New EU legislation amends Article 55 of the Bank Recovery and Resolution Directive (BRRD) to reduce the burden of the requirement to include contractual recognition of bail-in clauses in banks' contracts which are not governed by the law of an EU Member State.

The amending Directive (BRRD3) forms part of the Crisis Management and Deposit Insurance (CMDI) legislative package originally proposed by the European Commission in April 2023. BRRD3 was published in the Official Journal on 20 April 2026 and enters into force on 10 May 2026. It requires Member States to adopt measures transposing the amendments into national law within two years and to apply those measures from 12 May 2028.

Article 55 BRRD applies to EU banks and EU parent companies and subsidiary financial institutions within the scope of BRRD where they are party to a contract or instrument creating a liability which is potentially subject to write-down and conversion (bail-in) in resolution but which is not governed by the law of a Member State. Member States must require these entities to include in those contracts and instruments a contractual term by which the creditor or other party recognises that the liability may be subject to the write-down and conversion powers under the BRRD and agrees to be bound by any resulting reduction, conversion or cancellation of the liability. This requirement is subject to limited exceptions, including where it is legally or otherwise impracticable to include the contractual term.

BRRD3 recognises that this requirement, including the procedure for notifying and assessing the impracticability of the inclusion of the required contractual terms, is unnecessarily broad, complex and burdensome. Accordingly, it makes the following amendments:

• Unless the resolution authority otherwise requires, the requirement will no longer apply to an in-scope entity that is a liquidation entity or a subsidiary that is not itself a resolution entity. Liabilities of entities falling within this exception will not count towards an entity's minimum requirement for own funds and eligible liabilities (MREL). For these purposes, a resolution entity is an entity in respect of which the resolution plan provides for resolution action and a liquidation entity is an entity subject to a resolution plan that provides for its winding up in normal insolvency proceedings or an entity (other than a resolution entity) in respect of which the group resolution plan does not provide for the exercise of write-down and conversion powers.
• In-scope entities will still be able to disapply the requirement where they conclude that it is legally or otherwise impractical to include the contractual term in a contract or instrument, but now without the need for prior notice to their resolution authority. However, they will have to notify their resolution authority if liabilities that do not include the required contractual term amount to more than 10% of a class of liabilities which includes liabilities eligible for bail-in. The resolution authority may then require the inclusion of the term within a reasonable timeframe where it concludes that it would be practical to include the contractual term (and taking into account the need to ensure the entity's resolvability). It may also direct changes to the entity's practices concerning the application of the impracticability exception. As is the case today, the impracticability exception will not apply to additional tier 1 instruments, tier 2 instruments and unsecured liabilities under bonds and other forms of transferrable debt and instruments creating or acknowledging a debt, and liabilities falling within the impracticability exception will not count towards an entity's MREL.
• The requirement will no longer apply to contracts or instruments creating liabilities that might arise in the future from an uncertain event (i.e., wholly contingent liabilities such as indemnities against losses that may result from potential third-party claims) as BRRD3 also envisages that bail-in will not apply to these liabilities. However, the requirement in Article 55 will continue to apply to contracts creating other liabilities, including liabilities based on present obligations arising from past events which will result in a loss but where the timing or amount of the liability is uncertain (which will remain subject to bail-in). Therefore, this change may only have a limited impact.

In addition, the requirement under Article 55 will no longer apply to contracts or instruments creating liabilities for deposits made by the wider range of public authorities that will qualify for deposit guarantee scheme (DGS) protection under amendments to the Deposit Guarantee Scheme Directive made by another Directive in the CMDI legislative package (because insured deposits are not bail-inable liabilities). Currently, deposits of all public authorities are excluded from DGS protection (and are thus bail-inable liabilities), although Member States have a national option to extend DGS protection to deposits of some smaller local authorities. The amendments extend the scope of DGS coverage to cover deposits of all public authorities other than certain central or state government entities.

Entities subject to the national rules implementing Article 55 may wish to consider possible changes to their policies and procedures for complying those rules to reflect the amendments when they are brought into effect.

Authors: Caroline Dawson, Chris Bates