8.6.8 Refinement of burden-sharing requirements

In the author’s view, burden-sharing should not take place against all costs. In practice, it has already been seen that this is not desirable and leads to destructive1 behaviour among Member States. Nonetheless, it is the author’s view that burden-sharing requirements under the resolution framework and State aid regime for the banking sector should be streamlined in such a way that the State aid regime for the banking sector requires similar burden-sharing as the resolution framework.2

At the same time, certain correction mechanisms should be introduced or refined within the resolution framework. First, the principles and safeguards that apply when the bail-in tool is used should also apply when the PONV conversion power is exercised, whether this is in resolution or outside it; especially taking into account that BRRD II and SRMR II introduce a new definition of eligible liabilities, as a result of which the scope of the PONV conversion power is extended.

Secondly, a financial stability exemption for the banking sector, as we know it under the State aid regime, should be introduced, allowing for discretion in the exercise of the PONV conversion power and the use of the bail-in tool.3 This makes it possible for the resolution authority to exempt certain liabilities from the scope of the burden-sharing requirement when this would endanger financial stability or lead to disproportionate results: for example, in case the failure of the bank is caused by or contributes to a systemic crisis. This exemption should be accompanied by certain safeguards, such as the NCWO principle.4

Thirdly, the burden-sharing requirement should not apply when the SRF or national resolution funds step in to cover losses or recapitalise a bank. This will reduce the hurdle to make use of the SRF or national resolution funds.

Fourthly, a distinction should be made between solvency and liquidity support. As discussed in section 8.6.5, application of the burden-sharing requirement in case of liquidity support, such as precautionary guarantees, is not line with the State aid regime for the banking sector. This form of support is considered less distortive than solvency support, as a result of which burden-sharing may not offset the consequences thereof for the shareholders and creditors. Instead of requiring burden-sharing, more attention could be paid towards remuneration, collateral and the temporality of the liquidity support.