11.1.3 Remedying the bank’s weaknesses

The restructuring plan should contain measures that remedy the bank’s weaknesses. These weaknesses can be manifold: they can concern the business model of the bank, its funding model, its corporate governance framework, its risk management system, etc. The fact that the restructuring plan addresses these weaknesses is relevant to the assessment of the return to long-term viability.1 In this PhD-study, each restructuring measure remedying a specific weakness is considered a relevant characteristic. For instance, the fact that the restructuring plan provides for a reduction of the bank’s reliance on wholesale funding is identified as a relevant characteristic.

In that regard, two remarks are in order. Firstly, it should be noted that the bank’s weaknesses are often interrelated. For instance, an excessive growth strategy may result in a large portfolio of non-performing loans (NPL’s), which negatively affects the profitability of the bank. An excessive growth strategy is usually financed by a strong reliance on wholesale funding2, and it is made possible by a weak risk management system (such as low credit standards). In addition, a weak corporate governance framework or inadequate remuneration system may induce the bank’s senior management to take excessive risks and to pursue an aggressive growth strategy.3

Secondly, the distinction between the bank’s weaknesses (and the corresponding restructuring measures) is not always clear-cut; they are not always classified in the same way. For instance, sometimes risk management is treated as part of the corporate governance framework; and sometimes, it is treated separately. Furthermore, risk management and the funding model are sometimes grouped together under the heading ‘reduction of risk profile’. Similarly, the focus on the bank’s core activities and the abandonment of risky activities can be classified under ‘reduction of risk profile’, but also under ‘business model’. In addition, the business model can be understood as concerning the bank’s activities. Conversely, it can also be understood as comprising both the activities and the funding.

To conclude, the restructuring measures each constitute a partial solution to the bank’s problems. Consequently, although the weaknesses and the corresponding restructuring measures (and thus the relevant characteristics) are discussed separately in the following sections, they should not be viewed in isolation.