How it works

When a resolution authority draws up a group resolution plan, it does not designate every legal entity for resolution. It identifies one or more resolution entities, around which resolution groups are formed, and treats the remaining entities as liquidation entities. A liquidation entity is one for which the plan foresees no independent resolution action: were it to fail, it would be wound down under the applicable national insolvency or liquidation regime, rather than being stabilised with resolution tools.

The distinction follows directly from the public interest assessment. An entity is earmarked for resolution only where its failure would threaten critical functions or financial stability and where those objectives could not be met as well through ordinary insolvency. Where insolvency is judged adequate — often for smaller subsidiaries, holding companies without critical functions, or entities whose activities can be discontinued in an orderly way — the entity is planned for liquidation instead. As a consequence, liquidation entities are generally not required to build up external MREL on the same basis as resolution entities, because the plan does not rely on bailing in their creditors to keep them open.

"Liquidation entity" is operational terminology used by the Single Resolution Board and other resolution authorities rather than a defined term in the BRRD itself; it is the natural counterpart to the resolution entity concept introduced by the 2019 banking package. Its foundation lies in resolution planning under BRRD Arts. 10–14 and in the public interest assessment under BRRD Art. 32(1)(c) and (5), which is the test that determines whether an entity is directed towards resolution or towards normal insolvency proceedings. The MREL framework in BRRD Arts. 45–45m then calibrates loss-absorbing requirements according to whether an entity is a resolution entity or a liquidation entity.

Relevance for banks and investors

For banks, the classification affects the internal structure of loss-absorbing capacity and the volume of MREL that must be issued and where. Entities identified for liquidation typically carry lighter or recapitalisation-free MREL requirements, since the plan does not envisage keeping them going as a resolved firm.

For investors, whether an issuer is a resolution entity, a subsidiary within a resolution group, or a liquidation entity is decisive for how its liabilities would be treated in a crisis. Claims on a liquidation entity would be dealt with in insolvency according to the ordinary creditor hierarchy, without the resolution authority applying bail-in to keep the entity open. Understanding which category an issuer falls into is therefore essential before comparing the seniority and expected recovery of its instruments.