6.4.4.1 Example 1: The capital injection from a resolution fund to a bridge bank

Carichieti was put in resolution by the Italian resolution authority through the application of the bridge bank tool and the asset separation tool. The Italian resolution authority had decided to transfer all assets and liabilities (apart from equity and subordinated debt that remained in the residual entity) from the bank to a bridge bank and subsequently to transfer non-performing loans (NPL) from the bridge bank to an AMC. Both the bridge bank and the AMC were owned by the resolution fund and controlled by the resolution authority. The bridge bank received assets and liabilities resulting in a negative net equity value of EUR 26 million. This negative equity value was compensated in cash by the resolution fund. In return for making up the negative net value, the resolution fund received a senior claim of EUR 26 million in the residual entity. In addition, a further 141 million was injected by the resolution fund in the bridge bank in cash in order to enable a CET1 value of around 9%. The Commission considered the capital injections by the resolution fund to constitute State aid. It identified the bridge bank as the beneficiary of the aid.3 The same assessment was made in relation to the resolution of Carife4, Banca Marche5, and Banca Etruria.6 The resolution of these banks took place in the same way as the resolution of Carichieti.

In the case of BES, the creation of a bridge bank was considered the only remaining solution for safeguarding the stability of the financial system in Portugal. BES’s sound business activities were transferred to the bridge bank. The bridge bank received assets and liabilities, such as cash, retail deposits and performing loans, central bank funding, Government Guaranteed Bonds, and T-Bills (treasury bills backed by the US government Treasury Department). Shares and certain claims on entities of the BES group remained in BES. The Portuguese resolution fund provided the bridge bank with an initial share capital of EUR 4,899 million in exchange for common shares. In order to finance this capital injection, the resolution fund levied EUR 286 million of funds from the Portuguese banking sector. Furthermore, Portugal granted a loan to the resolution fund. The Commission considered that the capital injection by the resolution fund qualified as State aid.7

In the case of BES, Portugal submitted a winding up plan setting out commitments in relation to the bridge bank and BES.9

In the case of BES, the Commission considered that the Portuguese authorities estimated that immediate liquidation or bankruptcy would increase the resolution costs and that it would also imply a disbursement of the deposit guarantee scheme to reimburse covered deposits. Furthermore, the Commission considered that immediate resolution or bankruptcy as opposed to winding up in an orderly manner would involve a fire sale of assets while no party was interested in an outright sale of the assets and liabilities of BES. Therefore, the orderly resolution of BES was the least costly option for Portugal, also taking into account the commitment of Portugal to not provide any additional capital injections to the bridge bank in the future.10

In the case of Carichieti, the Commission considered that the claims of shareholders and subordinated debt holders were not transferred to any continuing economic activity, but remained in the residual entity and were written down. It also considered that the residual entity had no assets and the resolution fund received a senior claim on the residual entity. This construction ensured that subordinated debt holders participated appropriately in the cost of the winding up. The Commission also noted positively that Italy committed that no future claim of shareholders and holders of subordinated debt or any hybrid instruments of Carichieti or the residual entity would be transferred to the bridge bank.11 In the case of BES, the Commission noted positively that, as a result of the Portuguese banking resolution law, the burden-sharing extended also to cover claims by related parties (e.g. shareholders and Board members) of a non-contractual nature (e.g. deposits of qualified shareholders with more than 2% shareholding).12

In the cases of Carichieti and BES, the Commission considered that measures to limit distortions of competition could consist of the withdrawal of the banking license of the residual entity and the subsequent launch of insolvency procedures. It also noted that the residual entity would not compete on the market or pursue new activities. Moreover, in the case of BES, the pricing policy of the residual entity was designed to encourage customers to find more attractive alternative options. In addition, it considered, positively in this respect, that a bridge bank is established only for a limited period of time, after which it will be sold or go into winding up in an orderly manner. It also took into account that during the existence of the bridge bank, a strict deposit and loan pricing policy was implemented and that the brands Carichieti and BES ceased to exist.13

In the case of Carichieti, the Commission mentioned that Italy had committed to notify to the Commission the sale of the bridge bank if a buyer was found.14