Given the fact that some EU Member States have adopted different approaches to the treatment of unsecured, non-subordinated liabilities in the event of insolvency or resolution, EU legislators deemed it necessary to amend the European legislative to harmonise the creditor hierarchy. This was achieved by means of an amending directive to the BRRD (Directive (EU) 2017/2399), which was published in the Official Journal of the European Union at the end of 2017 and sets out the concept of contractual subordination. According to this concept, unsecured  non-subordinated instruments may be contractually subordinated (“non-preferred senior debt”), provided the following conditions are met:

• the initial contractual maturity of the debt instruments is at least one year;
• the debt instruments do not contain embedded derivatives and are not derivatives themselves;
• the contractual documentation explicitly refers to the lower ranking.

In order to implement the described provisions of the amending directive Section 46f(5) to (7) of the German Banking Act (Kreditwesengesetz) was amended accordingly, with effect from 21 July 2018. In line with the amending directive, the new Section 46f of the German Banking Act also contains grandfathering arrangements for outstanding German bank bonds that were statutorily subordinated under the German Resolution Mechanism Act (Abwicklungsmechanismusgesetz) with effect from 1  January 2017.

BaFin has published a Guidance Notice on the treatment of certain liabilities of CRR institutions under insolvency law.