6.5.1 Precautionary guarantees and precautionary recapitalisation

The resolution framework provides for access criteria for precautionary guarantees and precautionary recapitalisation, as discussed in section 5.3.2.2. The Commission’s decisions assessing these State aid measures, show that these access criteria are considered by the Commission to qualify as intrinsically linked provisions of the resolution framework.1 The assessment by the Commission of these criteria is discussed in section 5.3.2.2. In addition, the Commission assesses precautionary guarantees and precautionary recapitalisation on compatibility with the internal market under the State aid regime for the banking sector. See sections 3.5.4 and 3.5.6 for a discussion of the assessment criteria that apply to funding guarantees and (rescue) recapitalisation. As a result, it is necessary to take both the access and assessment criteria into account in the design of precautionary guarantees and precautionary recapitalisation. Some remarks can be made in that respect.

First, some of the assessment criteria under the State aid regime for the banking sector overlap with the access criteria set out in the resolution framework.2 The Commission does not seem to make a separate assessment of the access criteria for precautionary guarantees and precautionary recapitalisation that overlap with assessment criteria under the State aid regime for the banking sector. For example, it can be read in the Commission decisions, that it deems the access criterion in respect of remuneration and the access criterion that the measure is granted – and proportionate – to remedy a serious disturbance in the economy and to preserve financial stability to be fulfilled on the basis of its assessment under the State aid regime for the banking sector.

Secondly, some assessment criteria apply in addition to the access criteria under the resolution framework. For example, under the State aid regime for the banking sector funding guarantees may only be granted for new issues of banks' senior debt (subordinated debt is excluded) with maturities from three months to five years (or a maximum of seven years in the case of covered bonds).3 In addition, for some funding guarantees, a restructuring or wind up plan needs to be submitted, unless the aid is reimbursed within two months.4 Furthermore, the Member State awarding the guarantee should commit to a number of behavioural safeguards.5

Thirdly, the assessment and access criteria may be contradictory. For example, under the resolution framework, the award of precautionary guarantees triggers the exercise of the PONV conversion power,6 while under the State aid regime for the banking sector, the burden-sharing requirements are only triggered in case restructuring aid is granted. If the aid is reimbursed within two months, there will be no restructuring or liquidation obligations triggered. It seems to be reasonable to interpret the exercise of the PONV conversion power in relation to precautionary guarantees in such a way that this is only necessary in cases where the aid is not reimbursed within two months.

Another example can be found in the applicability of the burden-sharing requirements under the State aid regime in the case of precautionary recapitalisation. In all the cases of precautionary recapitalisation described in this dissertation, precautionary recapitalisation was assessed as being restructuring aid. In other words, in all cases, the Member States submitted a restructuring plan to the Commission on the basis of which the Commission assessed whether the bank could be restored to long-term viability. This implies that the burden-sharing requirements under the State aid regime should be met, unless this would endanger financial stability or lead to disproportionate results. The burden-sharing requirements apply despite the fact that precautionary recapitalisation is excluded from the application of the PONV conversion power.8

Fourthly, it is unclear who has the authority to decide that the conditions of precautionary recapitalisation are being met or not. Donnelly and Asimakopoulos take the stance that it is up to the ECB and the SRB to decide this.11 Taking into account that the assessment of these conditions forms part of the determination whether a bank is failing or likely to fail, this seems to be a correct approach.12 In its decision in respect of the precautionary recapitalisation of MPS the Commission states: “The Commission concludes that the conditions under which the aid measures (Measure 1 and Measure 2) are granted are in line with the exemption provided for in Article 32(4)(d) BRRD. Therefore, the aid measures do not trigger the "failing or likely to fail" criterion under the BRRD in relation to the Bank and can be implemented outside resolution.”13 It therefore seems that the Commission also sees a role for itself in this respect, albeit that this could – in the author’s view – not extend beyond the role of State aid authority.