The Recovery and Resolution Directive (RRD) consists of 3 key elements: preparation, early intervention and resolution.
To prepare for situations that could lead to financial stress or failure, 2 plans must be drawn up. These detail how such situations would be dealt with if they were to arise.
- Recovery plan: firms must submit a recovery plan to their competent authority. The plan will then be reviewed by that authority.
- Resolution plan: the resolution authority will draw up a resolution plan for each firm based on the information which firms must provide.
If the authorities identify obstacles to resolvability during this planning process, they can require a firm to take appropriate measures, such as requiring changes to be made to their corporate or legal structure.
2. Early intervention
A firm is deemed to face financial distress if it is in breach of, or is about to breach, certain requirements (referred to as ‘triggers’). In this situation, the competent authority may intervene. It has a choice of course of action. These include:
- replacing the firm’s management
- requiring the firm to draw up an action plan to mitigate the problems
- implementing part, or all, of the firm’s recovery plan, and
- moving the firm into the resolution phase.
If a firm is failing or likely to fail and there is no reasonable prospect of alternative private sector recovery measures, the resolution authority must decide whether to use its tools and powers. Resolution tools at its disposal include:
- selling or merging the business with another firm
- setting up a temporary bridge bank
- transferring the assets to a separate vehicle, and
- writing down and converting the liabilities (bail-in)
Figure 1: the 3 phases, the authorities responsible and the tools or powers available.
Key: CA – competent authority; RA – resolution authority.
The diagram does not contain an exhaustive list of requirements or tools available but is merely illustrative.