Public funding of failing banks in the European Union (LBF vol. 19) 2020/7.2.1.1:7.2.1.1 Restructuring in resolution

Public funding of failing banks in the European Union (LBF vol. 19) 2020/7.2.1.1

7.2.1.1 Restructuring in resolution

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Resolution does not necessarily lead to restructuring of the bank.1 This depends on the resolution tool applied by the resolution authority.2 While the bail-in tool is primarily aimed at preserving the bank as an autonomous legal entity, the transfer tools normally involve the disappearance of the bank as such.3 The bail-in tool is therefore referred to as a ‘going concern’ solution, while the transfer tools are in principle ‘gone concern’ solutions.4

The bail-in tool may, also be combined with a transfer tool, e.g. in order to provide funding to a bridge bank5 or to enable a sale under the sale of business or asset separation tool by converting to equity or reducing the principal amount of claims or debt instruments transferred under these tools. In these cases, the application of the bail-in tool may qualify as a ‘gone concern’ solution.

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. In that case, resolution through bail-in should be accompanied by (i) replacement of management, except where retention of management is appropriate and necessary for the achievement of the resolution objectives, and (ii) a subsequent restructuring of the bank and its activities in a way that addresses the reasons for its failure. That restructuring should be achieved through the implementation of a business reorganisation plan.6 The contents of the business reorganisation plan have been discussed in section 4.7.1.2.

In short, the business reorganisation plan has to set out the measures aiming to restore the long-term viability of the bank or its parent company or parts of its business within a reasonable timescale. These measures may, for example, include the reorganisation of the activities of the bank, changes to the operational systems and infrastructure, the withdrawal from loss-making activities, restructuring of existing activities, and the sale of assets or business lines.7 The business reorganisation plan should, in principle, be submitted to the resolution authority within one month after the application of the bail-in tool for recapitalisation purposes. In exceptional circumstances or where the business reorganisation plan is required to be notified within the State aid regime, the resolution authority may extend the period up to a maximum of two months or until the deadline laid down by the State aid regime, whichever occurs earlier.8

Where the business reorganisation plan includes measures already featuring in the latest versions of previously prepared recovery or resolution plans for the bank, these should be limited to elements which remain relevant following that bank’s failure and resolution and the situation in the relevant markets.9

The resolution framework does not provide any guidance in relation to the (potential) restructuring process in other situations in resolution, with the exception of the following:

1.

The resolution power to remove or replace the management body and senior management should normally be exercised as part of resolution, unless the retention of such management body and/or senior management is considered necessary for the achievement of the resolution objectives; and

2.

The continuity arrangements as discussed in section 4.7.1.4.

In addition, when the transfer tools are used, the market party that will acquire the assets, rights and liabilities or shares or other instruments of ownership in the failing bank, may also want to restructure this bank or its assets, rights or liabilities. This, however, takes place outside the resolution framework.

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