5.3.2.1 Precautionary guarantees and precautionary recapitalisation

Ad 2: Member State guarantees for equity claims are prohibited.3 The State guarantees mentioned under 2 can therefore only be provided in relation to liabilities other than equity, e.g. bonds.

Ad 3: A subgroup of the EU Financial Services Committee has argued in a report that “If the conditions in Article 32(4) BRRD / Article 18(4) SRMR (…) are met, it seems conceivable, based on the legislative text, to provide a credit institution with aid in the form of precautionary recapitalisation so as to finance an impaired asset measure (…) i.e. the bank's NPLs would be bought by an AMC supported by the state at a transfer price which can be higher than the estimated market price but not higher than their real economic value, provided this is equivalent to a temporary injection of own funds or purchase of capital instruments.”4 According to this argumentation, a precautionary recapitalisation could therefore also entail an impaired asset measure, which makes the scope of EPFS that does not trigger resolution (even) broader. At the time of writing this dissertation, this has not yet happened. It is therefore still to be seen whether this argumentation resonates in practice. For completeness sake, the Italian securitization scheme (Garanzia sulla Cartolarizzazione delle Sofferenze, ‘GACS’)5 and the Greek Hellenic asset protection scheme (Hercules, based on the Italian securitization scheme)6 could have been examples, because they are guarantee schemes under which a State guarantee covers the senior tranches of securitisation structures containing NPLs from banks' balance sheets. The Commission however considered that both schemes do not qualify as State aid, as a result of which they do not qualify as EPFS.7 Article 32(4)(d) BRRD (Article 18(4)(d) SRMR) is therefore not applicable.

In the resolution of BES, Portugal transferred State guaranteed bonds issued by BES to the value of EUR 3,750 million to the created bridge bank. These were issued under the Portuguese Guarantee Scheme approved earlier by the Commission. The liquidity provided to the bridge bank through the State Guaranteed bonds therefore constituted State aid, albeit that it was already approved and awarded prior to the resolution of BES. On 15 December 2015, Portugal extended the maturity of the bonds by one year, as well as the government guarantee. The Portuguese resolution authority considered this necessary to stabilise the liquidity situation of the bridge bank. The extension could not be done under the Portuguese Guarantee Scheme as approved earlier by the Commission because this was restricted to solvent banks with no capital shortfall. The bridge bank had a capital shortfall in the adverse scenario as revealed by the asset quality review and stress test by the ECB. The Commission considered the extension of the bonds and the government guarantee to qualify as precautionary guarantees in favour of the bridge bank.8

On 7 October 2016, the Commission approved that Greece granted a State 1guarantee on a bond to be issued by Attica Bank.9

On 23 December 2016, Italy submitted a request for approval of a precautionary guarantee for senior bonds issued by MPS for a maximum nominal sum of EUR 15 billion. The Commission temporarily approved the aid, conditional on, amongst other things, the submission of a restructuring plan.10

Banca Popolare di Vicenza asked Italy for EUR 3 billion liquidity support in the form of a State guarantee on a bond with a maturity of three years. At that time, the bank was considered a solvent institution experiencing temporary liquidity pressures. The Commission approved the liquidity support on 18 January 2017.11 On that same date, it also approved liquidity support in the form of a State guarantee on two bonds of EUR 1.75 billion, each with a maturity of two and three years, to Veneto Banca.12 On 6 April 2017, the Italian State submitted an informal request for granting additional liquidity aid in the form of a State guarantee on a bond of EUR 2.2 billion to Banca Popolare di Vicenza and a State guarantee on two bonds of EUR 700 million each to Veneto Banca. The Commission also approved this additional liquidity support.13

On 8 January 2019, Italy’s cabinet approved a decree law to provide a State guarantee for future bonds issued by Banca Carige for a nominal value of EUR 3 billion, as well as a guarantee to enhance the quality of collateral in order to access ELA (both precautionary guarantees). The Commission decided not to raise objections against the liquidity support.14 The decree law also allows for participation in a capital increase (precautionary recapitalisation) to be activated only as a residual option.15

In addition, a number of guarantee schemes provide the possibility to Member States to award precautionary guarantees. Examples are the Greek State Guarantee Scheme for banks16, the Cypriot Guarantee Scheme for banks17, the Portuguese Guarantee Scheme18, the Polish Bank Guarantee Scheme19 and the Italian Bank Guarantee Scheme.20

In 2015, the Commission approved Greece's precautionary recapitalisation of four Greek banks: Piraeus Bank, Alpha Bank, Eurobank, and National Bank of Greece. In all cases, the precautionary recapitalisation consisted of the commitment of the Hellenic Financial Stability Fund to act as a backstop for the required capital increase.21

On 4 July 2017, the Commission approved Italy’s plan to support a precautionary recapitalisation of the Italian bank MPS for the sum of EUR 5.4 billion.22 This approval followed the confirmation by the ECB in its supervisory capacity that MPS was solvent and met capital requirements, and on Italy obtaining a formal confirmation from private investors that they would purchase the non-performing loan portfolio. MPS first attempted to raise private capital on the markets, but in December 2016 it announced that this private capital raise had failed. The Italian authorities then decided to apply for State aid in the form of a precautionary recapitalisation. The recapitalisation took place by the subscription of the Italian State of EUR 3.9 billion newly issued shares. To further address the shortfall, MPS's shareholders and junior bondholders contributed to the costs of restructuring of the bank for an amount of EUR 4.3 billion, that is from the conversion of junior bonds into shares and the dilution of existing shareholders. The Italian State compensated retail junior bondholders who were mis-sold by converting their bonds into shares and buying those shares from them, for a total amount of EUR 1.5 billion. In return, the retail junior bondholders received more secure senior instruments.23

On 18 December 2017, the Commission approved Lithuania's plan to support the precautionary recapitalisation of the Lithuanian Central Credit Union (LCCU) amounting to EUR 8.9 million under the State aid regime for the banking sector. Under the Lithuanian Central Bank's stress test and asset quality review, the LCUU had no capital shortfall under the baseline scenario and a capital shortfall of around EUR 8.9 million under the adverse scenario. Lithuania's planned precautionary recapitalisation only addressed the shortfall in this adverse scenario. The Commission therefore concluded that the proposed restructuring aid ensured that the LCUU continued to be viable in the long-term while distortions of competition were minimised, in particular given the small size of the beneficiary, its small market share and the aid amount.24