What it is
Contractual recognition of bail-in is a contractual term that institutions must include in liabilities governed by the law of a third country. Through the clause, the creditor or counterparty acknowledges that the liability may be subject to write-down or conversion powers exercised by an EU resolution authority, and agrees to be bound by any such action.
The requirement exists because a resolution authority's statutory powers apply directly only within the EU legal order. A liability governed by non-EU law might not be enforceably bailed in under that foreign law unless the parties have contractually agreed to recognise the authority's powers. The clause bridges that gap.
How it works
When an institution issues or enters into a liability under third-country law that is not otherwise excluded from bail-in, it must include a term by which the counterparty recognises the resolution authority's write-down and conversion powers and consents to the effects, including reduction of principal or conversion into equity. The requirement supports the credibility of the resolution strategy by ensuring that loss-absorbing capacity issued under foreign law can actually be used.
Where including such a clause is impracticable for a given category of liabilities, the framework provides for limited exceptions and for authorities to be informed, so that the institution does not rely on those liabilities for meeting its loss-absorbing requirements when recognition cannot be assured. This preserves resolvability while acknowledging practical constraints in some markets.
Legal basis
The requirement to include contractual recognition of bail-in in third-country-law liabilities is set out in the BRRD, which specifies the scope of the obligation, the categories of liabilities concerned and the treatment where inclusion is impracticable. It operates alongside the general bail-in and write-down and conversion provisions of the BRRD and the SRMR.
Relevance for banks and investors
For banks, the requirement is an operational and legal-documentation obligation that shapes how instruments governed by foreign law are drafted, and it affects whether such instruments can count towards MREL. Failure to include a valid clause can undermine the enforceability of a bail-in and the recognition of loss-absorbing capacity.
For investors, the presence of a recognition clause is a clear signal that an instrument governed by non-EU law is nonetheless within reach of EU resolution powers. It confirms that geographic governing law does not shield a claim from write-down or conversion.