Valuing Derivatives In A Bank Bail-In

Under the EU's Bank Recovery and Resolution Directive ("BRRD")¹, one of the key powers given to national resolution authorities is the ability to impose losses on, or "bail-in", certain financial liabilities of the failing bank in a resolution action, either by writing down the principal amount of the liability or converting it into equity. One of the main aims of a bail-in is to ensure that creditors and/or shareholders can be made to bear an appropriate proportion of the failing institution's losses, in order to minimise the need for the application of public funds (a "bail-out").

The BRRD provides that all liabilities of the bank in resolution can be bailed-in, unless they are contained on an express list of excluded liabilities, or are excluded from bail-in pursuant to the discretion of the relevant resolution authority, which can be exercised in exceptional circumstances. As a result, derivatives liabilities are eligible for bail-in, except to the extent