Public funding of failing banks in the European Union (LBF vol. 19) 2020/1.3.4:1.3.4 Restrictions

Public funding of failing banks in the European Union (LBF vol. 19) 2020/1.3.4

1.3.4 Restrictions

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This research is restricted in several ways. Firstly, the resolution framework for the banking sector is laid down in the BRRD and the SRMR. The entities that can be placed in resolution under the BRRD and the SRMR are, however, not only banks and banking groups. Also certain investment firms (whether part of a banking group or not) and financial institutions forming part of a banking group can be subject to resolution. Discussion of the particularities of the application of the resolution framework to these entities falls outside the scope of this dissertation. This dissertation focus es on the application of the resolution framework on banks and banking groups.1

Secondly, political, economic and social considerations have played their part in the realization of laws and regulations, and even in decisions in individual cases. It is not always possible to discover the impact of these considerations on the choices that have been made or the outcome of certain processes. When not explicated, these considerations are out of scope of this research.

As a result, a more thorough analysis of the relationship between financial stability and competition in the banking sector, which would have required the processing of the relevant literature by economists, is outside the scope of this dissertation. This may be a topic for future research.

Thirdly, this dissertation does not discuss the impact of insolvency law on the regulation of public funding of failing banks. Although the resolution framework has introduced an alternative for the winding up of a bank in insolvency proceedings, this has not made national insolvency proceedings less relevant for failing banks.2 Winding up a bank under national insolvency proceedings is still the alternative for banks where resolution is not in the ‘public interest’. In addition, resolution can involve the liquidation of certain parts of a bank under national insolvency proceedings. Also, the efficacy of the ‘no creditor worse off’ principle’3 under the resolution framework depends on the national insolvency proceedings that would have applied if the bank had not been put in resolution.4

Taking into account the relevance of national insolvency proceedings for the functioning of the resolution framework, it is unfortunate that these proceedings are still not harmonized within the EU.5 The Directive on the reorganisation and winding up of credit institutions (Reorganisation and Winding Up Directive)6 only provides for the harmonisation of private international law rules for the insolvency of banks throughout the EU. In some countries (such as Italy) specific proceedings have been developed for the liquidation of banks that include a form of cooperation with the competent authority. In other countries, banks are liquidated under the national insolvency proceedings, which apply to commercial businesses.7

Fourthly, this dissertation does not include a comparison with the US resolution framework. Although this would have been useful in some instances (e.g., for assessing the benefits of a bank holding structure with a special purpose entity (SPE) at the top), this would have been a rather complex and unwieldy process, particularly as the State aid complexities do not arise there.8

Fifthly, the State aid regime and resolution framework are still in development, as will be elaborated in the next section. This dissertation is up to date until 7 June 2019 – the date on which the Banking Package was published in the Official Journal of the EU. Any further developments after this date have not been included in this dissertation.

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