Public funding of failing banks in the European Union (LBF vol. 19) 2020/5.2.1.2:5.2.1.2 To preserve or restore viability, liquidity or solvency

Public funding of failing banks in the European Union (LBF vol. 19) 2020/5.2.1.2

5.2.1.2 To preserve or restore viability, liquidity or solvency

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The BRRD and SRMR consider only public funding that is provided “in order to preserve or restore the viability, liquidity or solvency” of a bank or group entity of the bank to be EPFS. In other words, only if public funding – be it national or supranational – has a certain objective, does it fall in scope of the EPFS concept. State aid granted to a bank does not always have the objective of preserving or restoring the viability, liquidity or solvency of the bank, it can also be granted for other purposes, such as liquidation. This form of aid falls outside the scope of the definition of EPFS.

Whether or not aid qualifies as EPFS, was a question that the Commission had to answer in its assessment of a measure of indirect aid to banks granted by Cyprus.1 The Commission assessed that the definition of EPFS does not encompass any type of aid, but only aid whose objective is “to preserve or restore the viability, liquidity or solvency” of a bank. The objective of the measure at hand was two-fold: the aid objectively pursued the social goal of Article 107(2)(a) TFEU and the goal of addressing the social hardships particular to the vulnerabilities faced by owners of micro and small businesses under Article 107(3)(c) TFEU. The Commission assessed that in both cases, the predominantly social objective indicated that the aid scheme’s objective was not to preserve or restore the viability, liquidity or solvency of a bank. It was also unlikely that it would result in any material effect on any of the financial institutions' viability, liquidity or solvency. The Commission therefore assessed that the measure did not qualify as EPFS.2

The definition of EPFS is not restricted to rescue or restructuring aid granted to remedy a serious disturbance in the economy of a Member State on the basis of Article 107(3)(b) TFEU. It can also involve rescue or restructuring aid granted to facilitate the development of certain economic activities or of certain economic areas on the basis of Article 107(3)(c) TFEU. This will be relevant, if the Commission decides to change the legal basis for its assessment of rescue and restructuring aid awards in the banking sector back to Article 107(3)(c) TFEU.3

The objective of the ESM DRI is to preserve the financial stability of the Eurozone as a whole and of its Member States, by catering for those specific cases in which a participating Member State of the SSM experiences acute difficulties with its financial sector that cannot be remedied without significantly endangering its fiscal sustainability due to a severe risk of contagion from the financial sector to the sovereign. The use of this instrument could also be considered, if other alternatives would have the effect of endangering the continuous market access of a participating Member State.4 The use of the ESM DRI is restricted to the specific purpose of recapitalizing institutions. It may not be used for winding up institutions.5 Taking into account this objective and restrictions, the ESM DRI is per definition used to preserve or restore the viability or solvency of a bank.

The SRF may only be used for the purpose of ensuring the efficient application of the resolution tools and exercise of the resolution powers.6 The resolution objectives do not, as such, include the objective of preserving or restoring viability, liquidity or solvency of a bank of a group entity. The continuity of critical functions should be ensured and adverse effects on financial stability should be avoided. It is however not necessarily said that this should be done by preserving or restoring the viability, liquidity or solvency of a bank. The bank may also be put in liquidation while critical functions are transferred to another bank under the sale of business tool. The SRF can also be used in such a situation. It seems to be unintended that this use of the SRF falls outside the scope of EPFS. This could be clarified by supplementing the objective of EPFS with “or to resolve the bank or its group by applying resolution tools and powers”.7

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