Public funding of failing banks in the European Union (LBF vol. 19) 2020/4.5.3.1:4.5.3.1 General conditions for the application of the transfer tools

Public funding of failing banks in the European Union (LBF vol. 19) 2020/4.5.3.1

4.5.3.1 General conditions for the application of the transfer tools

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In case one of the transfer tools is applied by the resolution authority, the following general conditions apply:

a)

The transfer does not have to comply with any procedural requirements;

b)

The transfer has to take place conform the valuation conducted under Article 36 BRRD;

c)

The transfer has to take place in accordance with the State aid regime;

d)

The transfer may take place more than once; and

e)

The transfer may be reversed.

Ad a: Procedural requirements

Where shares, instruments of ownership, assets, rights or liabilities are transferred under a transfer tool to a private sector purchaser, bridge institution or asset management vehicle, respectively, this does not have to comply with any procedural requirements under company or securities law.1 Member States may however require that the application of the transfer tool is subject to ex ante judicial approval, provided that the procedure relating to the application for approval and the court’s consideration are expeditious.2 In addition, Member States have to ensure that all persons affected by a decision to apply the sale of business tool have the right to appeal against that decision.3

Ad b: The valuation requirement

Before applying a transfer tool, a fair, prudent and realistic valuation of the assets and liabilities of the bank in resolution has to be carried out by a person independent from any public authority, including the resolution authority, and the bank in resolution (hereinafter referred to as: ex ante valuation). Where an ex ante valuation is not possible, resolution authorities may carry out a provisional valuation followed by an ex post valuation carried out by an independent valuer and complying with all the requirements set out in Article 36 BRRD (Article 20 SRMR).4

The objective of the ex ante (or provisional) valuation is to assess the value of the assets and liabilities in order to:

1.

when the bridge institution tool or asset separation tool is applied, inform the decision on the assets, rights, liabilities or shares or other instruments of ownership to be transferred and the decision on the value of any consideration to be paid to the bank in resolution or, as the case may be, to the owners of the shares or other instruments of ownership;

2.

when the sale of business tool is applied, to inform the decision on the assets, rights, liabilities or shares or other instruments of ownership to be transferred and to inform the resolution authority’s understanding of what constitutes commercial terms;

3.

in all cases, to ensure that any losses on the assets of the bank in resolution are fully recognised at the moment the resolution tools are applied.5

This valuation carried out before applying a transfer tool (Valuation 2) forms part of the same valuation that is carried out to determine that the resolution conditions are met and which resolution tool(s) should be applied (Valuation 1). This valuation should be distinct from the valuation carried out for the purpose of assessing whether shareholders and creditors would have received better treatment, if the bank in resolution had entered into normal insolvency proceedings (Valuation 3).6 Valuation 3 is discussed in more detail in section 4.5.5.

Preparing the highly technical and complex valuation report before the resolution action is taken has proven to be difficult in practice. In its valuation report prepared on Banco Popular, Deloitte pointed out the constraints of preparing a report in an extremely short period of time (i.e. 12 days instead of six weeks).7

Ad c: In compliance with the State aid regime

It is not further specified in the BRRD and SRMR what is meant with a transfer in accordance with the State aid regime. It seems to refer to the fact that under the State aid regime, the sale of (part of) a bank during an orderly liquidation procedure or resolution may entail State aid to the buyer, unless the sale is organised via an open and unconditional competitive tender and the assets are sold to the highest bidder.8

The assessment whether a transfer involved State aid to the buyer was made by the Commission in relation to the transfer of economic activities of Novo Banco to Lone Star. In its decision, the Commission verified whether the sales process had been fair, open, competitive and transparent, that the sale happened on market terms and that the offer chosen maximized the value of the assets and liabilities sold. The Commission concluded that Lone Star was not a beneficiary of State aid.9

Although this is not mentioned in the resolution framework as a condition, the transfer tools should also be applied in compliance with the merger control exercised by the Commission or the national competition authorities.10

Ad d: More than once

The transfer tools may be used more than once in order to make supplemental transfers of shares or other instruments of ownership issued by the bank in resolution or, as the case may be, assets, rights or liabilities of the bank in resolution.11

Ad e: Re-application

Following the application of a transfer tool, a resolution authority may, with the consent of the purchaser, re-apply the transfer tool in order to transfer the shares, ownership instruments, assets, rights or liabilities, as applicable, back to the original owners or the bank, as the case may be. The original owners and the bank are obliged to take back any such shares, instruments of ownership, assets, rights or liabilities.12 In case of application of the bridge institution tool, the shares, ownership instruments, assets, rights or liabilities may also be transferred by the resolution authority to a third party.13 Re-application of the bridge institution and the asset separation tool may only take place, provided that this possibility is expressly stated in the instrument by which the transfer was made or the specific shares, instruments of ownership, assets, rights or liabilities do not, in fact, fall within the classes of, or meet the conditions for transfer.14

In the case of BES the Portuguese resolution authority, the Banco de Portugal, approved to retransfer certain senior bonds from the bridge institution Novo Banco to BES. This measure was deemed necessary to ensure that the losses of BES were absorbed by the bank’s shareholders and creditors. A group of 14 asset managers started legal proceedings against the Banco de Portugal following this retransfer.15

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