Public funding of failing banks in the European Union (LBF vol. 19) 2020/5.3.2.3:5.3.2.3 Relevance of precautionary guarantees and recapitalisation

Public funding of failing banks in the European Union (LBF vol. 19) 2020/5.3.2.3

5.3.2.3 Relevance of precautionary guarantees and recapitalisation

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If the access criteria for precautionary guarantees or precautionary recapitalisation are met, public support can be granted by Member States to banks without triggering the FOLTF determination. This means that Member States can grant these forms of public support without triggering resolution. This means that the powers of the resolution authorities are not triggered, including the power to apply the bail-in tool. Moreover, no mandatory bail-in of 8% of the total liabilities including own funds of the bank in resolution has to take place as a precondition for the Member State support.1 In relation to precautionary guarantees, there is one exception to the rule that the resolution framework is not triggered. This relates to the exercise of the PONV conversion power, as will be discussed in section 5.3.3.

The BRRD and the SRMR provide for the requirement for the Commission to review, by 31 December 2015, whether there is a continuing need for allowing precautionary recapitalisation and the conditions that need to be met in that case.2 At the time of writing this dissertation, the review has not taken place. According to Véron, including the possibility of precautionary recapitalisation seems to be motivated by a need for transitional arrangements in order to prepare the Member States and the banks for the new bail-in requirements.3 The question is whether there will not always be a need (or desire) for precautionary recapitalisation to be allowed.4 In July 2017, Hellwig reported that precautionary recapitalisation may be advantageous for banks active in multiple jurisdictions, as long as there are no binding agreements on single-point-of-entry resolution.5 In that case, resolution may lead to resolution procedures in multiple jurisdictions, each taking control of legally independent units. As a result, certain integrated operations may no longer be viable. In that case, precautionary recapitalisation may solve the financial difficulties of the bank before it comes to resolution. He however notes that maintenance of payment systems and lending does not necessarily warrant precautionary recapitalisation, as long as the resolution authorities have sufficient funding available to continue these activities in resolution. In addition, concerns about the impact on bank lenders/investors do not necessarily warrant precautionary recapitalisation, since the resolution authority can choose to exempt certain liabilities from a bail-in. Hellwig therefore recommends restricting the domain of precautionary recapitalisation to those cases where a pre-emption of resolution makes a difference to financial stability or the maintenance of bank lending.6 In the author’s view, it would be recommendable to include precautionary guarantees and precautionary recapitalisation in the resolution process itself. This means that precautionary guarantees and precautionary recapitalisation will no longer be excluded as trigger for resolution and the resolution authority will be involved in the decision-making process, including the implementation of the guarantees or recapitalisation. In order to achieve this, the resolution framework should provide for more flexibility in respect of the bail-in requirements that apply when EPFS is granted; see also section 8.6.5.

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