5.5.1.1 Access restriction

If the resolvability assessment reveals that the winding up in normal insolvency proceedings or the resolution likely involves the use of EPFS – other than national resolution funds or the SRF –, ELA or any central bank liquidity assistance provided under non-standard collateralisation, this should lead to the outcome that there are substantive impediments to the resolvability of the bank or group involved. In that case, measures should be taken to improve the resolvability. As a result, resolvability cannot be established when EPFS or ELA (or any central bank liquidity assistance provided under non-standard collateralisation) is required in the resolution or winding up of a bank in normal insolvency proceedings. In that case, restructuring measures can be imposed on the bank that need to ensure that this is not required.1 An exemption is made for the use of national resolution funds or the SRF. The use of these means of EPFS does not impede resolvability.

Recovery plans may not assume access to EPFS, but they may assume access to ELA and other central bank support. Resolution plans have to identify how resolution actions could be financed without assuming EPFS – other than national resolution funds or the SRF –, ELA or any central bank liquidity assistance provided under non-standard collateralisation.

The exercise of the PONV conversion power is triggered when EPFS is used, except in the situation of a precautionary recapitalisation. This means that, prior to access to EPFS, the resolution authority has to reduce CET 1 items in proportion to the losses and to the extent of their capacity, after which the principal amount of AT 1 instruments has to be written down or converted in CET 1 instruments or both, and/or the principal amount of Tier 2 instruments has to be written down or converted into CET 1 instruments or both.2 ELA does not trigger the exercise of the PONV conversion power.

A bank is considered to be FOLTF, inter alia, where EPFS is required, unless it concerns precautionary guarantees or precautionary recapitalisation. As a result, resolution is triggered where EPFS is granted, provided that the other resolution conditions are also met. Resolution authorities have no discretion in that respect. When a bank is put in resolution, a mandatory bail-in of shareholders and creditors applies s hould the bank want to access EPFS, with the exception of precautionary recapitalisation and precautionary guarantees.3 ELA granted by a national central bank does not trigger resolution as such.

The resolution framework has introduced criteria that have to be fulfilled in order to get access to EPFS (access criteria). These access criteria set strict boundaries for the award of EPFS outside of resolution, as a result of which the award of EPFS outside of resolution is only possible in the form of precautionary guarantees and precautionary recapitalisation. In addition, when using EPFS in resolution,4 the access criteria include the mandatory application of a bail-in to effectuate a contribution from shareholders and creditors to cover the losses of a bank, as further discussed in section 7.4.3.2. Moreover, the access criteria ensure that the use of GFST and the ESM DRI is only possible as an ultimum remedium.5

The resolution framework does not provide for any access criteria in respect of ELA, as long as this does not qualify as EPFS. As discussed in section 5.4.1, the criteria for access to ELA are the result of the prohibition on monetary financing set out in Article 123 TFEU in combination with the State aid prohibition set out in Articles 107 and the requirement of financial independence set out in Article 130 TFEU. Within the Eurozone, the ELA Agreement also forms part of the assessment framework; this has not changed as a result of the resolution framework.6

For example, the introduction of the award of EPFS as a trigger for resolution creates an absolute restriction to the access of public funding. When a bank is put in resolution, a mandatory bail-in of shareholders and creditors applies should the bank want to access EPFS, with the exception of precautionary recapitalisation and precautionary guarantees (albeit, that the PONV conversion power should be exercised in respect of precautionary guarantees).7 It can be read in the BRRD recitals that this exception should be appreciated against the objective of preserving financial stability.8

For example, the use of national resolution funds and the SRF do not impede resolvability. In addition, ELA, contributions from the national resolution funds and contributions from the SRF are all public funding means that are available without triggering burden-sharing (unless – in the case of the national resolution funds and the SRF – they are used to cover losses or recapitalise a failing bank). In the author’s view, it is remarkable that the bail-in requirement applies when national resolution funds or the SRF cover losses or recapitalise a failing bank, as this may cause hesitation to use these public funding means; this seems to be contrary to the purpose of the resolution framework to favour the use of these means (which are funded by the banking sector itself) over Member State support. This may however be justified by reasons of limiting moral hazard.

In addition, the very strict requirements for the use of the ESM DRI, similar to the requirements that apply for the use of the GFST, are quite remarkable, as this instrument is not an actual taxpayers’ liability.9 Véron argues that it should even be allowed to use the ESM DRI for precautionary recapitalisation. According to him, currently, only individual Member States can engage in precautionary recapitalisations, a situation that prevents the fulfilment of the European Banking Union’s aim “to break the vicious circle between banks and sovereigns”. Allowing the ESM to participate in a precautionary recapitalisation either alone or alongside Member States would help to fulfil that promise.10 The relevance of this discussion is, however, limited, because the ESM DRI is intended to develop into the SRF backstop.