Public funding of failing banks in the European Union (LBF vol. 19) 2020/8.6.5:8.6.5 Distinction between rescue and restructuring resolution

Public funding of failing banks in the European Union (LBF vol. 19) 2020/8.6.5

8.6.5 Distinction between rescue and restructuring resolution

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Currently, the resolution framework provides for precautionary guarantees and precautionary recapitalisation. Through these, it is possible for Member States to provide State aid without triggering resolution, including a mandatory threshold for bail-in. Since this takes place outside of resolution, the resolution authorities are not involved in cases where banks are assisted through precautionary guarantees or precautionary recapitalisation. In the author’s view, it would be better to include precautionary guarantees and precautionary recapitalisation in the resolution process. This means that precautionary guarantees and precautionary recapitalisation will no longer be excluded as a trigger for resolution, and the resolution authority will be involved in the decision-making process, including the implementation of the guarantees or recapitalisation.

In order to do this, it will be necessary to make a further distinction between the funding needs of the bank and the applicable burden-sharing requirements. The State aid regime for the banking sector can be taken as an example. Within this regime, a distinction is made between the assessment of rescue and restructuring aid. No burden-sharing requirement applies with respect to rescue aid, unless the aid cannot be reimbursed within two months. In that case, the rescue aid should be followed up by restructuring or winding up in normal insolvency proceedings, as part of which a burden-sharing requirement applies. Within the resolution framework a same distinction could be created between ‘rescue resolution’ and ‘restructuring resolution’. The rescue resolution would cover the ‘precautionary guarantee and precautionary recapitalisation tools’, while the restructuring resolution would cover the use of the resolution tools.

In case of rescue resolution in the form of a precautionary guarantee, no burden-sharing requirement (in the form of the exercise of the PONV conversion power) should apply, unless the aid is not reimbursed within two months. In that case, the rescue resolution should be followed by a restructuring resolution which triggers the burden-sharing requirement (in the form of the exercise of the PONV conversion power and, potentially, the application of the bail-in tool) or winding up in normal insolvency proceedings. In case of rescue resolution in the form of precautionary recapitalisation, the burden-sharing requirement should be applied conform the guidance that has been published by the Commission with respect to rescue recapitalisations,1 unless the precautionary recapitalisation takes place in the form of restructuring aid. In that case, it should be seen whether the burden-sharing requirement under the resolution framework should be alleviated, taking into account that the bank is still solvent.2

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