Public funding of failing banks in the European Union (LBF vol. 19) 2020/7.4.1.1:7.4.1.1 Burden-sharing cascade

Public funding of failing banks in the European Union (LBF vol. 19) 2020/7.4.1.1

7.4.1.1 Burden-sharing cascade

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Application of the burden-sharing principle normally entails that losses are first absorbed by equity, after which contributions are made by hybrid capital holders and subordinated debt holders. Hybrid capital and subordinated debt holders must contribute to reducing the capital shortfall to the maximum extent. The Commission does not require a contribution from senior debt holders (in particular from insured deposits, uninsured deposits, bonds and all other senior debt) as a mandatory component of burden-sharing. State aid must not be granted before equity, hybrid capital, and subordinated debt have fully contributed to offset any losses.1

Where the capital ratio of the bank, that has an identified capital shortfall, remains above the EU regulatory minimum, the bank should normally be able to restore the capital position on its own, in particular through capital raising measures as set out above. If there are no other possibilities, including any other supervisory action, such as early intervention measures or other remedial actions to overcome the shortfall as confirmed by the competent or resolution authority, then burden-sharing measures must be taken.

In cases where the bank no longer meets the minimum regulatory capital requirements, subordinated debt must always be converted or written down, in principle before State aid is granted.

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