The 2007/2008 financial crisis exposed banks and the broader financial market to unprecedented pressures. These pressures led to certain banks seeking significant support from their governments and to large-scale interventions by central banks. The crisis also forced many financial institutions to significantly restructure their businesses and strengthen their capital, liquidity and funding bases. This crisis revealed that many financial institutions were insufficiently prepared for a fast-evolving systemic crisis and thus were unable to act and respond in a way that would avoid potential failure and prevent material adverse impacts on the financial system and ultimately the economy and society.
In response to the crisis, a number of jurisdictions (such as the member states of the European Union, including Germany and the UK as well as the U.S.) have enacted new regulations requiring banks or competent regulatory authorities to develop recovery and resolution plans. The Group recovery plan (“Recovery Plan”) is updated and submitted to our regulators at least annually to reflect changes in the business and the regulatory requirements. The Recovery Plan prepares us to restore our financial strength and viability during an extreme stress situation. The Recovery Plan’s more specific purpose is to outline how we can respond to a financial stress situation that would significantly impact our capital or liquidity position. Therefore it lays out a set of defined actions aimed to protect us, our customers and the markets and prevent a potential resolution event. In line with regulatory guidance, we have identified a wide range of countermeasures that will mitigate different types of stress scenarios. These scenarios originate from both idiosyncratic and market-wide events, which would lead to severe capital and liquidity impacts as well as impacts on our performance and balance sheet. The Recovery Plan is intended to enable us to effectively monitor, escalate, plan and execute actions in the event of a crisis situation.
The Management Board oversees the development of the Recovery Plan and has set up a dedicated contingent governance process to manage financial stress events.
As set out in the Bank Recovery and Resolution Directive (”BRRD”), the German Recovery and Resolution Act (Sanierungs- und Abwicklungsgesetz, “SAG”) transforming the BRRD into German national legislation, and the Single Resolution Mechanism Regulation (the “SRM Regulation”), the Group resolution plan is prepared by the resolution authorities, rather than by the bank itself. We work closely with the Single Resolution Board (“SRB”) and the Bundesanstalt für Finanzdienstleistungsaufsicht (“BaFin”) who establish the group resolution plan for Deutsche Bank which is currently based on a single point of entry (“SPE”) bail-in as the preferred resolution strategy. Under the SPE strategy, the parent entity Deutsche Bank AG would be recapitalized through a direct bail-in (write-down and/or conversion to equity of capital instruments (Common Equity Tier1, Additional Tier1, Tier2) and other liabilities eligible for bail-in) to stabilize the group. Within one month after the application of the bail-in tool to recapitalize an institution, the BRRD (as implemented in the SAG) requires such institution to establish a business reorganization plan addressing the causes of failure and aiming to restore the institution's long-term viability.
The BRRD requires banks in EU member states to maintain minimum requirements for own funds and eligible liabilities (“MREL”) to make resolution credible by establishing sufficient loss absorption and recapitalization capacity. Apart from MREL-requirements, Deutsche Bank AG, as a global systemically important bank, will be subject to global minimum standards for Total Loss-Absorbing Capacity (“TLAC”), which sets out strict requirements for the amount and eligibility of instruments to be maintained for bail-in purposes. In particular, TLAC instruments must be subordinated to other senior liabilities. From January 1, 2017, non-structured senior debt instruments issued by Deutsche Bank AG meet the TLAC subordination requirement, since Germany adopted legislation to adjust the creditor hierarchy in insolvency for banks in the German Banking Act. This ensures that a bail-in would be applied first to equity and TLAC instruments, which must be exhausted before a bail-in may affect other senior liabilities such as deposits, derivatives, debt instruments that are “structured” and money market instruments.
In addition, Title I of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the implementing regulations issued by the Federal Reserve Board and the Federal Deposit Insurance Corporation (“FDIC”) require each bank holding company with assets of U.S.$ 50 billion or more, including Deutsche Bank AG, to prepare and submit annually a plan for the orderly resolution of subsidiaries and operations in the event of future material financial distress or failure (the “U.S. Resolution Plan”). For foreign-based companies subject to these resolution planning requirements such as Deutsche Bank AG, the U.S. Resolution Plan relates only to subsidiaries, branches, agencies and businesses that are domiciled in or whose activities are carried out in whole or in material part in the United States. Deutsche Bank AG filed its last U.S. Resolution Plan in July 2015 and was not required to file a U.S. Resolution Plan in 2016 or 2017. Our next U.S. Resolution Plan is due on July 1, 2018.
The core elements of the U.S. Resolution Plan are Material Entities (“MEs”), Core Business Lines (“CBLs”), and Critical Operations (“COs”). The U.S. Resolution Plan lays out the resolution strategy for each ME, defined as those entities significant to the activities of a CO or CBL, and demonstrates how each ME, CBL and CO, as applicable, can be resolved in a rapid and orderly manner and without systemic impact on U.S. financial stability. The U.S. Resolution Plan also discusses the strategy for continuing Critical Services in resolution. Key factors addressed in the U.S. Resolution Plan include how to ensure:
- Continued access to services from other U.S. and non-U.S. legal entities as well as from third parties such as payment servicers, exchanges and key vendors;
- Availability of funding from both external and internal sources;
- Retention of key employees during resolution; and
- Efficient and coordinated close-out of cross-border contracts.
The U.S. Resolution Plan is drafted in coordination with the U.S. businesses and infrastructure groups so that it accurately reflects the business, critical infrastructure and key interconnections.
MREL and TLAC
Under the Single Resolution Mechanism (“SRM”) Regulation, the Bank Recovery and Resolution Directive (“BRRD”) and the German Recovery and Resolution Act (Sanierungs- und Abwicklungsgesetz, “SAG”) banks in the European Union (“EU”) are required to meet at all times a robust minimum requirement for own funds and eligible liabilities (“MREL”) which is determined on a case-by-case basis by the competent resolution authority.
The Single Resolution Board (“SRB”) intends to set binding MREL targets for the majority of the largest and most complex banking groups in its remit as part of the 2017 resolution planning cycle and to communicate the MREL decision to them (via National Resolution Authorities) in the first quarter 2018.
In addition, on November 9, 2015, the Financial Stability Board (“FSB”) published a standard that will require, when implemented as law, global systemically important banks (“G-SIBs”) to meet a new firm-specific minimum requirement for total loss-absorbing capacity (“TLAC”) starting on January 1, 2019.
On July 6, 2017, the FSB published guiding principles on internal TLAC, i.e., the loss absorbing capacity that a resolution entity has committed to material sub-groups so that losses and recapitalization needs of material sub-groups may be passed with legal certainty to the resolution entity of a G-SIB resolution group without subsidiaries within the material sub-groups entering into resolution.
Both the TLAC and MREL requirements are specifically designed to require banks to maintain a sufficient amount of instruments which are eligible to absorb losses in resolution with the aim of ensuring that failing banks can be resolved without recourse to taxpayers’ money.
On November 23, 2016, the European Commission (“EC”) proposed a revision of the Capital Requirement Regulation (“CRR”) to implement TLAC into EU legislation. In addition, it proposed amendments to the BRRD and the SRM Regulation. Under the Commission’s CRR revision proposal, the loss absorbency regime for EU global systemically important institutions (“G-SIIs”) would be closely aligned with the international TLAC term sheet. The instruments which qualify under TLAC are Common Equity Tier 1 instruments, Additional Tier 1 instruments, Tier 2 instruments and certain eligible unsecured liabilities. The TLAC term sheet introduces a minimum requirement of 16 % of Risk Weighted Assets (“RWAs”) or 6 % of leverage exposure by January 1, 2019; and 18 % of RWAs and 6.75 % of leverage exposure by 2022. The resolution authority would be able to request a firm-specific add-on if deemed necessary. For non-G-SIIs banks, the MREL would still be set on a case-by-case basis.
Furthermore, under the German Banking Act, as amended by the German Resolution Mechanism Act, which was published in November 2015, senior bonds rank junior to other senior liabilities, without constituting subordinated debt, in insolvency proceedings opened on or after January 1, 2017. On December 27, 2017, an EU Directive amending the ranking of unsecured debt instruments in the insolvency hierarchy for the purpose of banks’ resolution and insolvency proceedings has been published which introduces a common EU approach to banks’ creditor hierarchy, thereby enhancing legal certainty in the event of resolution. The Directive introduces non-preferred senior debt instruments as a separate category of senior debt. These new instruments will rank junior to all other senior liabilities but will be senior to subordinated debt provided they have an original contractual maturity of at least one year, do not contain embedded derivatives or be derivatives themselves and the contractual documentation explicitly refers to their lower ranking under normal insolvency proceedings. Member States are required to transpose the amending Directive into national law by December 29, 2018. The new provisions will apply to unsecured debt instruments issued on or after the date of when the respective national law enters into force. Any senior bonds that rank junior to other senior liabilities in accordance with the German Banking Act provisions published in November 2015 will be grandfathered and represent non-preferred senior debt instruments according to the EU Directive published on December 27, 2017.