Ensuring the resolvability of banking groups

Ensuring the resolvability of banking groups

An analysis of the supervisor’s room to manoeuvre

Nicolas Raschauer • Thomas Stern

Catchwords

intervention, resolvability, banking group

Regulations BRRD, Austrian Recovery and Resolution Act – BaSAG, EU-SRM-Regulation, Charta of Fundamental Rights – CFR

Structure

I. Background ........................................................................................................................................................... 3

II. Legal bases ............................................................................................................................................................ 3

III. Overview ................................................................................................................................................................ 3

IV. The concept of resolvability ............................................................................................................................... 3

V. Assessment of resolvability ................................................................................................................................ 5

VI. Resolvability as part of resolution planning ................................................................................................... 5

VII. Impediments to resolvability ............................................................................................................................ 7

VIII. Catalogue of supervisory measures to remove impediments ..................................................................... 7

IX. The supervisors room to manœuvre (»Intervention determinants«) ........................................................ 8

X. Conflict of prudential aims ................................................................................................................................ 10

XI. Interim summary ................................................................................................................................................. 10

XII. Key points of the cross-border procedure for the purpose of resolvability .............................................. 12

This manuscript is based on a practical inquiry. The legal situation in the EU/in Austria was taken into account until 28.1.2019. The article makes no reference to the legal situation in Liechtenstein. We thank Tanja Habicher Wagner for her great support while writing the manuscript.

Abstract

The resolvability of banking groups plays an essential role for the effectiveness of the European resolution regime. In this regard, the European legislator provided the resolution authorities a broad set of powers and duties in order to assess, maintain – or if necessary – establish the resolvability of the banking groups concerned.

In Austria, the framework for the recovery and resolution of credit institutions and investment firms (»BRRD«) has been implemented by the Federal Act on the Recovery and Resolution of Banks (»BaSaG«). The following manuscript analyses the normative parameters, requirements and limits, namely the intervention determinants (the »supervisors’ room to manoeuvre«) for ensuring the resolvability of cross-border banking groups, taking into account different (singular or multiple) resolution approaches and the major structural factors, such as the functioning of group resolution planning in cross-border resolution colleges.

I. Background

The lessons learned from the recent financial crisis have prompted the European legislator to introduce minimum standards for the resolution of credit institutions (recital 1 and 10 BRRD). In contrast to normal insolvency proceedings, an effective (and credible!) resolution regime could help to reduce the negative impact of an institution’s failure on financial market stability, the real economy and taxpayers.

The core of a functioning resolution regime is the resolvability of failing banks. Since the resolvability does not already exist by nature, both regulatory requirements (BRRD including Level II and III Acts) and intensive supervisory intervention are required in certain cases. As these interventions significantly affect the freedom to carry on a business and the right to property, the relevant determinants for the activities of the resolution authorities ensuring this kind of resolvability have to be discussed.

II. Legal bases

The provisions on resolvability can be found in Title II Chapter II (incl annex Section C) of the BRRD, which is implemented by Sections 27 to 31 of the Austrian Federal Act on the Recovery and Resolution of Banks (BaSaG). Of increased importance are also art 23 et seq of the Delegated Regulation (EU) 2016/1075 (»Assessment of resolvability«) and the EBA/GL/2014/11. For the eurozone, the provisions of the SRM-Regulation have to be considered too.

III. Overview

The BRRD essentially includes three interrelated procedure steps to ensure the resolvability of a banking group:

1. Assessment of the resolvability (hereinafter Chapters IV and V);
2. Removal of major impediments to the resolvability (Chapters VI and VII);
3. Detailed description of the resolvability in the group resolution plan (Chapter VIII).

In order to make this complex subject area more comprehensible, the individual steps are presented separately. However, the most important networks and spillovers to other steps are pointed out in each case. This perspective is important for the presentation of the intervention determinants in chapters IX and X.

IV. The concept of resolvability

The concept of resolvability is set out in art 15 and 16 of the BRRD. According to art 16 para 1 second subparagraph BRRD, a group (art 2 para 1 no 26 BRRD) is to be regarded as resolvable »if it is feasible and credible for the resolution authorities to either wind up group entities under normal insolvency proceedings or to resolve group entities by applying resolution tools and powers to group entities while avoiding to the maximum extent possible any significant adverse effect on the financial system, including in circumstances of broader financial instability or system wide events, of the Member States in which group entities are established, or other Member States or the Union and with a view to ensuring the continuity of critical functions carried out by the group entities, where they can be easily separated in a timely manner or by other means.«

Resolvability is therefore not an objective, but a subjective condition. The competent resolution authority decides solely and exclusively if the bank is resolvable (taking into account the facts set out in Section C of annex C and, if applicable, art 88 BRRD) or not. In this context, the cumulative elements of the feasibility and credibility of the resolution regime are of elementary relevance.

While feasibility is based on the effectiveness of the resolution tools in order to achieve the resolution aims, the term credibility refers in particular to the »possible impacts on creditors, counterparties, customers and employees and possible actions that third-country authorities may take.«

By definition, »resolvability« does not only include the application of resolution instruments according to the BRRD, but also ordinary insolvency proceedings. In the spirit of the BRRD, liquidation through ordinary insolvency proceedings is always regarded as an alternative to the use of resolution tools.

If a banking group is actually put under resolution, it is a question of the public interest according to art 32 para 1 lit c BRRD. It is not a question of its resolvability. Indeed the definition of »resolvability« thus does not primarily aim at the use of resolution tools, but at reducing adverse effects on other market participants and the system as such.

The term »resolvability« therefore does not correspond fully with the objectives of resolution according to art 31 para 2 BRRD, which ultimately requires the use of resolution tools or powers. In essence, resolvability therefore only exists if, from the point of view of the resolution authority, the liquidation or the resolution of a banking group does not result in any significant adverse effects on the financial market.

If there is no possibility to resolve the bank, the resolution authority shall remove the impediments responsible for this, provided this is compatible with the principle of proportionality.

As already mentioned above, »resolvability« does not necessarily mean that the banking group will actually be put under resolution in the event of failure. »Resolvability« is thus only an indication for public interest.

It is worth noting that the European legislator never directly assumes a scenario in which the resolvability of an institution or a group could not ultimately be established. Consequently, the resolvability is therefore not a direct normative factor for the resolution or use of resolution tools. Indirectly, however, the resolvability is required within the framework of the public interest test.

Conversely, the European legislator assumes that any significant impediment to ensuring the resolvability can be eliminated either by the group itself or by alternative measures by the resolution authority – without a public bail-out or comparable tools.

V. Assessment of resolvability

The resolution authorities shall assess the resolvability when drawing the group resolution plan at the latest. The resolution authorities shall comply with the following testing stages when assessing the resolvability:

a. Assessment of feasibility and credibility of liquidation of the institution or group under normal insolvency proceedings;

b. Selection of a preferred resolution strategy for the assessment;

c. Assessment of feasibility of the selected resolution strategy;

d. Assessment of credibility of the selected resolution strategy.

Lit a projects the general conditions for resolution and its principles, according to which no creditors shall incur greater losses by using the resolution tools than would have been incurred if the institution or entity had been wound up under normal insolvency proceedings. This first testing stage is consistent and emphasises the alternative character of the recovery regime.

Lit b requires the resolution authorities to define a resolution approach in principle. This stage narrows the perspective of group resolution planning and allows a stronger focus on the activities that are absolutely necessary to ensure resolvability.

The implementation of the third (lit c) and fourth (lit d) testing stages appears to be extremely complex and challenging for the resolution authorities. Accordingly, they have to analyse a large number of legally determined sub-aspects in order to qualify a banking group as resolvable.

Thus, art 16 para 2 (in conjunction with annex Section C of the BRRD) requires the assessment of internal control aspects and procedures, the assessment of internal and external financial support agreements, as well as the analysis of the complexity of the group, special cross-border aspects, and the assessment of sub-aspects of the impacts on the financial system.

However, the obligation to analyse and the appropriate consideration of these aspects does not mean that the resolution authority would have to give an affirmative opinion on each item and to qualify the group as resolvable. The vague wording suggests a holistic valuation method in which the individual sub-aspects are to be analysed, but the resolvability is to be determined within the framework of the overall picture.

This is also supported by art 31 para 3 BRRD, which describes the resolution objectives as being of equal significance.

The above definition of resolvability also requires the assessment to include a minimum of concrete projection with regard to the applied resolution tools. Consequently, within the framework of this projection, the resolution objectives and their weighing against each other as well as the general principles governing resolution must also be taken into account.

The resolution authorities nevertheless have a certain degree of discretion in the allocation of value and prioritisation of the different aspects. However, bail-out related transactions must be disregarded.

VI. Resolvability as part of resolution planning

The assessment of resolvability is a fundamental part of group resolution planning (art 12 para 4 in conjunction with art 16 para 3 BRRD), so that the finalisation of resolution planning cannot take place without the assessment of resolvability or the decision to remove the major impediments (cf art 17 para 2 BRRD). Thus, there shall not actually be a final group resolution plan which could be a significant impediment to the resolution of the group (cf also art 88 para 1 lit d BRRD), although assumptions and provisions in art 22 para 7 of the Delegated Regulation 2016/1075 are opposed to this diametrically.

It should be noted, however, that the existence of a group resolution plan is not a normative requirement for the actual resolution of a group (cf art 32 BRRD). However, the existence of a group resolution plan in turn supports the feasibility and credibility of the resolution tools, i.e., the existence of the resolvability. As part of the resolution planning, the resolution authorities should also select the optimal resolution approach for the group, in particular with regard to the allocation of the loss-absorbing capacity within the group (art 12 para 1 BRRD).

In group resolution plans, a distinction is made between a single-point-of-entry approach (art 2 para 5 of the Delegated Regulation 2016/1075; central resolution via group’s top management; "single point of entry") and a multiple-point-of-entry approach (art 2 para 6 of the Delegated Regulation 2016/1075; decentralised resolution; "multiple points of entry"), although hybrid approaches are also conceivable and permissible.

Although the approach chosen by the resolution authorities is of great importance in practice, it is not directly linked to the assessment of resolvability in normative terms. However, the chosen approach has an indirect effect within the framework of the proportionate application (art 17 para 6 lit b BRRD) insofar as the resolution authorities are required to ensure a comprehensible consistency between measures and the chosen resolution approach when assessing the resolvability and, if applicable, when selecting alternative measures pursuant to art 17 para 4 BRRD.

For example, it would not be permissible to introduce alternative measures that are not even necessary for the chosen resolution approach, such as the obligation to build up eligible liabilities on a decentralised basis, if a pure SPE approach (recapitalisation via parent company) was chosen.

From a structural point of view, the assessment of the resolvability of cross-border banking groups is a joint project of the respective resolution authorities (art 13 para 4 BRRD). Normally, the resolvability of a group can then only be determined with the consensus of all resolution authorities concerned. In practice, it is precisely the choice of the resolution approach (SPE or MPE) that can lead to conflicts of interest and thus to the prevention of a joint decision-making.

In such cases, the BRRD provides for binding mediation powers by the EBA on initiative of a resolution authority concerned (art 13 para 5 and para 6, respectively second subparagraph BRRD). Only in cases where the EBA does not intervene, or where none of the resolution authorities demands binding mediation by the EBA, art 13 para 5 and para 6 BRRD allow independent national initiatives, albeit within a narrow framework. In such a case, the resolution authorities shall nevertheless take into account the "views and reservations" of the other resolution authorities concerned (cf art 13 para 5 and 6 BRRD).

The same principles also apply to the implementation of alternative measures to ensure the resolvability of cross-border groups (cf art 18 para 6 and para 7 BRRD). The compulsory consideration of the interests of the other resolution authorities thus constitutes an important dimension in the examination of the proportionality principle and in turn significantly limits mutual manoeuvrability. In practice, it seems very difficult in such a case to maintain a synchronised resolution view of the group. Finally, the failure of the joint decision-making indicates serious differences in the interests of the parties involved. The differences would tend to intensify in the case of isolated national measures, which would in fact significantly reduce the possibilities for ensuring the resolvability. This would probably lead to a lose-lose situation overall.

VII. Impediments to resolvability

The BRRD does not provide an independent definition of the cases in which there is a significant impediment to resolvability (art 17 para 1 and art 18 para 2 BRRD). However, size ("too big to fail") and complexity ("too complex to fail") are likely to be the main obstacles to resolvability. The list of facts in annex Section C BRRD is a non-exhaustive list.

It is important to note that impediments to resolvability do not necessarily relate to the group, its structure or proceedings, but may also relate to exogenous and/or endogenous factors, such as the impact on the financial system and the behaviour of other market participants, including issues in third countries. Therefore, an impediment is in principle any established fact that effectively prevents the 100% resolvability of the group, regardless of its inherent economic, political, legal, or psychological nature. A purely abstract, potential restriction is not sufficient to qualify it as an impediment within the meaning of the BRRD.

A significant impediment thus reduces, by definition, the feasibility or credibility of the resolution regime, or leads to significant adverse effects on the system in case of an institution’s or a group’s failure.

VIII. Catalogue of supervisory measures to remove impediments

If the resolution authority comes to the conclusion that a group is not resolvable, it shall take appropriate measures to ensure the resolvability, in particular to reduce the main impediments (art 17 para 1 and art 18 para 2 BRRD). However, the institution or group shall have the chance to remove the impediment itself or to propose measures to the authority to remove the impediment, before measures are taken by the resolution authority (art 17 para 3 BRRD).

If the resolution authority can prove that the activities or proposals of the institution or the group are not suitable for ensuring the resolvability, the authority is in principle authorised to take alternative measures (art 17 para 4 BRRD).

The non-exhaustive catalogue of alternative supervisory measures can be found in art 17 para 5 BRRD. Among other things, the catalogue enables the resolution authority to carry out intensive interventions in the institution and in the group structure. In essence, the catalogue mentioned in art 17 para 5 BRRD comprises the following instruments:

• Revision of intragroup financing agreements;
• Drawing up service agreements to cover the provision of critical functions;
• Limitation of the group’s maximum individual and aggregate exposures;
• Strengthened information requirements relevant for resolution purposes;
• Requirement to divest specific (in particular illiquid) assets in the event of stress;
• Limitation of the business model;
• Structural changes of the group;
• Change in the refinancing base.

The resolution authority may thus require the consolidating institution to restructure both intra-group links and relationships with third parties in such a way that resolvability is ensured. In extreme cases, this can lead to a continuous structural separation of entities or business lines, and thus the elimination of synergies intended for business policy purposes or diversification effects. Consequently, this can result in the establishment of independent systems, procedures, or processes for certain entities, as well as personnel changes. Such alternative measures would have far-reaching consequences for the relationship between parent institution and subordinate institutions, and thus for the entire group governance.

Both the quantity as well as the quality of the tools available should normally enable the resolution authority to remove the main impediments to ensuring resolvability. However, it should be noted that some of the tools mentioned above could seriously interfere with the economic activity of the institution or group. Moreover, the extent to which conflicts of objectives between the authorities responsible for ongoing supervision and the resolution authorities shall be taken into account appears questionable.

IX. The supervisors’ room to manoeuvre ("Intervention determinants")

The supervisors’ room to manoeuvre to apply alternative measures in order to ensure the resolvability of a bank or banking group is limited in several respects. On the one hand, the application of alternative measures is only permissible in a subsidiary manner and only if the measures envisaged by the group itself can be seen as ineffective or too late. One noteworthy fact is that the BRRD – even in the event of an imminent resolution – does not provide for any explicit exception to this subsidiarity.

On the other hand, the resolution authority bears a multidimensional burden of proof: it shall demonstrate both the ineffectiveness of the measures implemented or proposed by the institution or group, as well as the effectiveness of the alternative measures and their proportionality. Among the necessary tools, the resolution authority has to find the most moderate means that meet the above-mentioned requirements. The additional short, medium, and long-term costs resulting from the measures, such as restructuring within the group, shall also be taken into account. The negative effects on the owners of the institute and their right to entrepreneurial freedom as well as the solidity and stability of the institute’s ongoing business must also be considered.

Due to the mandatory projection of the resolution tools in the context of resolution planning and the choice of resolution approach (SPE, MPE), the requirement of proportionality also takes into account the resolution objectives under art 31 BRRD. The alternative measures must therefore also be suitable for achieving one or more resolution objectives that correspond to the assumptions of the selected resolution approach and the general principles for resolution.

In the case of cross-border groups, the resolution authorities must also take into account the potential impact of the measures in all the Member States where the group operates (art 18 para 4 BRRD).

X. Conflict of prudential aims

Further intervention limits may result from conflicts of objectives between the resolution authority (BRRD) and the authority responsible for ongoing supervision (CRR/CRD). The competent authority alone is responsible for assessing the risk profile of an institution or group. This includes the evaluation of the business model, internal governance, capital, and liquidity of the supervised institution.

Even if the statutory tasks of these authorities are closely interlinked in economic terms, the resolution authority may not directly or indirectly undermine the responsibilities and results of the competent authorities. For example, intensive intervention by the resolution authority in a business model classified by the competent supervisory authority as sustainable or intervention in a liquidity buffer judged as appropriate would appear to be very difficult to justify, unless the resolution is an acute threat.

The possibilities of demanding the institution to establish superordinate financial holding companies appear to be equally conflict-immanent. The implementation of the latter measure could even result in a change of competence in consolidated supervision in the future.

Remarkable in this respect is recital 29 BRRD, which mentions the interaction between the resolution authority and the competent authority, but does not fix it consistently in terms of standards. Only in individual cases does the BRRD provide for concrete methods for the (indirect) resolution of such conflicts of objectives.

In order not to generate contradictions between BRRD and CRR/CRD, the activities of the resolution authority shall not hinder the fulfilment of the tasks of the competent supervisory authority and must be cut down to the bare essentials when alternative measures are taken. However, this principle is likely to be relativised or reversed as the institution or group becomes increasingly destabilised.

XI. Interim summary

The analysis of the concept of resolvability reveals its complexity, but also its inconsistent classification within the BRRD regime. Intuitively, the concept of resolvability is a central prerequisite for the functioning of the resolution regime. However, this could not be fully proven by normative means, especially since the legal interrelationships between resolvability, resolution planning, and actual resolution show large inconsistencies and legal gaps.

In addition, there is no executable scenario within the BRRD considering that an institution is deemed as not resolvable. On the contrary, the European legislator seems to assume that the resolution authority could always ensure resolvability by the application of alternative supervisory measures.

The prerequisites for setting such alternative measures are defined in a very narrow sense, making it extremely difficult for a resolution authority to implement these instruments effectively. A simple balancing of effectiveness and proportionality between the measures proposed by the institute and the alternative supervisory measures proposed by the authorities is not sufficient to comply with the BRRD minimum standards.

This inherent contradiction within the BRRD between the principle of equal significance of the resolution aims and the simultaneous emphasis on financial market stability as the "overriding argument" also appears remarkable. Structural limits to the possibilities of intervention are also drawn by the European procedural provisions within the framework of the resolution authorities.

The resolution authority shall prove the following when taking alternative measures to ensure the resolvability:

1. Ineffectiveness of the measures proposed by the institute itself;
2. Effectiveness of the alternative supervisory measures;
3. Proportionality of the alternative supervisory measures;
4. Compliance with European procedural requirements;
5. Ensuring legal compliance;
6. Consistency with resolution objectives;
7. Consistency with the resolution approach;
8. Consistency with the resolution principles;
9. No significant impact on the Member States concerned;
10. No significant impact on the internal market for financial services;
11. No conflict with tasks of the competent authority.

These requirements clearly show that they impose a heavy burden of argumentation on the resolution authority, even though the European legislator assumes that banking groups will be able to resolve in any case. This is consistent insofar as it reduces the negative factual impact of conflicts of prudential aims between ongoing supervision and the resolution authority.

Surprisingly, however, this does not necessarily lead to the conclusion that banking groups in which there are significant impediments to ensuring the resolvability cannot actually be resolved. The reason is that resolvability pursuant to art 16 para 1 BRRD is not a direct normative prerequisite for resolution pursuant to art 32 BRRD.

There is much to be said in favour of resolving this supposed contradiction: the closer the actual resolution of a banking group comes, the stronger the intervention rights of the resolution authorities shall be. A turning point is likely to be the moment of early intervention pursuant to art 27 BRRD, as the resolution authority shall prepare the resolution at the latest from that date, and not just by ensuring the resolvability. Up to this point, the focus of official argumentation and action has been on the competent supervisory authorities. Accordingly, the principle of proportionality and the conflict of objectives must be interpreted dynamically.

XII. Key points of the cross-border procedure for the purpose of resolvability

For a correct understanding of the previous statements, the distribution of roles between the individual resolution authorities from different Member States involved in group resolution planning should be discussed below (art 12, 13 and 88 BRRD; Sections 25 of the Austrian Federal Act on the Recovery and Resolution of Banks (BaSAG)).

The administrative procedure referred to consists of four different stages:

a. Section one: The procedure led by the group resolution authority; at this stage, which may last up to four months, the resolution authorities involved shall draw up a joint resolution plan.

b. Section two: If the participating authorities do not agree, the competent group resolution authority shall be entitled to establish a group resolution authority autonomously, taking into account the opposed points of view of the other participating resolution authorities.

c. Section three: In parallel, each national resolution authority has the right, under certain conditions, to draw up individual resolution plans for subsidiaries located in its Member State, taking into account the dissenting votes of the other resolution authorities.

d. Section four: In parallel, each resolution authority may initiate a mediation procedure before the EBA if this is necessary to draw up a joint group resolution plan and to settle disagreements. In this case, the EBA shall be entitled, if necessary, to issue a binding conciliation decision which shall be binding on all involved resolution authorities.

It follows that in sections two and three of the planning procedure, decisions of the competent authorities may be taken only in line with the EBA decision.

A. In detail

The procedure for drawing up group resolution plans applies when a group consists of a parent undertaking and several subsidiaries which operate in several EEA Member States and/or third countries. The subsidiaries are included in the supervision on a consolidated basis. In the group resolution procedure, a distinction must be drawn between three key players having different rights and obligations.

Probably the most decisive role is played by the "competent authority" for the group-level resolution. It is assigned the task/function of the "lead entity", since it has to take the necessary steps in sections one and two of the procedure in the group processing and coordinate them with other parties; the competent authority chairs the resolution committee.

Art 2 para 1 no 44 BRRD assigns the role of the "competent authority" for the group resolution procedure to the resolution authority in the Member State in which the consolidating supervisory authority has its registered office.

On the other hand, a distinction must be made between the other national resolution authorities, which are responsible for resolution planning in relation to individual subsidiary institutions at national level. Together, the competent resolution authorities form a so-called "resolution college", which is responsible for drawing up a group resolution plan.

A resolution college must therefore be constituted if a resolution plan is to be drawn up for a "group" within the meaning of the BRRD. According to the considerations of the EU legislator, a resolution college represents a "discussion forum" for all questions in connection with cross-border group resolution. All involved resolution authorities are obliged to participate in such a college with adequate resources.

Such a "joint project" can therefore only function if all the actors involved, in particular the competent group resolution authority and the other resolution authorities, participate in it on an equal footing and with appropriate seriousness (principle of administrative cooperation).

In primary law, the requirement of administrative cooperation is also expressly anchored in the principle of loyalty. This principle is directly applicable. As a result, the EU bodies involved in a resolution college (SRB; EBA) and the national resolution authorities are obliged to provide mutual support and comprehensive cooperation within the framework of resolution planning and the college.

It follows from this that one of the aforementioned parties may not deviate from the basic procedure laid down in art 13; 88 BRRD during the pending planning procedure without good reason. A national resolution authority, for example, which is responsible for the planning of a subsidiary may not unilaterally impose certain resolution measures during a pending planning procedure or "threaten" to do so preventively, if its opinion is not followed. Corresponding deviations from the normative intention would therefore have to be classified as illegal or abusive and as a violation of the principle of loyalty or article 13 of the BRRD. Thus art 13 para 2 BRRD also consistently stipulates that group resolution plans are to be drawn up and updated jointly.

B. The different process levels

The group planning procedure consists of four different, possibly overlapping sections of the procedure. Section one represents the standard procedure. Sections two to four of the procedure, which are standardized in art 13 BRRD, should only be carried out according to the scheme of the law or the ratio legis, if the standard procedure cannot be completed.

The further analysis of the procedure will depend on whether the national resolution authority is the competent authority for the group resolution and therefore has the role of "lead entity", or, to the contrary, whether the national resolution authority is not the competent authority for the group resolution and therefore only participates in the procedure in other respects.

Irrespective of the role played by the national resolution authority in group planning, the main motto is the following: The authorities involved in the resolution college must jointly develop the group resolution plan and decide on it. This implies that the "lead entity", i.e., the "competent resolution authority", coordinates closely with the other resolution authorities involved and, if necessary, also involves the EBA and the other banking supervisory authorities in its planning.

It is the responsibility of the resolution authority responsible for group resolution to promote the procedure and, above all, to involve effectively the resolution authorities involved. In this respect, the "lead entity" plays a leading role in the proceedings. The aim of the resolution college at procedure level one is to jointly draw up a group resolution plan within the four-month period stipulated by secondary law.

In order to achieve this goal, the participation of the EBA on a consultative basis is provided for during the planning procedure, which must ensure an efficient and coherent functioning of the resolution college. At the request of the "lead entity", the EBA may help in reaching an agreement even before the initiation of an official conciliation procedure.

As the authority responsible for group resolution, the resolution authority shall initiate a reassessment of the group resolution plan, including the minimum capital requirements and eligible liabilities. During this first "negotiation and planning phase", it is the responsibility of the competent group resolution authority to ensure a comprehensive exchange of information within the college and to consult the other supervisory authorities involved; the latter must be granted the right to comment on decisions and to participate in meetings of the resolution college within the four-month period.

If there is no joint decision by the resolution authorities within the four-month period, the resolution authority responsible for the group shall decide on the group resolution plan by itself (procedure stage two). The authority shall justify its decision. Such individual acting is only permissible under the further condition that no mediation procedure has been initiated before the EBA and that the four-month period expired without result. In this case, the law imposes a comprehensive obligation to state reasons to the competent group resolution authority.

The group resolution authority must explain to what extent its decision on the adoption of a group resolution plan is necessary: the authority shall, among other things, prove to what extent it has taken account of the views and reservations of other settlement authorities and for what reasons a joint decision was not possible.

The decision shall then be notified to the resolution authorities concerned and to the group institutions, in particular to the parent company. The decision of the competent group resolution authority is provisionally binding on all members of the college involved in the planning process as well as on all institutes belonging to the group.

The other national resolution authorities are obliged to follow the jointly developed proposal for a group resolution plan in their further individual planning for national subsidiaries. They must base their further planning on it.

According to the understanding of art 13 para 6 BRRD, the national resolution authority may not easily deviate from this jointly developed proposal, but must clearly explain in its national decision why it could not adhere to the joint proposal. The national resolution authority is therefore not permitted to "deviate" without further ado, but only for valid reasons. This is due to the fact that the resolution authority was already able to formulate its reservations towards the responsible group resolution authority in procedure stage one; procedure stage one represents the standard model from which the members of the resolution college involved should not deviate.

However, a different procedure applies if one of the supervisory authorities involved initiates the mediation procedure before the EBA. During the conciliation phase, the resolution authority with group responsibility must postpone its decision in anticipation of a possible decision by the EBA.

During the mediation process, differences of opinion between the members of the college involved should be reduced as far as possible. This presupposes a comprehensive willingness to cooperate on the part of the parties involved; the EBA is also obliged to deal with diverging points of view before adopting a decision. Ideally, the resolution authorities concerned can settle disagreements and reach a joint decision.

If the EBA’s attempt at conciliation fails, the authority will issue a binding conciliation decision within one month from being seized, which regularly provides for various measures to resolve the conflict. This decision is addressed to the resolution authorities of the resolution college and binds them, in particular at procedure stage two and three; the resolution authorities are not permitted to deviate from it under EU law.

Normally, the parties involved in the mediation procedure subsequently succeed in reaching a joint decision, as art 13 BRRD intended. Only if the conciliation procedure before the EBA fails, the competent group resolution authority may issue its "sole" decision in accordance with the EBA decision.

Another procedure stage shall apply if the national resolution authority is not the group resolution authority. According to art 13 para 1 et seq and art 6 of the BRRD, it has an accompanying position in the group planning procedure at stage one.

The national resolution authority must initially "only" participate in the common procedure, support the responsible group resolution authority and make a comprehensive contribution to the planning process by means of opinions and analyses. First, the "one-sided" positions-taking, which does not take into account the status quo of the group and only focuses on the interests of a national subsidiary, second, the unwillingness to move away from a position once taken in the interest of the joint decision-making and planning process as well as of the entire group, or third, the lack of willingness to compromise on the part of a participating national resolution authority in general violate the cooperation obligation laid down and owed.

During the first procedure stage, the resolution authorities involved should seriously engage themselves for and jointly develop a group settlement plan; it may be necessary to ask the EBA for assistance.

The situation becomes precarious if no joint decision by the resolution college is reached within four months of the complete submission of all the necessary information and analyses. Under the assumption that the EBA has not initiated a mediation proceeding, the national resolution authority is entitled to issue an individual resolution plan that applies to the respective national subsidiary as the ultima ratio at procedure level three.

However, the corresponding national group resolution plan is subject to strict legal barriers.

First, the national resolution authority responsible for a national subsidiary must give detailed reasons why it could not follow a jointly developed proposal for a group resolution plan. It is not sufficient for the national resolution authority simply to refer to contrary opinions expressed so far in the group planning procedure and to revert to its view in the sense of an "insistence decision". It is also intended to explain why it is absolutely necessary to maintain its position in the interests of the national subsidiary – hence from a national point of view – and why an agreement on a common group plan ultimately had to be avoided on the basis of national interests. If it turns out that the objective stated by the national resolution authority or the interests pursued by it could have been achieved equally effectively by the joint group resolution plan, a deviation by the national resolution authority proves to be illegal, as any deviation from the standard procedure requires a valid reason.

Second, any individual resolution plan adopted at procedural level three shall be developed in light of the views and reservations of the other members of the resolution college and in accordance with the last proposal for a group resolution plan. The national resolution authority must convincingly demonstrate the extent to which it has taken into account the views of the other authorities.

If the national resolution authority unilaterally orders specific planning measures to the detriment of the national subsidiary without taking into account the requirements or the developed proposal for a group plan, the national individual resolution plan adopted at stage three is to be regarded as illegal and countervailable. This does not apply if the EBA has also initiated stage four – parallel to the third procedure stage – meaning that the EBA has initiated a mediation procedure. In this case, the national resolution authority may only adopt a national resolution plan if no joint resolution plan has been reached within the conciliation phase. Additionally, the national resolution authority must take the following decision in accordance with the conciliation decision of the EBA. In such a case, the national resolution authority is prohibited from deviation.

To put it in a nutshell, the role of the national resolution authority, which is not the competent group resolution authority and which participates in a resolution college, is clearly defined and interpreted strictly. The national resolution authority must participate in the development of a joint group plan and should contribute its know-how and analyses in the joint planning process. A deviation from a jointly developed proposal for a group resolution plan or from the standard procedure by a national resolution authority is only permissible for compelling reasons in the public interest.

In addition, the national resolution authority shall ensure that it takes adequately into account its decision of conflicting opinions or reservations of other resolution authorities or the EBA through a balanced decision. However, if it is already indicated during the four-month planning phase that the participating national resolution authority is not seriously interested in a joint planning decision and rejects a planning proposal developed by other members of the resolution college without valid reasons and therefore demonstrably holds intransigently to its own opinion during the entire planning process, a subsequent "solo effort" by the national resolution authority would have to be qualified as an abuse of law or a violation of art 13 para 6 BRRD.

C. Excursus: The role of the SRB in cross-border group planning

If a bank is under the supervision of the ECB, the SRB replaces the relevant national resolution authority or, in the case of cross-border group resolution, the SRB replaces the authority responsible for group resolution. Instead of the national resolution authority participating in each settlement college, the SRB must therefore carry out the tasks outlined above within the individual procedure stages.

Further, the SRB has to ensure that the "uniform resolution mechanism" functions properly. The national resolution authorities shall cooperate closely with the SRB. Otherwise, the procedure is similar to the one described above.

XIII. Fundamental legal aspects of the group planning procedure

Actions of resolution authorities or of the SRB pursuant to art 13, 88 BRRD in conjunction with the SRB Regulation are only admissible if they can be compatible with the requirements of European fundamental rights. In this context, the fundamental rights anchored in the European Charter of Fundamental Rights (CFR) are addressed, which as a rule also favor legal persons.

According to established case law, the ECJ understands that situations falling within the scope of the European Union law are appraisal-relevant in light of the fundamental European rights, but not of other fundamental rights; this is because all relevant procedure steps for group resolution plans are fully determined by EU law.

The CFR is used in all possible case constellations, which constitute an "implementation of Union law". It follows that "the fundamental rights guaranteed by Union law are applicable to the case referred". Thus, even when a situation falls within the scope of the fundamental freedoms and those freedoms get limited in this way.

In the light of ECJ interpretation, it can be assumed that the Member States and their institutions have a far-reaching obligation. Nevertheless, according to the Court of Justice, no situation could be conceived which would be covered by Union law if a national provision falls within the scope of EU law without the fundamental rights of the Union being applicable.

In this case, there is unambiguously a case of "implementation of European Union law", since the national resolution authorities or the SRB apply the BRRD, the SRM Regulation or the Federal Act on the Recovery and Resolution of Banks (BaSAG), and thus apply secondary Union law or legal provisions passed in the implementation of an EU directive.

As the recitals of the BRRD state, each procedure stage, therefore also in the area of group resolution planning, pursuant to the BRRD must be carried out in accordance with art 52 CFR. Planning that affects the legal sphere of groups and their institutions must be taken for the purpose of safeguarding compelling public interests (e.g., financial stability) and must be absolutely necessary in this respect. The principle of proportionality of the CFR must also be taken into account when setting planning files.

1. Resolution planning and freedom of ownership (art 17 in conjunction with art 52 CFR)

Every planning act set within the scope of art 13 BRRD must be compatible with the requirements of freedom of ownership (art 17 para 1 CFR in conjunction with art 1 1st additional protocol of the ECHR). The protection of property has long been of fundamental importance in the settled case-law of the ECJ. Art 17 CFR protects property, i.e. any property right which has arisen by virtue of one’s own performance and which is assigned to a person (including a legal person) in accordance with the legal provisions of the Member States or which is legally secured in its creation, which constitutes the substance of economic self-determination and thus forms the basis of economic freedom.

In abbreviated form, art 17 CFR protects every lawfully acquired possession, namely against inadmissible state restrictions on the right of disposal, whereby disposal here is to be understood as a privately autonomous right to use, dispose, encumber and bequeath the property. Official disposal restrictions – these are regulations on the use of property ("restraints on disposal") – are laid down "by legislation" in accordance with art 17 para 1 subpara 2 CFR. These barriers must be necessary in the public interest (see also art 52 para 1; 3 CFR in conjunction with art 1 para 2 of the 1st additional protocol of the ECHR). According to established case law, "private property rights" per se fall within the material scope of protection of the fundamental right. Therefore, a company’s freedom of disposition is also subject to the qualified protection of art 17 CFR. All instruments of private law are therefore included in the protection of fundamental rights.

Restrictions on the right of property, therefore also official planning acts pursuant to art 13 in conjunction with art 88 BRRD, which interfere with the organisational and private autonomy of the credit institutions or groups, are only justified if they correspond to a "general interest" addressed by BRRD and which are "necessary" with regard to this. This limited authorisation is addressed to the competent legislator as well as to the competent enforcement bodies – including those of the Member States (such as the resolution authorities). A legal basis is required for any infringement of ownership. This implies that the legislator itself must determine the admissibility, the purpose and limits of infringement of fundamental rights. The "general good" is to be understood as any reasonable – i.e. "generalizable" – public interest or regulatory objective compatible with the Union law and specified in the BRRD or the SRB Regulation. In this context, particularly the functioning of the national and European financial markets as well as the protection of depositors can serve as a justification for restricting the individual freedom of discretion and of scope.

Furthermore, restrictions on the right of property shall not affect the essence of the fundamental right or in any other way violate mandatory principles, such as a legally specified division of competences. It follows, for example, that resolution authorities may only draw up plannings in accordance with the legal requirements of art 13 BRRD or the national implementing regulations. Deviations from the statutory planning procedure must therefore be absolutely necessary for effective resolution planning. For encroachments on fundamental rights under art 17 CFR, the general rule is that they must be revoked as soon as the justification on which they are based subsequently ceases to apply or proves to be non-existent.

In proportion, planning acts are within the scope of application of the BRRD and resulting encroachments on the ownership’s freedom pursuant to art 52 para 1 CFR if they represent a suitable and necessary means of achieving a certain general interest and if the public interest in the encroachment outweighs the opposing interest of the person concerned.

The fundamental rights’ assessment of group resolution plans within the meaning of art 13; 88 BRRD is carried out according to the following scheme:

• First, it must be examined whether a planning act is "in the public interest" (i.e. pursuant to art 52 para 1 CFR for the fulfilment of a justifiable "general interest").
• Following this, an assessment must be made as to whether the planning act is suitable for achieving the public interest objective. It is important to assess whether a national planning act can lead to achieving the desired objective at all.
• Once suitability has been established, the third step is to question whether the respective planning act is necessary in the sense that it constitutes a gentle means of achieving this goal. In other words, it must be examined whether the respective planning act represents the means which restricts the fundamental rights position of the credit institution or group concerned as little as possible. The alternatives available to the resolution authorities should also be considered. Therefore, at each procedure stage it should be questioned whether divergent steps taken by national resolution authorities are absolutely necessary or whether a common resolution plan may be sufficient.
• If the necessity of an encroachment on fundamental rights can also be affirmed, it must be examined at a final level whether there is an appropriate relationship (adequacy or "proportionality in the narrower sense") between the general good pursued in each case by a resolution plan and the fundamental rights position restricted by a planning act. At this point, a balancing of the interests at stake must be carried out.

Now there can be no doubt that the graduated and complex group planning procedure under art 13; 88 BRRD can be applied in accordance with fundamental rights, in particular if national resolution authorities fulfil the role assigned to them in accordance with the law. National resolution authorities are therefore free to make use of art 13 para 6 BRRD – interpreted in conformity with fundamental rights – if there are valid reasons to deviate from a jointly developed group plan (ultima ratio). Otherwise, it must be assumed that the adoption of a national resolution plan is to be regarded as contrary to fundamental rights.

1. Freedom of employment and enterprise (art 16; 52 CFR)

In addition, planning acts pursuant to art 13; 88 BRRD must also be measured in terms of art 16 CFR. Art 16 CFR guarantees a legally enforceable, justiciable fundamental right, which also protects legal persons. Art 16 CFR, in accordance with art 119 TFEU (freedom of competition), positively affects the company’s right to pursue (independent) economic and business activities in the Member States. For the interpretation of the facts pursuant to art 16 CFR, the doctrine and case law of art 6 of the Basic Law on the General Rights of Citizens, StGG, (freedom of employment) can also be used, since the scope of protection of the two fundamental rights overlaps and the transfer of the national dogmatics to art 16 CFR was not excluded.

The fundamental right of entrepreneurial freedom protects any self-employed activity which is carried out with a certain regularity and which is directed towards achieving economic success; therefore, credit institutions and their banking businesses are also protected by art 16 CFR. Not only is the commencement of this activity protected from interference, but also the exercise of the entrepreneurial activity. In this respect, entrepreneurial freedom can be understood as freedom of investment, production and sales. Entrepreneurial freedom of disposition is closely linked to private autonomy, which is protected by property rights.

However, protection under fundamental rights only exists against those state measures that directly affect the commencement or exercise of employment. If the realization of a certain employment activity is in fact only prevented as a reflex or side effect of a state act, there is no encroachment on fundamental rights as an offence.

Interferences in the entrepreneurial freedom are permissible under similar conditions as interferences in the freedom of ownership. According to the Constitutional Court and the European Court of Justice, freedom of enterprise can be restricted if this interference is required by the public interest (or a sustainable "general good") and if it is suitable, adequate and otherwise objectively justified in order to attain the objective. Within the framework of the adequacy test, a balance is drawn between the severity of the intervention and the weight of the interests which shall be realized. The question of less severe measures (necessity), on the other hand, plays hardly any role in the case law on freedom of employment.

In the scope of application of art 16 CFR, it also applies that the group resolution procedure pursuant to art 13; 88 BRRD can be applied in conformity with fundamental rights, with reference being made to the comments on art 17 CFR. A national resolution authority may deviate from a jointly developed group resolution plan only if this is absolutely necessary to fulfil a recognised general interest, i.e. if there are valid reasons for the deviation from the standard procedure in individual cases. If these valid reasons, which the resolution authority must explain in detail in its decision pursuant to art 13 para 6 BRRD, are not present, a national solo attempt also violates art 16 in conjunction with art 52 CFR.

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