Public funding of failing banks in the European Union (LBF vol. 19) 2020/4.7.2:4.7.2 Winding up under normal insolvency proceedings

Public funding of failing banks in the European Union (LBF vol. 19) 2020/4.7.2

4.7.2 Winding up under normal insolvency proceedings

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Once the resolution authority has taken the decision to put the bank in resolution, normal insolvency proceedings should be excluded except, if they need to be combined with the use of the resolution tools and at the initiative of the resolution authority.1 In the event of a partial transfer of assets of a bank in resolution to a private sector purchaser or to a bridge bank, the residual part of the bank in resolution should be wound up in normal insolvency proceedings.2 In addition, where the operations of a bridge institution are terminated, because two years have lapsed since the date on which the last transfer from a bank in resolution pursuant to the bridge institution tool was made, or, in case this period was extended, the extended period of time has lapsed, or the bridge institution’s assets are completely wound up and its liabilities are completely discharged, the bridge institution has to be wound up in normal insolvency proceedings.3 Also in relation to the asset separation tool, it is stated that its purpose is to maximise the value of the assets transferred to it through sale or winding up in an orderly manner.4

The winding up process itself is not in scope of the resolution regime. This is still subject to the national insolvency proceedings of the Member States in combination with the Reorganisation and Winding Up Directive.

The SRB and the ECB have called for further harmonization of insolvency law. The divergence of national insolvency laws is considered a major obstacle towards a fully-fledged European Banking Union.5

If a bank fails or is likely to fail and the conditions for resolution are not met, it should in principle be wound up in normal insolvency proceedings. The winding up of a failing bank through normal insolvency proceedings should always be considered before resolution tools are applied.6

The power of the SRB to decide that a bank should be put in liquidation, if the resolution conditions are not met is contested by ABLV Bank in an action brought before the CI on 3 May 2018.7 At the time of writing this dissertation, the CI had not yet assessed the case. Ms König, Chair of the SRB, emphasized that the FOLTF assessment does not automatically link to the criteria for insolvency/liquidation. Ms Nouy, Chair of the SSM, suggested to amend Article 32 BRRD to add as a criterion for liquidation under national law a FOLTF declaration. This should make clear that absent ‘public interest’, banks would need to be liquidated under national insolvency law and not resolved.8BRRD II introduces a new Article 32b which requires Member States to ensure that a bank in relation to which the resolution authority considers that the resolution conditions, besides the public interest condition, are met, should be wound up in an orderly manner in accordance with the applicable insolvency law.

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