Public funding of failing banks in the European Union (LBF vol. 19) 2020/7.2.2:7.2.2 The restructuring process under the State aid regime for the banking sector

Public funding of failing banks in the European Union (LBF vol. 19) 2020/7.2.2

7.2.2 The restructuring process under the State aid regime for the banking sector

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When a bank receives State aid, the restructuring process as laid down in the State aid regime for the banking sector may apply, depending on the circumstances:

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Recapitalisation and asset relief measures must in principle be preceded by the approval by the Commission of a restructuring plan. Only when recapitalisation or asset relief measures are required to preserve financial stability, can this be granted before a restructuring plan is approved. This restructuring plan has to be submitted within two months of the date of the decision temporarily approving the aid.

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Funding guarantees and liquidity support can be granted as rescue aid before a restructuring (or winding up) plan is approved. A restructuring (or winding up) plan must however be submitted to the Commission within two months for any bank granted guarantees on new liabilities or on renewed liabilities for which, at the time of the granting of the new guarantee, the total outstanding guaranteed liabilities (including guarantees accorded before the date of that decision) exceed both a ratio of 5% of total liabilities and a total sum of EUR 500 million. In addition, for any bank which causes the guarantee to be called on, an individual restructuring (or winding up) plan must be submitted within two months after the guarantee has been activated.1

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Liquidation aid to assist the winding up of the bank in an orderly manner must be preceded by the approval by the Commission of a plan for the orderly liquidation of the bank (winding up plan).

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Liquidation aid to the economic activity to be sold must be preceded by the approval by the Commission of a plan for the integration of the economic activity in the buyer (integration plan).

The State aid regime for the banking sector provides that a capital raising plan should be implemented by the bank as part of or before the restructuring process in order to ensure that the award of State aid is as limited as possible.

As soon as a capital shortfall likely to result in a request for State aid has been identified, a Member State can enter into pre-notification contacts with the Commission on the basis of a capital raising plan.2

The capital raising plan sets out capital raising measures (e.g. right issues, conversion of debt into equity, liability management exercises, capital-generating sales, securitisation), burden-sharing measures (absorption of losses by equity, hybrid capital holders and/or subordinated debt holders) and safeguards preventing the outflow of funds (e.g. dividend bans, prohibition to repurchase shares).3 Only if the capital raising measures and safeguards are not sufficient to fill the capital shortfall, then shareholders and subordinated creditors will be required to contribute through burden-sharing measures.4 If after the implementation of all the measures a capital shortfall remains, it can in principle be covered by State aid.5

Further details of the restructuring and liquidation process under the State aid regime for the banking sector have been discussed in section 3.7.

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