Summary

The subject of this dissertation is the regulation of public funding of failing banks in the EU. Three areas of law are involved in this regulation: prudential regulations, State aid rules and the resolution framework. If the level of own capital and eligible liabilities is insufficient to absorb losses and recapitalise a failing bank, the resolution thereof will be difficult to envisage without the use of public funding. As a result, there is a delicate interaction between the State aid regime for the banking sector and the resolution framework for failing banks. The following threefold research question is at the heart of this dissertation:

This dissertation has eight chapters. Chapter 1 presents the research question and contextualises it. Chapter 2 discusses the funding profile of banks in order to gain a better understanding on how the State aid regime and resolution framework interact. It takes a closer look at the definition of credit institution in banking regulation. It describes the variety of activities and business models of banks within the EU and elaborates on the balance sheet of a bank. While business models and balance sheets of banks differ, they have in common that they all need to comply with the regulatory capital requirements and the MREL. This should safeguard that the reliance of banks on short-term wholesale funding to finance the expansion of their balance sheets, together with the use of high leverage, supports economically useful banking activities that serve the general interest, while banks are resolvable when they are failing. If the level of own capital and eligible liabilities is insufficient to absorb losses and recapitalise a failing bank, other funding resources will be necessary to resolve the bank. These may be provided by private market parties, but also by Member States, national central banks, deposit guarantee schemes, national resolution funds, the SRF and/or the ESM. Taking into account that banks are currently still in the initial stage of implementing the MREL, it may be realistic to assume that it will be necessary to use alternative resources in the resolution of banks, in any event, as long as the MREL has not been fully implemented. The MREL requirement is still developing in terms of the minimum required MREL. In addition, although competent authorities have a full set of powers available when regulatory capital requirements are (likely to be) breached, this still needs to evolve in relation to the MREL requirement.

Chapter 3 discusses the State aid regime for the banking sector. The EU is unique in having a State aid regime under which Member States give up part of their sovereignty by requiring the approval by the Commission of State aid awards. While the application of the State aid rules in the banking sector was often neglected prior to the GFC, this completely changed when Member States started to award mind-blowing amounts of State aid to their banking sectors in order to keep them alive after the fall of Lehman Brothers in 2008. It is thanks to the exercise of State aid control by the Commission that a certain level playing field could be protected within the internal market during the GFC. Not all public funding qualifies as State aid. Public funding only comes within the remit of State aid control, if it is assessed to be an intervention by a Member State or through Member State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods and that affects trade between Member States. Aid measures in the banking sector already led to many discussions between the Member States and the Commission about the qualification as State aid. By exercising State aid control in the banking sector, the Commission had – and still has – to balance the necessity and the proportionality of an aid measure in achieving an EU objective versus the distortion of competition brought about it. The Commission has continuously stressed that financial stability is the overriding goal of State aid policy in the banking sector, whilst ensuring that State aid and distortions of competition between banks and across Member States are kept to the minimum. To find the right balance between the two is key to the State aid regime for the banking sector.

Chapter 4 discusses the resolution framework for the banking sector. The term ‘resolution’ has a new meaning as of 1 January 2015, when the BRRD entered into force. From that date on, it is commonly used to explain the situation that a bank is failing or likely to fail, but, instead of being wound up in normal insolvency proceedings, it is ‘resolved’ through administrative, non-judicial procedures while preserving insured deposits and other services essential for maintaining financial stability, such as payment services. The primary objective of resolution is to maintain financial stability and minimise losses for the society, in particular taxpayers. For this reason, certain critical stakeholders and functions (such as depositors and payment systems) need to be protected and maintained as operational, while other parts, which are not considered key to financial stability, may be allowed to fail in the normal way. Resolution is not available for each and every bank. Only, if the resolution authority decides that there is a ‘public interest’ to put a bank in resolution this can take place. The BRRD harmonised procedures for resolving banks at EU level, in order to submit resolution authorities to the same principles and to provide them with the same set of tools in order to achieve the resolution objectives. With the introduction of the SRB and the SRF in the SRMR, not only harmonisation, but also centralisation of the resolution process at supranational level took place within the European Banking Union. The resolution regime is still in its infancy. The different authorities involved in resolution scan the boundaries of their mandates and powers, the Member States try to find loopholes to comply with the resolution regime, while keeping the taxpayers satisfied, and the resolution framework itself faces an upgrade (through BRRD II, BRRD II bis and SRMR II).

Chapter 5 analyses and assesses the impact of the resolution framework on the access to public funding as a remedy for failing banks. This impact can be described as (the attempt to) restrict the access to and use of public funding by failing banks. The resolution framework introduced the terms EPFS and ELA to regulate access to public funding. Only, if public funding falls within scope of one of these concepts, is the access thereto regulated by the resolution framework. If public funding qualifies as EPFS or ELA, access thereto is restricted in several ways under the resolution framework: (a) through the resolvability assessment, (b) in the recovery and resolution plans, (c) by making EPFS a trigger for the exercise of the PONV conversion power, (d) by making EPFS a trigger for resolution, and (e) by making the access to EPFS subject to compliance with certain access criteria, including the application of a mandatory threshold for bail-in in respect of – certain forms of – EPFS granted in resolution. In respect of ELA, a separate assessment framework applies that provides for access criteria. The access restrictions included in the resolution framework do not all restrict access to public funding in the same way. Some contribute to minimising the total amount of public funds necessary to assist failing banks. Others are more directed towards introducing a certain ‘funding cascade’ in which taxpayers’ money is used in the last instance. In addition, they differ depending on whether it concerns the availability of public funding in or outside of resolution. The resolution framework therefore not only provides for access restriction, but also for access differentiation. There are still some hurdles in restricting access to public funding. Abolition of these hurdles may further contribute to restricting the access to public funds, although finding the right balance between financial stability and the protection of public funds may be more important.

Chapter 6 analyses and assesses the impact of the resolution framework on the exercise of State aid control by the Commission. The State aid regime for the banking sector has not changed as a result of the introduction of the resolution framework. The Commission still assesses State aid awards to failing banks on the basis of the 2013 Banking Communication. This does not, however, mean that the resolution framework has not had an impact on the exercise of State aid control by the Commission. This impact has both an institutional and a procedural dimension. At an institutional level, the role of the Commission as State aid authority has been extended to the assessment of supranational EPFS. Furthermore, the Commission has acquired the new role of co-resolution authority within the SRM. This entails that the assessment of the discretionary aspects of the resolution decisions taken by the SRB is exercised by the Commission, together with the Council. At a procedural level, the resolution framework impacts the assessment by the Commission of State aid awards. Since the introduction of the resolution framework, the Commission has to apply the State aid regime for the banking sector on aid granted in resolution (resolution aid). This term is not included in the 2013 Banking Communication, as a result of which it is not clear which framework applies to the assessment by the Commission of this resolution aid. This chapter discusses the assessment criteria that can be established based on the Commission’s decision practice in respect of resolution aid. In addition, the Commission has to assess State aid awards not only on compatibility with the internal market, but also on compliance with intrinsically linked provisions of the resolution framework. As a result, the Commission has to be aware of the dynamics of resolution procedures in its assessment, including the tight timelines. This is not without challenges. The Commission has to deal with tensions between its different roles, while taking the boundaries of its different mandates and the cooperation with the SRB into account. In addition, it has to deal with tensions between different sets of rules. Although the resolution framework acknowledges the priority of the State aid regime for the banking sector, the Commission cannot approve a State aid award if it violates intrinsically linked provisions of the resolution framework. Especially in the absence of a (much desired) revision of the State aid regime for the banking sector, it has become challenging to fully comprehend State aid control by the Commission in the banking sector without knowledge of both the State aid regime for the banking sector and the resolution framework.

C hapter 7 analyses and assesses the impact of the resolution framework on the restructuring process of a failing bank. After the resolution authority (the SRB or the national resolution authority) has put the bank in resolution, the resolution of the bank starts. This may trigger restructuring of the bank, but not necessarily so. The resolution framework only provides for a restructuring process when the bail-in tool is applied for recapitalisation purposes. In that case, a business reorganisation plan has to be prepared by the bank. In addition, the resolution framework introduced new possibilities to enforce ex ante restructuring on the basis of the recovery and resolution plans. When resolution involves the award of State aid, e.g. through the use of the GFST, the restructuring process under the State aid regime for the banking sector may also apply. As a result, the restructuring process of a failing bank has become multi-faceted after the introduction of the resolution framework. After all, a failing bank may not only be faced with the restructuring process under the State aid regime for the banking sector, but also under the resolution framework. Although these restructuring processes may be triggered at the same time, they may differ and impose different restructuring obligations on the bank. In addition, the resolution framework introduced a new ‘restructuring authority’, namely the resolution authorities. The cooperation between the Commission and the resolution authorities in restructuring is, however, a topic that has not received a lot of attention. Although, there seems to be the premise of close liaison and some guidance is given in respect of the business reorganisation plan, uncertainty remains. Lastly, this chapter compares the burden-sharing obligations of shareholders/creditors of a failing bank under the resolution framework with the obligations under the State aid regime for the banking sector. Although the State aid regime for the banking sector already provides for a burden-sharing principle, the resolution framework takes it one step further: it introduced the requirement to bail-in 8% of total liabilities and own funds of a bank to have access to public funding, in resolution, with some exceptions. In addition, it introduced the possibility to bail-in senior debt holders. The bail-in requirement under the resolution framework has met with great scepticism. The mandatory burden-sharing allocation may lead to undesirable outcomes that are both financially and politically untenable. This ties into the fact that there (still) are restrictions in the ability of the bail-in tool to perform as intended, especially those that are caused by retail debt holdings.

Chapter 8 contains the conclusion. It starts with a retrospective on Part 1 of this dissertation (Chapters 2, 3 and 4). Subsequently, it discusses the assessments that have been made in Part 2 with respect to the impact of the resolution framework on the access to public funding as a remedy for failing banks, the exercise of State aid control by the Commission and the restructuring process of a failing bank (Chapters 5, 6 and 7). It summarises the hurdles, tensions and challenges that are identified as part of these impact assessments. It also discusses potential steps to address these hurdles, tensions and challenges and presents some thoughts on the further development of the regulation of public funding within the European Banking Union. The chapter ends with a reflection on the contribution of the resolution framework to solving the inadequacies, as mentioned in Chapter 1, in the institutional and regulatory framework for the banking sector to safeguard the stability of domestic financial markets and the single financial market as a whole; to break the link between Member States and banks; and to limit the risks of moral hazard.