Public funding of failing banks in the European Union (LBF vol. 19) 2020/7.4.2.2:7.4.2.2 Triggers for burden-sharing

Public funding of failing banks in the European Union (LBF vol. 19) 2020/7.4.2.2

7.4.2.2 Triggers for burden-sharing

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The triggers for burden-sharing under the resolution framework depend on the burden-sharing technique applied.

The PONV conversion power has to be exercised by the resolution authority:

1.

when the determination has been made that conditions for resolution have been met, before any resolution action is taken;

2.

when the appropriate authority determines that unless the PONV conversion power is exercised, the bank or the banking group will no longer be viable; or

3.

when EPFS is required by the bank or banking group, except in the case of precautionary recapitalisation.1

Application of the bail-in tool when a bank is put in resolution is not a given, contrary to the use of the PONV conversion power.2 For each resolution case, the resolution authority should assess whether the bail-in tool is the most appropriate resolution tool to apply taking into account the resolution objectives. There is, however, one situation in which the bail-in tool has to be applied. This is the situation in which EPFS is used to assist in the resolution process, with the exception of contributions by national resolution funds or the SRF, other than when used for loss absorption or recapitalisation.3

In addition, the resolution framework has introduced a threshold for burden-sharing when certain public funding sources are used in the resolution phase.4 A bail-in of 8% of total liabilities and own funds of the bank has to take place when:

1.

the national resolution funds or SRF is used for loss absorption or recapitalisation;5

2.

the GFST are used;6 or

3.

the ESM DRI is used.7

In addition, all unsecured, non-preferred liabilities, other than eligible deposits, have to be written down or converted in full when:

1.

the ESM DRI is used; 8 or

2.

alternative financing sources are used.9

There is no bail-in threshold in relation to resolution financing by deposit guarantee schemes. Deposit guarantee schemes can, however, only absorb losses that would have otherwise been suffered by covered depositors.10

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