Public funding of failing banks in the European Union (LBF vol. 19) 2020/7.2.3.2:7.2.3.2 Comparison of restructuring obligations on the basis of the restructuring plan and the business reorganisation plan

Public funding of failing banks in the European Union (LBF vol. 19) 2020/7.2.3.2

7.2.3.2 Comparison of restructuring obligations on the basis of the restructuring plan and the business reorganisation plan

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Table 11 showed that there is an overlap between the restructuring obligations on the basis of a restructuring plan and business reorganisation plan. Both the restructuring plan and the business reorganisation plan need to include measures to restore the long-term viability of the bank.

Laitenberger mention that zombie banks artificially kept alive distort competition and market prices, do not provide for financial stability, and cannot lend to the real economy.1 Restoration of the long-term viability of the bank is therefore important, both from a State aid law perspective and a resolution law perspective.

It can be read in the Restructuring Communication that long-term viability is achieved when a bank is able to cover all its costs including depreciation and financial charges, and provide an appropriate return on equity, taking into account its risk profile. The restructured bank should be able to compete in the marketplace for capital on its own merits in compliance with relevant regulatory requirements.2

The business reorganisation plan has to set out measures aiming to restore the long-term viability of the bank, its parent company, or parts of its business within a reasonable timescale.3 These measures may, for example, include the reorganisation of the bank’s activities, changes to the operational systems and infrastructure, the withdrawal from loss-making activities, restructuring of existing activities, and the sale of assets or business lines.4 The long-term viability of a bank is deemed restored following resolution if, at the latest by the end of the reorganisation period, the bank or banking group is capable of fulfilling its internal capital adequacy assessment process, and all the relevant prudential and other regulatory requirements on a forward-looking basis, and that it has a viable business model that is also sustainable in the long-term.5

Both the State aid regime for the banking sector and the resolution framework hence impose measures on the bank to restore its long-term viability. The assessment whether this is restored is, however, different under the State aid regime for the banking sector and the resolution framework. The restoration of long-term viability under the resolution framework focusses on the fulfilment of prudential requirements in addition to having a viable business model, while having a viable business model seems to be the main element of long-term viability under the State aid regime for the banking sector. As a result, the measures included in the restructuring plan may differ in focus from the measures included in the business reorganisation plan.

The recitals of Delegated Regulation (EU) 2016/1400 state that the guidelines and communications adopted by the Commission in relation to its State aid assessment may provide useful reference for elaboration of the business reorganisation plan, even where no State aid has been granted, since, they share the objective of restoring the bank’s long-term viability.6

In addition to the measures to restore the long-term viability of the bank, a restructuring plan also needs to contain measures to limit the distortion of competition. This is not a requirement for the business reorganisation plan.

Furthermore, the restructuring plan needs to contain monitoring arrangements. This requirement does not apply to business reorganisation plans. However, the management body or the person or persons appointed by the resolution authority has to submit a report to the resolution authority at least every six months on progress in the implementation of the plan.7

Lastly, restructuring under the resolution framework requires the replacement of management, except where retention of management is appropriate and necessary to achieve the resolution objectives. Under the State aid regime for the banking sector, any entity relying on State aid for its restructuring or winding up in an orderly manner should normally replace the CEO, as well as other board members, if appropriate, if recourse to State aid could have reasonably been averted through appropriate and timely management action.8

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