Tier 2

Notes issued under the Programme may be subject to statutory write-down or bail-in powers

Under the Regulatory Capital Write-Down Powers in the proposed Directive on the recovery and resolution of banks and investment firms (the “RRD”), Resolution Authorities will have the power to write-down Tier 1 and Tier 2 Capital instruments issued by a bank or bank holding company before determining that the relevant institution has reached a point of non-viability (“PONV”) and, accordingly, taking any form of resolution action or applying any resolution power set out in the RRD. It is proposed under the RRD that Resolution Authorities will also have the power under the RRD to convert the interests of holders of writtendown Tier 1 and Tier 2 Capital instruments into Common Equity Tier 1 Capital instruments (e.g., ordinary shares) of the institution. The RRD is subject to the EU legislative process and may be amended before it is finalised, but it is currently proposed that any measures that are ultimately adopted in this connection will apply to Tier 1 and/or Tier 2 Capital instruments that are in issue on the date the RRD comes into force and, consequently, that no transitional rules will apply. Moreover, the RRD does not contain any explicit provisions regarding grandfathering of outstanding regulatory capital instruments.

It is also proposed under the RRD that Resolution Authorities will be able to exercise Bail-In Powers to write-down certain unsecured liabilities of banks and bank holding companies that meet the conditions for resolution (which include a determination that a PONV has been reached or is likely to be reached) or to convert such unsecured liabilities into equity, either to recapitalise the relevant Institution (subject to appropriate restructuring of the Institution’s business) or to provide capital for any bridge institution that the Resolution Authorities establish in connection with the resolution of the Institution. Subject to certain exemptions set out in the RRD (including secured liabilities, bank deposits guaranteed under an EU member state’s deposit guarantee scheme, liabilities arising by virtue of the holding of client money, liabilities to other non-group banks or investment firms that have an original maturity of fewer than seven days and certain other exceptions), it is intended that all liabilities of Institutions should potentially be ‘bailin- able’ (“Eligible Liabilities”). Resolution Authorities will apply the Bail-In Powers to the shares and other Eligible Liabilities of a failing Institution in accordance with a hierarchy prescribed by the RRD, pursuant to which, for example, subordinated debt instruments are to be written down or converted ahead of senior unsecured debt. The Bail-In Powers that are proposed to be given to Resolution Authorities include the ability to write-down or convert certain unsecured debt instruments into shares of the Institution, to reduce the outstanding amount due under such debt instruments (including reducing such amounts to zero) or to cancel such debt instruments. The RRD does not exempt Eligible Liabilities recognised or issued before a particular date from the scope of the Bail-In Powers, although it is currently proposed that transposition of the Bail-In Powers need not be carried out by Member States until at the latest four years after the entry into force of the Directive.