3.4.1.7 The 2013 Banking Communication

In July 2013, the Commission updated the Crisis Framework by adopting the 2013 Banking Communication. This Communication replaces the 2008 Banking Communication and supplements the other Crisis Communications.1

One of the most important changes introduced in the 2013 Banking Communication concerns the restructuring procedure. Under the 2008 Banking Communication, recapitalisation measures and asset relief measures were temporarily approved as rescue aid, while the in-depth analysis of the aid measures was postponed to the restructuring stage. The final authorisation of the aid measures depended on the restructuring plan. In the 2013 Banking Communication, the Commission departed from this approach. Following the 2013 Banking Communication, the Commission will authorise recapitalisation measures as restructuring aid only after agreement on the restructuring plan has been reached.2 In other words: the “clear-first-ask-questions-later approach” has been abandoned with the 2013 Banking Communication. The reason for this change in approach is that the market conditions had changed and that there was less need for an immediate approval of aid measures.3

Temporary approval of recapitalisation measures and asset relief measures as rescue aid is still possible under the 2013 Banking Communication.4 However, this is only possible in exceptional circumstances: the emergency recapitalisations or impaired assets measures must be absolutely necessary to preserve financial stability. The Communication further requires that the competent supervisory authority should confirm that there is an exceptional risk to financial stability that cannot be averted by any other less distorting measures. So only in those exceptional circumstances is the “clear-first-ask-questions-later approach” maintained. Once the emergency measures are authorised as rescue aid, the Member State has two months to submit a restructuring plan.

Member States should submit a capital raising plan before or as part of the restructuring plan. The capital raising plan should contain 1) capital raising measures, 2) burden-sharing measures and 3) safeguards preventing the outflow of funds from the bank.5

The beneficiary bank should identify capital raising measures, such as rights issues, voluntary conversion of subordinated debt instruments into equity, capital-generating sales of assets, or earnings retention.6

The 2013 Banking Communication introduced stricter burden-sharing requirements.7 Shareholders, hybrid capital holders and subordinated debt holders should contribute to reducing the capital shortfall. There are two main ways in which hybrid capital holders and subordinated debt holders can contribute: either by converting their debt into Common Equity Tier 1 or by writing down the principal of their instruments.8 State aid may not be granted before equity, hybrid capital and subordinated debt have fully contributed to offset any losses.9 In essence, the Banking Communication introduces some form of a “bail-in”. However, it is not a general bail-in by all bank creditors, because the Commission does not require contributions from senior debt holders.

The reason to introduce this bail-in was to make an end to the diverging approaches to burden-sharing across Member States.10 In the early stages of the financial crisis, Member States did not require creditors to contribute to rescuing banks. However, as the crisis developed, some Member States introduced stricter ex ante burden-sharing requirements. Diverging approaches to burden-sharing can lead to differences in funding costs. As a consequence, the level playing field may be undermined.

Points 45 and 46 are also of importance. Point 45 provides for an exception to the burden-sharing requirements. In point 46, the ‘no creditor worse off principle’ is enshrined.

The outflow of funds prior to the restructuring decision must be prevented.11 A bank that knows that it has a capital shortfall is not allowed to pay dividend, repurchase its shares or buy back hybrid capital instruments.12 If a bank nonetheless pays dividend or repurchases shares, then the Commission will, for the purpose of establishing the required measures to limit distortion of competition, add an amount equivalent to the outflow to the aid amount.13 As a result, the Commission may impose stricter remedies.

The 2013 Banking Communication is based on the idea that all capital generating measures should be exhausted before restructuring aid can be granted in the form of recapitalisation or impaired asset measures.14 Only the residual capital shortfall may be covered with restructuring aid.15 The residual capital shortfall is the capital shortfall that remains after the capital raising measures and burden-sharing measures have been implemented.

The 2013 Banking Communication also contains rules regarding guarantees and liquidity support. These aid measures can still be temporarily approved as rescue aid. This means that those aid measures can be granted before the Commission has approved the restructuring plan. However, this is only possible for banks that have no capital shortfall.16 If a bank with a capital shortfall needs liquidity support, the Commission will apply the procedure concerning recapitalisation, which means that the Member State has to submit a restructuring plan.