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The Bank Recovery and Resolution Directive (BRRD) defines a harmonised regulatory framework for resolving institutions across the EU. It establishes that resolution should be primarily and almost exclusively financed by private resources, in order to avoid, as far as possible, resorting to taxpayers' funds when dealing with unsound or failing credit institutions and investment firms.
The Directive also defines a request for extraordinary public support, as an indicator that an institution is failing or likely to fail. However, such support will not necessarily trigger a resolution if certain exceptional elements and conditions are met.
Among these elements and conditions, the BRRD specifically refers to public injections of own funds or to acquisition of capital instruments addressing a capital shortfall that may result from a stress test, an asset quality review or other equivalent exercises.
The EBA Guidelines specify that these tests, reviews, and exercises should have a specific timeline and scope, should provide a time horizon and reference dates, as well as a quality review process. Moreover, where relevant, they should also provide a macro-economic scenario and hurdle rates, and a timeframe to address the shortfall.