12.5.3.4 Remaining at the bad bank or bank in liquidation

Remaining at the bad bank or bank in liquidation is a form of burden-sharing that only occurs in the S/T/W-context or S/C/W-context. In these contexts, the bank is split-up into a bad bank and a good bank. The good bank is usually transferred to another bank, while the bad bank is wound-down. The S/T/W- context also comprises the situation in which all the good parts of the bank are transferred to a large viable bank, while the remainder is put into liquidation. In these cases, the shareholders (and subordinated debt holders) remain at the bad bank or bank in liquidation. This constitutes burden-sharing, as is nicely explained in the following recital:

There is thus burden-sharing by shareholders, hybrid capital holders and subordinated debt holders if they are not taken over by the acquiring bank. Is this form of burden-sharing equivalent to the other forms of burden-sharing? In other words: how burdensome is remaining at the bad bank or bank in liquidation for shareholders?

This depends on the quantity and quality of the residual assets. For instance, in the decision on Panellinia Bank, the Commission considered “that sufficient burden-sharing was achieved since the shareholders are entitled to proceeds from the liquidation only if the proceeds are sufficient to repay first the Resolution Fund, which has a large priority claim over other creditors. Therefore, given the scarcity of the residual assets in the Bank after the purchase and assumption, the shareholders are unlikely to get their investment back”.2

In addition, several cases were characterised by a so-called ‘earn-out mechanism’. Such a case is the case of Amagerbanken (a Danish bank), which was wound-down under the Danish winding-up scheme.3 All assets and some liabilities of the Danish bank Amagerbanken (“Old Bank”) were transferred to “New Bank”. This “New Bank” was merely a bridge bank: the good parts of New Bank were taken over by Bank Nordik. All shareholders and subordinated debtholders of Amagerbanken remained at Old Bank. The conditional transfer agreement contained an earn-out mechanism: if the winding-down of the remainder of the New Bank generated a profit, that profit was to be distributed as follows: First, repayment to the FSC of all aid received, including an annual interest payment of 10%. Second, any remaining proceeds from the liquidation of the remainder of the New Bank were to be distributed among the bankruptcy estate’s creditors and subsequently the shareholders.4 The Commission, however, noted that such a prospect was very unlikely in view of the assessment of the value of the assets transferred to the New Bank.5

It can be concluded that the fact that the shareholders remain at the bad bank or bank in liquidation usually amounts to full burden-sharing. In that sense, it is equivalent to a nationalisation (without any compensation), a complete dilution or a full write-down.