Public funding of failing banks in the European Union (LBF vol. 19) 2020/5.3.3:5.3.3 EPFS as a trigger for the exercise of the PONV conversion power?

Public funding of failing banks in the European Union (LBF vol. 19) 2020/5.3.3

5.3.3 EPFS as a trigger for the exercise of the PONV conversion power?

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Resolution authorities must exercise the PONV conversion power before EPFS, including precautionary guarantees, can be awarded to a bank.1 The PONV conversion power must therefore not only be exercised when EPFS is awarded in resolution, but also in the case of precautionary guarantees – which takes place outside of resolution.2 This outcome seems to be illogical, taking into account that the burden-sharing principle under the State aid regime for the banking sector only applies in relation to restructuring aid, which normally takes the form of recapitalisation or impaired asset measures. Precautionary guarantees are normally granted as temporary rescue aid, addressing liquidity issues rather than insolvency issues.

A justification for the exercise of the PONV conversion power in relation to precautionary guarantees could be that this contributes to the guarantees not being used to offset losses the bank has incurred or is likely to incur in the near future. This is, however, also an access criterion for precautionary recapitalisation, in which case the exercise of the PONV conversion power is not triggered.

In the event of precautionary recapitalisation, the resolution authorities are not required to exercise the PONV conversion power under the resolution framework. However, as will be discussed in section 6.5.1, the burden-sharing requirements as set out in the State aid regime for the banking sector still apply.

In the case of the precautionary recapitalisation of MPS, the Commission, for example, considered that all AT 1 and Tier 2 instruments held by MPS were subject to conversion into ordinary shares and would fully contribute to covering capital needs of MPS before State aid was injected.3

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