8.5.2 Challenges

The introduction of the resolution framework has caused certain challenges in relation to the restructuring process of a failing bank.

Firstly, a bank that is put in resolution with the assistance of State aid can be confronted with diverging restructuring processes as a result of colliding competences. In addition, a bank can be faced with restructuring obligations under the State aid regime for the banking sector, when there are no restructuring obligations under the resolution framework. For example, the resolution framework does not provide for a restructuring process in the case of precautionary recapitalisation. As a result, the restructuring process in case of precautionary recapitalisation is solely governed by the State aid regime for the banking sector. There is no role for the resolution authority in that case (section 7.5.2.1).

In addition, the resolution framework only sets out the criteria for the restructuring process of a bank in resolution when the bail-in tool is applied with the objective of restoring the capital of the failing bank to enable it to continue to operate as a going concern. The reason behind this may be that the bail-in tool is the only resolution tool that is considered a ‘going concern’ solution. In the author’s view, there are also, however, other situations in which the application of a resolution tool could be qualified as a ‘going concern’ solution. For example, the application of the bridge bank tool or sale of business tool may lead to the transfer of all shares in the failing bank to a bridge bank or third party. The resolution framework currently does not provide for a restructuring process in that respect. In addition, the asset separation tool (accompanied by the bail-in tool) could be applied to transfer impaired assets from a failing bank to an asset management vehicle, while the critical functions remain with the failing bank. In that case, the bank is only subject to a restructuring process, if the bail-in tool is applied for recapitalisation purposes (section 7.5.2.2).

Furthermore, the resolution framework does not provide for proportional application of the requirements as to the contents of the business reorganisation plan, while this is provided for with respect to the restructuring plan under the State aid regime for the banking sector (section 7.5.2.3).

Lastly, the resolution framework does not provide for transparency of the business reorganisation plan. As a result, the restructuring process of a bank that is put in resolution without the use of EPFS is less transparent than the restructuring process of a bank that is put in resolution with the use of State aid (section 7.5.2.4).

The State aid regime for the banking sector and the resolution framework both lack provisions that govern the cooperation between the Commission and the resolution authorities with respect to the restructuring process of a failing bank. This may be detrimental to an efficient and orderly restructuring process (section 7.5.3.1), especially because it is not clear how the competences of the Commission and the resolution authorities relate. For example, a question that may arise is whether the Member States and the Commission, when discussing a restructuring plan under the State aid regime, are in any way bound to the measures set out in the recovery and the resolution plan. Another question may be whether the Commission can desire more far-reaching restructuring measures from Member States than provided for in the resolution plan or set out in the business reorganisation plan (section 7.5.3.2). Lastly, effective judicial protection may be jeopardized by the resolution framework, since it may now be necessary to start legal proceedings against multiple authorities at multiple courts. This is not only very costly, but also time consuming while normally large stakes are at risk (section 7.5.3.3).

The resolution framework defines a standard burden-sharing cascade, which may include senior debt, and a mandatory bail-in threshold when certain public funding sources are used. There is, however, no ‘one size fits all’ approach when it comes to burden-sharing allocation when a bank fails. This has already led to artifices of Member States to deal with an (both financial and political) undesirable outcome, as a result of which, burden-sharing has not only become controversial, but also conveys the impression of arbitrariness (section 7.5.4.1). This effect is reinforced by the fact that the ability of the bail-in tool under the resolution framework to perform as intended is restricted as long as (i) investors do not understand the risk of bail-in and are therefore not able to charge adequate risk premiums and thus exert meaningful market discipline on banks, (ii) investors do not have sufficient loss-bearing capacity to incur a loss when their debt is bailed-in, and (iii) a bail-in endangers the health of other banks, because these are the holders of the bail-inable debt (section 7.5.4.2).

In addition, the resolution framework is more focused on the failure of an individual bank (idiosyncratic shock), while the State aid regime for the banking sector is developed in the midst of a systemic crisis. Idiosyncratic shocks and systemic crises can call for different approaches. While burden-sharing may contribute to financial stability in case of an idiosyncratic shock, this may be different when the whole banking sector fails. Requiring a bail-in of 8% of total liabilities and own funds of the bank to have access to public funding may not be realistic in that situation (section 7.5.4.3).