Council of the European Union Adopts Creditor Hierarchy, IFRS 9/Large Exposures Rules

The Council of the European Union, as the final result of the trilogue process adopted two legislative acts on banking:

  1. a directive on the ranking of unsecured debt instruments in insolvency proceedings (bank creditor hierarchy); and
  2. a regulation on transitional arrangements to phase in the regulatory capital impact of the IFRS 9 international accounting standard.

The general points of the directive on the ranking of unsecured debt instruments are as follows:

  • It creates a new class of subordinated debt in banks' insolvency hierarchy which would be eligible to meet the internationally agreed TLAC standard for global banks
  • It provides a rapid transposition in to national legal systems, by January 1, 2019 at the latest
  • Contains grandfathering provisions to allow existing national systems and already issued debt instruments still to be valid where they fulfil the conditions

With respect to the phase-in of IFRS 9, its new impairment model may lead to an increase in expected credit loss provisioning and consequential fall in capital ratios.  The original proposal contained a 3-year transitional period, however, at the urging of WOCCU, the impact was mitigated to a 5-year transitional period.  In addition, transitional arrangements will ease the effects of an abrupt end to the exemption currently enjoyed by large exposures.

Council of the European Union