org/10.2139/ssrn.2397800>
accessed 23 March 2015, pp. 39‐40.
67
SSM regulation, art 1.
68
See Robert J SCHILLER, The subprime solution (Princeton: Princeton University Press 2008), pp.39-49.
See also Henry TC Hu, ‘Too Complex to Depict-Innovation, Pure Information, and the SEC Disclosure
Paradigm’ 90 Tex L Rev 1601.
69
Hu.

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situation, which regulators tend to be reluctant to make.70 Besides, the relationship
between regulators and bank management do not allow too much confidence in a
rigorous implementation of such rules. Just as Attorney General Eric Holder told
Congress (U.S) on the hesitation of prosecuting banking criminals71:

“It does become difficult for us to prosecute them when we are hit with indications
that if you do prosecute—if you do bring a criminal charge—it will have a negative
impact on the national economy, perhaps even the world economy”.

IV The early intervention

1 the intervention mechanism

Early intervention is a mechanism applied to banks on the brink of a rapid financial

situation deteriorating and it is breaching or is likely to breach the prudential
requirements set by the correspondent regulatory agencies72. It is a group of
measures used to restore a firm in an early phase of distress to maintain efficiency
in recovery. The tools are provided for competent authorities first in the capital
requirement directive (CRD IV), which include the following powers73:

(1) To require institutions to hold its own funds and take steps to increase its
own funds, including asking the institution to use net profits to strengthen
the capital base;
(2) Require institutions to come up a plan to restore compliance of the
supervisory requirements;
(3) To restrict the operation of its business, or even to divest and wind down the
business that would pose excessive risk to the firm; or to reduce the risk
inherent in the activities it committed in;
(4) Restrict or prohibit distributions by the credit institution, to restrict and limit
the variable remuneration that are inconsistent with the risk profile of the
firm;
(5) Impose additional or more frequent reporting requirements, including
reporting on capital and liquidity positions; or require additional disclosure.

The BRRD provides a more detailed map of early intervention. It also expanded the
power of early intervention a little bit. Under the condition that there is a financial
deteriorating situation including deteriorating liquidity, increasing level of leverage,

70
Schillig, p. 22.
71
Jed S. Rakoff, ‘The Financial Crisis: Why Have No High-Level Executives Been Prosecuted?’ NYT
<http://www.nybooks.com/articles/archives/2014/jan/09/financial-crisis-why-no-executive-prosecutions/>
accessed 05 March 2015.
72
Avgouleas, Governance of global financial markets: the law, the economics, the politics, p. 407. See
also CRD IV, Article 102, the measures included in CRD III, art 136 (1).
73
CRD IV, art 104.

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loan default, and over‐concentration of risk exposure etc., 74and the competent
authorities could have following powers at its disposal75:

(1) Demand the management of firm to take necessary measures or

arrangements as set out in the recovery plan or to update the recovery plan if
the situation has changed with regarded to the assumptive one;
(2) Demand the management to assess the situation, identify problems and carry
out certain measures to address the problems;
(3) Demand the culpable or unfit management member to be removed from the
management body;
(4) Demand the management body to come up new plan for restructuring the
debt of the firm to prevent the financial situation of the firm from keep
deteriorating;
(5) Demand that the business strategy to be changed to be in line with changing
situation;
(6) Demand that the legal or operational structural of the firm to be changed;
(7) Require and acquire all necessary material information in order to update
the resolution plan of the firm to keep be prepared for the possible coming
resolution should the early intervention does not work.

The BRRD also provides a specific procedure for the implementation of the early
intervention process and how the intervention process to be triggered, which could
be both at the EU group undertaking level and at the institution level. The decision
should be made either by the consolidating authorities or the competent
authorities76. Besides, the early intervention process could be used into more than
one institution at the same time; in that case, the consolidated authorities as well as
the competent authorities would need to reach a joint decision, with the assistance
of the EBA on request77. However, in the absence of joint decision either the
consolidated authorities or the competent authorities could make their own
decisions78.
2 Assessment of the intervention mechanism

From the above description of the mechanism of early intervention, it shows the
lacking of a consolidated intervention at the group level. In reality, there is hardly
so‐called group early intervention of any kind. Without consistency and
coordination in action, the efficiency of early intervention can be doubted. For
example, although the group entities may come up with an early intervention which
may be extended to more than one institutions in the group, the final decision would
still be decided by the competent authorities, with the assistance of the EBA. In the
constant struggle between the member states and the EU, this tentative move of

74
BRRD, art 27(1).
75
BRRD, art 27(1)(a)-(h).
76
BRRD, art 30(2)-(3).
77
BRRD, art 30(6).
78
BRRD, art 30(4).

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coordination would not be material enough to undermine the reserved power of
competent authorities in resolution.

Similarly to the effectiveness of recovery and resolution plan, the effectiveness of

any pre‐resolution procedure, including the early intervention, will be dependent on
the supervision mechanism. Now that the competent authorities have great control
in the early intervention mechanism, the extent to which different competent
supervisors working together in applying early intervention when necessary would
essentially decide the efficiency of the intervention, especially when it comes to the
cross‐border institutions and group entities that related to many competent
authorities79. As referred above, the fact that the SSM has a series of weaknesses and
flaws would compromise the effectiveness of resolution procedures of any kind. 80
Taking into consideration the leaks, such as its limited scope excluding non‐
significant institutions and insurance institutions, home‐host issue, the cooperation
between the ECB and the NCAs, these factors would all possibly act as impediments
to a coordinated and effective supervision and therefore discredit the effectiveness
of early intervention to some extent.

Conclusion:
The fall of Lehman Brothers left huge challenges to the regulators in dealing with
the failure of banks, especially too big to fail banks. These challenges include the
spill over effect, the susceptibility of derivatives and short‐term credit to bank run,
the lack of certainty, and wanting of resolution powers and tools. They can only
possibly be solved by a resolution regime. The recovery framework is designed as a
preventive tool to avoid the seemingly unpractical resolution and facilitate it in an
unavoidable situation. Therefore its practicality and effectiveness is of critical
importance.

The practical effect of the recovery framework is yet to be tested, depending on the
way it is to be implemented. But addressing the above challenges, it still has some
leaks. Firstly, in the recovery framework where the member states still reserve the
main controlling power in decision making and implementation, the lack of
coordination would still cast strong doubt to the practicality of a speedy and
effective recovery, resolution planning, intra‐group support or early intervention. In
addition, in the aftermath of the crisis, firms and member state regulators will not
necessarily have strong incentive in being involved in procedures such as intra‐
group support and recovery and resolution planning due to competition concern.
Lastly, the effectiveness of the recovery framework would largely depend on the
effectiveness of supervisory mechanism under the SSM, which however has also
been criticized for its defects.

79
Valia Babis, pp. 30-31.
80
Wymeersch Eddy, pp. 25-44.

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