Bank Recovery and Resolution Directive Article 55 – Feel a Contract Review Coming On?
The more things change, the more they stay the same. How many times have we heard that old adage? Well this couldn’t apply any better to the Financial Services regulatory world. I have blogged before about the seemingly incessant barrage of new regulations disseminated by regulatory authorities here in the U.S. and all over the world. In fact, the blog by Seal’s Brian Wick on July 30 celebrates the fifth anniversary of Dodd-Frank and the myriad changes affecting the financial institutions in the U.S. These same affects are being felt throughout Europe as the European Banking Authority (EBA) tries to establish and maintain similar control through its own series of requirements. The one global constant is the every-growing strain this puts on financial institutions to keep up and comply with them. The latest of these new requirements (as of me penning this blog…) was released on July 3, 2015, in the form of Article 55 of the Bank Recovery and Resolution Directive (BRRD), as the BRRD continues to address and resolve the many challenges facing “too-big-to-fail” banks.
Article 55 requires banks to modify their contracts with non-European economic area creditors to include a write-down clause notifying these creditors that their contracts are subject to modification (i.e. write-down or conversion of their debt) by an EU Resolution Authority in the event that bank start to fail.
While it primarily only affects contracts created or entered into after January 1, 2016, Article 55 will impact agreements entered into prior to January 1, 2016, if the agreement is subject to “material amendment.” But like any good regulatory requirement, there are a slew of exceptions that outline when the stated actions are unnecessary. Specifically, Article 55 states that the requirement to include a Write-Down Clause within an agreement does not apply:
… if the liability is a:
- “Covered deposit”;
- Secured liability;
- Client asset;
- liability that arises by virtue of a fiduciary relationship;
- certain type of liability with an original maturity of less than seven days;
- certain type of liability owed to employees, trade creditors providing critical functions, tax authorities and deposit guarantee schemes; or
- certain type of deposit held by natural persons and micro, small and medium-sized enterprises;
While the meaning behind this mandate is important, I want to focus instead on the added (and on-going) impact that this new regulation (and all of those before and after it) has on banks. Banks now need to pore over their existing portfolio of agreements to determine which ones qualify for this write-down clause in the event of future amendment. The immediate step every bank takes when addressing these review “projects” is to first turn to their existing systems in hopes of finding the information necessary to meet these regulatory requirements. Once they (quickly) realize that the needed information doesn’t reside in any system, they’re forced to go through a manual review of all of their agreements.
And because there is typically a time-to-compliance aspect where these banks often have a finite (short) amount of time to meet these regulatory requirements, banks need to make a choice to either (1) spend a great deal of money outsourcing the review effort or (2) pull teams of internal bank lawyers off their primary responsibilities to concentrate on this immediate priority.
As I mentioned above, the near-constant emergence of new regulation compounds this problem by forcing these banks to review and re-review the same (and growing) portfolio of derivative agreements looking for different information – the repetitiveness of these remediation projects add millions in cost and thousands of hours lost in productivity.
Lastly, manual reviews, whether it’s using internal or external resources, introduce significant subjectivity and inconsistencies because there are few standards set for the reviewers to follow up front. Add to that the extremely lengthy and repetitive task of reviewing hundreds of contracts; the risk of errors and omissions is very high as well.
It’s with all of these challenges, added costs and risks in mind that has banks talking with Seal Software. Frustrated by the never-ending cycle of regulations and the associated repetitive review cycles they perform, banks are turning to Contract Discovery and Analytics to locate and process the tens of thousands of agreements they have upfront, extracting key terms to facilitate the initial steps of the review process. With every new regulation, banks can “teach” the technology to look for the specific terms (including the relevant exceptions) associated with the regulation at which point Seal’s solution will automatically look into every agreement within the portfolio again, pinpointing the ones that contain these new terms and extracting them into a simple-to-view abstract for review by the bank. This whole process taking minutes versus weeks, if not months, when done manually.
Article 55 is just one more in a line of recent and pending regulations that, while having the best intentions in mind, prove relentless in usurping and absorbing a vast amount of banks’ resources while introducing a significant amount of risk inherent to manual review processes. Leveraging Seal’s Contract Discovery and Analytics solution dramatically reduces the draw on these resources and eliminates the risks of manual review. In the words of baseball manager Yogi Berra, ‘It’s déjà vu all over again,’ with the EBA, and that’s one of the reasons we created the Seal platform.