French Monetary and Financial Code
In forceI. - The nominal value of additional Tier 1 capital instruments and Tier 2 capital instruments or eligible commitments referred to in VII issued by a person referred to in I of Article L. 613-34 may be reduced. These instruments may also be converted into equity securities mentioned in Chapter II of Title I of Book II or into other forms of ownership. This reduction and conversion take place under the conditions set out in this sub-section if the following two conditions are met:
1° The default of the above-mentioned person or of the group within the meaning of III of Article L. 511-20 to which it belongs is proven or foreseeable;
2° Taking into account the time required and other circumstances, there is no reasonable prospect that any other measure, including a private or prudential measure, in particular a measure taken pursuant to Article L. 511-41-5, other than the reduction in the nominal value or conversion of the own funds instruments or eligible commitments mentioned in VII, taken independently or in combination with one or more resolution measures provided for in paragraph 2 of sub-section 10 of this section, will enable the failure of the person or group to be avoided within a reasonable time.
These instruments may also be converted or their nominal value reduced in the event that exceptional public financial support is required, except in the circumstances referred to in 3° of III.
II. - The default of a person referred to in I of Article L. 613-49 is proven or foreseeable if this person meets or if there is objective evidence that this person is likely to meet one of the following conditions in the near future:
1° It no longer complies with the conditions of its authorisation ;
2° It is unable to pay its debts or other commitments as they fall due;
3° Exceptional financial support is required from the public authorities, except in the case mentioned in III;
4° The value of its assets is less than the value of its liabilities.
III. - Cases in which exceptional financial support from the public authorities is required in order to avoid or remedy a serious disturbance in the economy and to preserve financial stability are not covered by 3° of II, where this support takes one of the following forms:
1° A State guarantee in support of liquidity facilities granted by central banks in accordance with their terms and conditions;
2° A State guarantee for newly issued liabilities;
3° A contribution of own funds or a purchase of own funds instruments at prices and under conditions which do not confer an advantage on the person concerned. This contribution must be necessary to make good capital shortfalls identified in stress tests carried out at national, European Union or single supervisory mechanism level or in asset quality reviews or equivalent studies carried out by the European Central Bank, the European Banking Authority, the relevant national authorities or, where applicable, the competent authority. Such support may not be granted if the person is in one of the situations referred to in 1°, 2° and 4° of II of this Article or in I of Article L. 613-48-1.
The measures mentioned above are subject to approval under the Union's State aid legal regime and may only concern a solvent person meeting prudential solvency requirements. They are precautionary, temporary and proportionate to their purpose, which is to remedy the consequences of the serious disturbance in the economy. They are not used to offset losses that the person has incurred or is likely to incur in the near future.
IV. - The failure of a group is established or foreseeable if it is in breach of the consolidated prudential requirements applicable to it or if there are objective grounds for concluding that it will be in breach of those requirements in the near future, in particular because the group has incurred or is likely to incur losses such as to absorb all or a substantial part of its own funds instruments.
The failure of a central body referred to in Article L. 511-30 or of one of its affiliates is deemed to be established or foreseeable if, after implementation of the measures referred to in Article L. 511-31, the failure of the central body and of all the affiliates is also established or foreseeable.
V. - The reduction in nominal value or conversion of additional Tier 1 capital instruments, Tier 2 capital instruments or eligible commitments mentioned in VII provided for in I is carried out under the conditions set out in II, III and IV of Article L. 613-55-5.
For the application of 3° of I of Article L. 613-48-1, the reduction in the nominal value or the conversion of an own funds instrument issued by a subsidiary may not be implemented under conditions that are more unfavourable than a measure of the same nature applied to an own funds instrument of an equivalent level issued by the parent undertaking.
VI. - The reduction in the nominal value or conversion of own funds instruments referred to in I shall be preceded by a valuation of the assets and liabilities of the person concerned or of the group to which it belongs, carried out in accordance with the provisions of Article L. 613-47. This valuation forms the basis for calculating the reduction in nominal value or the level of conversion to be applied to these own funds instruments in order to deal with one or more of the situations mentioned in 1° to 5° of I of Article L. 613-48-1.
VII-The resolution board may only exercise its power to reduce the nominal value of eligible commitments or to write them down independently of a resolution measure in respect of commitments that meet all the eligibility conditions for satisfying the requirement referred to in IV of Article L. 613-44, with the exception of the condition relating to the residual maturity of the commitments referred to in Article 72c(1) of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013. In such a case, the resolution college shall reduce the nominal value or convert the commitments in such a way that no creditor incurs losses greater than those it would have incurred in the context of a judicial liquidation pursuant to Book VI of the French Commercial Code.
VIII.Where own funds instruments or eligible liabilities of a subsidiary which is not itself a resolution entity have been acquired indirectly by the resolution entity through other entities within the same resolution group, the power to reduce the nominal value of these instruments and liabilities or to convert them at the level of the subsidiary is exercised simultaneously with the exercise of the same power at the level of the parent undertaking of the subsidiary concerned or at the level of other parent undertakings which are not resolution entities, so that the losses are effectively passed on to the resolution entity and the entity concerned is recapitalised by it.
IX-Where a resolution measure is taken in respect of a resolution entity or, in exceptional circumstances, by way of derogation from the preventive resolution plan, in respect of a person that is not a resolution entity, the amount that is reduced, written down or converted at the level of such an entity is recognised in the threshold established in 1° of IV of Article L. 613-55-1 that applies to the entity concerned.
X.-Where the reduction in the nominal value or conversion of own funds instruments or eligible commitments mentioned in I is carried out independently of a resolution measure, it is followed by the valuation provided for in II of Article L. 613-57 II and III of the same article applies.
