The European Bank Recovery & Resolution Directive (BRRD) might appear to be that kind of legislative instrument best left to the dark Victorian desks of some large law firms, but, lo and behold, one should note that the BRRD does have a significant impact even on retail depositors, bondholders and shareholders.

This brief article is not intended to explain the nitty-gritty of the BRRD, but rather to highlight in simple terms the relevance to readers as potential depositors or holders of shares or bonds in a Maltese bank.

For starters, the BRRD was transposed into Maltese law through a series of legislative interventions, the more important being amendments to the Malta Financial Services Authority Act and the enactment of the new Recovery and Resolution Regulations 2015 (the Resolution Regulations). Malta now boasts of yet another authority, the Resolution Authority, although the day-to-day functions of this authority are carried out by a so-called Resolution Committee.

Depositors will now enjoy preferential status above other unsecured creditors

The Resolution Committee has been given a new set of tools to intervene sufficiently early and quickly in an unsound or failing bank so as to ensure the continuity of the bank’s critical financial and economic functions, while minimising the impact of an institution’s failure on the economy and financial system.

One of the main themes of the BRRD is that in the event of a bank failing or likely to fail, the Resolution Committee will intervene through a raft of powers and tools in relation to the failing bank. Just by way of flavour, the Resolution Committee has the power to take control of the failing bank and exercise all the rights and powers conferred upon the shareholders and the board of directors of the bank. It would also have the power to transfer to another entity rights, assets or liabilities of the bank.

As a shareholder in a Maltese bank

The long and short of the BRRD is that in the event of a bank which is failing or is likely to fail, as a shareholder you will bear losses first, before any other creditors. The days of a government bail-out (as happened in certain jurisdictions during the financial crisis) are over and now EU technocrats speak of ‘bail-ins’. In layman’s terms, a shareholder in a bank runs the risk of having the entire value of his shares wiped out.

As a holder of bonds in a Maltese bank

As a bondholder, much depends on whether the bonds are secured or not. Broadly speaking, any secured bonds issued by a bank are generally exempt from a bail-in. However, unsecured bonds, be they senior or subordinated, will be the next to bear the bank’s losses after shareholders. In addition, as is noted below, there is a change to creditor hierarchy, such that unsecured bondsare statutorily subordinated to most bank deposits.

One important safeguard of relevance is that, in the case of a bail-in, no creditor (including you as bondholder) should incur greater losses than you would have incurred if the institution had been wound up under normal insolvency proceedings in accordance with a ‘no creditor worse off’ principle.

In layman’s terms, unsecured bonds issued by banks now carry greater risks.

As a depositor in a Maltese bank

As a depositor in a Maltese bank you stand to gain from the provisions of the BRRD. You must not forget that under the Maltese Depositor Compensation Scheme, the first €100,000 per eligible depositor (certain corporates are excluded from this cover) is covered by law through the Depositor Compensation Scheme.

Before the advent of the BRRD to Maltese legislation, any amount in excess of €100,000 would be lost by a depositor in the event of the insolvency of a bank (this is exactly what happened in Cyprus a few years ago).

The Resolution Regulations have now added a provision to the effect that any amount in excess of the €100,000 per elig-ible depositor (subject to some exceptions) will enjoy a preferential ranking above ordinary, unsecured creditors (such as unsecured bondholders).

So, in brief, the creditor’s hierarchy in the insolvency of a bank would be as follows:

1. Secured debt;

2. Covered deposits (up to €100,000 per depositor);

3. Eligible deposits exceeding €100,000 from individuals and SMEs;

4. Ordinary, unsecured and non-preferred creditors.

To sum up, deposits in banks are better off and depositors will now enjoy a preferential status above other unsecured creditors. Investors in shares and unsecured bonds should, in contrast, be aware of heightened risks.

Conrad Portanier is a partner at Ganado Advocates and a visiting lecturer in the Department of Commercial Law at the University of Malta.