Public funding of failing banks in the European Union (LBF vol. 19) 2020/5.3.5.6:5.3.5.6 Access to other Member State support than GFST (alternative financing sources)

Public funding of failing banks in the European Union (LBF vol. 19) 2020/5.3.5.6

5.3.5.6 Access to other Member State support than GFST (alternative financing sources)

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The resolution framework does not exclude the possibilities for Member States to support banks in resolution.1 As discussed in sections 5.3.5.4 and 5.3.5.5, the GFST provide Member States with the option to recapitalise a bank or to take a bank in ownership if the GFST have been implemented by the relevant Member State. Member States can however also provide other forms of support, such as funding guarantees, liquidity support, or impaired asset measures. The question is whether there still is access to these types of measures within resolution and, if so, whether any access restrictions apply.

An argument that there should still be access to Member State support in resolution is, that the ESM DRI, as discussed in the next section, could never be applied, if this access were not available, since application of this instrument requires a contribution by the participating Member State requesting for the application of the ESM DRI. The ESM DRI would then be an empty shell.

In accordance with Article 44(7) BRRD and Article 27(9) SRMR, in extraordinary circumstances, the resolution authority may seek further funding from ‘alternative financing sources’. Alternative financing sources include in any event the GFST, based on the text of Article 37(10) BRRD, and the ESM DRI, based on the text of Article 30(6) SRMR. Article 44(7) BRRD and Article 27(9) SRM are, however, not restricted to alternative financing sources in the form of GFST and the ESM DRI. It therefore seems that other support measures from Member States would also be available in resolution, as long as the following access criteria are met.2

An interesting question is whether Member States could still recapitalise a bank in accordance with Article 44(7) BRRD or Article 27(9) SRMR, without qualifying this as the use of the GFST. It is the author’s understanding that this would be in violation of the resolution framework. See also section 5.5.2.5.

Access criterion 1: Bail-in

In accordance with Article 44(7) BRRD and Article 27(9) SRMR, in extraordinary circumstances, the resolution authority may seek further funding from ‘alternative financing sources’ after the national resolution funds or SRF have contributed up to 5% of total liabilities, and all unsecured, non-preferred liabilities, other than eligible deposits, have been written down or converted in full.3

Access criterion 2: Assessment by Commission in case of exclusion ofliabilities

Where the contribution by alternative financing sources is required because of exclusion of certain liabilities in accordance with Article 44(3) BRRD (Article 27(5) SRMR), the Commission may, within 24 hours of receipt of such a notification, or a longer period with the agreement of the resolution authority, prohibit or require amendments to the proposed exclusion if the requirements under the resolution framework are not met, in order to protect the integrity of the internal market. This is without prejudice to the application by the Commission of the State aid regime for the banking sector.4

An interesting question is whether alternative financing sources also include alternative funding means as meant in Article 105 BRRD.5 These are ‘borrowings or other forms of support from institutions, financial institutions or other third parties’ in the event that the amounts raised by a national resolution fund or the SRF are not immediately accessible or sufficient. The BRRD seems to use both terms randomly. It could, however, also be that there is a difference between alternative financing sources and alternative funding means; the SRMR seems to point in that direction.6 In the author’s view, it would be logical to make a distinction between alternative financing sources and alternative funding means, since the latter are clearly meant as a backstop to the national resolution funds and the SRF, while the former could also be used for a different purpose, if one takes into account the text of Article 44(7) BRRD and Article 27(9) SRM.

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