Public funding of failing banks in the European Union (LBF vol. 19) 2020/4.5.2.1:4.5.2.1 Triggers for the exercise of the PONV conversion power

Public funding of failing banks in the European Union (LBF vol. 19) 2020/4.5.2.1

4.5.2.1 Triggers for the exercise of the PONV conversion power

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The PONV conversion power should not only be applied where the determination is made that conditions for resolution have been met, before any resolution action is taken, but also (i) when the appropriate authority1 determines that unless the PONV conversion power is exercised the bank or the banking group will no longer be viable and (ii) when EPFS is required by the bank or banking group, except in the case of precautionary recapitalisation.2 The PONV conversion power can therefore be applied independently of a resolution action. It can even actually prevent that a bank is put in resolution, namely where the exercise of the PONV conversion power would effectively restore the bank’s financial position so that it would no longer be considered non-viable.3

An example of the latter is the exercise of the PONV conversion power in case of precautionary guarantees (see section 5.3.3). See however section 6.5.1 for a critical remark.

A bank or banking group is considered no longer viable, if the bank or banking group is FOLTF4 and there is no reasonable prospect that any action other than the exercise of the PONV conversion power, independently or in combination with a resolution action, would prevent the failure of the bank or the banking group within a reasonable timeframe. This basically means that, if the resolution authority considers that the resolution conditions, apart from the condition that resolution is necessary in the public interest, are met, the PONV conversion power should be exercised, if this prevents the failure of the bank or the banking group within a reasonable timeframe. In the author’s view, one could question why the resolution authority should exercise the PONV conversion power outside of resolution. This power could also be mandated to the competent authority, as is the case with the early intervention powers. This seems to be justified and also more efficient, since the exercise of the PONV conversion power takes place in the pre-resolution phase in that case.

It can be read in the decisions in relation to Veneto Banca, Banca Popolare di Vincenza, ABLV Bank and ABLV Bank Luxembourg that the SRB did specifically consider whether the exercise of the PONV conversion power independently of any resolution action would prevent the failure of these banks within a reasonable timeframe. In all four cases, the SRB considered that this was not the case. The decisions and notices available do not specify the reasoning for this conclusion.

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