4.5.2 ESM direct recapitalisation instrument

The ESM provides financial assistance to Member States in the Eurozone. In some cases, the ESM indirectly recapitalised banks. For instance, in 2012, the ESM granted a loan to Spain, which in turn used these funds to recapitalise its banks. Art. 15(1) of the ESM Treaty provides that the ESM may grant financial assistance through loans to an ESM Member for the specific purpose of re-capitalising the financial institutions of that ESM Member. Art. 15(3) of the ESM Treaty is also of relevance, since this provision refers to Articles 107 and 108 TFEU.

The Banking Union allows for a rescue of banks at EU-level: the Euro Area Summit Statement of 29 June 2012 held that the ESM should get the possibility to recapitalise banks directly. However, if banks are rescued/supported at EU-level, then banking supervision should also be transferred to EU-level.1 In order words: the SSM was a precondition for the direct recapitalisation by the ESM.

The direct recapitalisation instrument (DRI) was intended to break the vicious circle between banks and governments. However, because of the introduction of the bail-in tool and the national resolution financing arrangements/the Single Resolution Fund, the DRI is less likely to be used.2 It has even been remarked that “the prospects for ESM direct recapitalisation were later shrunk to the point of near-meaninglessness”.3

As regards the relation between the DRI and the recovery and resolution framework, the provisions of Art. 8 of the ESM Guideline on Financial Assistance for the Direct Recapitalisation of Institutions (hereinafter: “ESM Guideline”) are of importance.

In the first place, Art. 8(1) of the ESM Guideline stipulates that the DRI cannot be used as a “precautionary recapitalisation” in the sense of Art. 32(4)(d)(iii) BRRD or Article 18(4)(d)(iii) SRM-Regulation. Consequently, the DRI would most likely trigger resolution.

In the second place, a precondition for the use of the DRI is that a bail-in of at least 8% has to be applied. In addition, there must be a contribution from the resolution financing arrangement of at least 5%. Moreover, all unsecured, non- preferred liabilities, other than eligible deposits, must be written down or be converted in full. These three preconditions follow from Art. 8(3) of the ESM Guideline.4 Similar conditions can be found in the BRRD and the SRM- Regulation. Art. 44(7) BRRD and Art. 27(9) SRM-Regulation provide that in extraordinary circumstances, further funding may be sought from alternative financing sources.5 There are, however, two preconditions: firstly, the 5% limit of the contribution of the SRF should be reached; and secondly, all unse-cured, non-preferred liabilities, other than eligible deposits, should be written down or converted in full.

As regards the relation between the DRI and the State aid control framework, the question could arise whether State aid rules also apply to the ESM direct recapitalisation instrument. After all, if the ESM recapitalises banks directly, is the recapitalisation imputable to the Member State? The Euro Area Summit Statement of 29 June 2012 leaves little room for doubt as to the applicability of the State aid rules:

The relevance of the State aid rules to the DRI was reiterated in the following statement:

Art. 1(3) of the ESM Guideline provides that the DRI shall be provided in accordance with the State aid provisions under Art. 107 and 108 TFEU. Consequently, the intention to grant aid under the DRI has to be notified to the Commission.8 Since the State aid rules apply to the DRI, a restructuring plan is required for banks that benefit from the DRI.9 Pursuant to Art. 4(5) of the ESM Guideline, the ESM shall, jointly with the institution(s) and the ESM Member concerned, draw up a restructuring plan. This, once again, underlines the significance of the State aid rules in case of a direct recapitalisation by the ESM.