How it works

Excluded liabilities are the liabilities that the resolution authority may not write down or convert when applying the bail-in tool. While bail-in is designed to reach as broad a pool of creditors as possible, certain claims are carved out by law because subjecting them to loss would cause disproportionate harm, undermine financial stability, or conflict with other protections.

The categories of mandatory exclusion typically include covered deposits, which are protected up to the deposit guarantee limit; secured liabilities to the extent they are collateralised, including covered bonds; liabilities to employees for accrued salary and pension benefits; liabilities to commercial or trade creditors for goods and services critical to daily operations; liabilities arising from participation in payment or settlement systems with a short remaining maturity; and liabilities to other institutions with an original maturity of less than seven days.

Because these liabilities are excluded, the losses they would otherwise have borne fall on the remaining bailinable creditors. In exceptional circumstances the resolution authority may also exclude, on a discretionary basis, further liabilities that would otherwise be bailinable, for example where they cannot be bailed in within a reasonable time or where exclusion is necessary to preserve critical functions; where this happens, the shortfall may be met by the resolution financing arrangement, subject to strict conditions.

The exclusions are set out in the Bank Recovery and Resolution Directive as part of the bail-in regime. Article 44 of the BRRD defines the scope of the bail-in tool and lists the liabilities that are excluded from it, together with the conditions under which the resolution authority may make additional discretionary exclusions. The bail-in tool itself is governed by Articles 43 to 44 and 48 of the BRRD, and by Article 27 of the SRMR for the Banking Union. Protection of covered deposits derives from the Deposit Guarantee Schemes Directive and the depositor preference established in Article 108 of the BRRD.

The no-creditor-worse-off safeguard operates alongside these exclusions, ensuring that no creditor receives less in resolution than it would have received in normal insolvency.

Practical relevance

For investors, the list of excluded liabilities defines the perimeter of bail-in risk: holders of instruments outside the excluded categories bear a greater share of loss precisely because protected claims are removed from the pool. Understanding which liabilities are excluded is therefore essential to estimating loss-given-resolution for any given instrument.

For depositors, the exclusion of covered deposits is the practical guarantee that insured savings are shielded even when a bank is resolved. For banks, the interaction between excluded liabilities and MREL matters because excluded liabilities cannot count towards loss-absorbing capacity, which shapes the funding structure institutions must build.