Public funding of failing banks in the European Union (LBF vol. 19) 2020/4.4.1.2:4.4.1.2 The failure of the bank cannot be prevented within a reasonable timeframe

Public funding of failing banks in the European Union (LBF vol. 19) 2020/4.4.1.2

4.4.1.2 The failure of the bank cannot be prevented within a reasonable timeframe

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The second condition to put a bank in resolution is that there is no reasonable prospect that any alternative private sector measures, including measures by an institutional protection scheme (IPS), or supervisory action, including early intervention measures or the write-down or conversion of relevant capital instruments in accordance with the PONV conversion power, taken in respect of the entity, would prevent its failure within a reasonable timeframe.

An alternative private sector measure would for example be a voluntary recapitalisation. Alternative private sector measures also include measures by an IPS. An IPS is a contractual or statutory liability arrangement entered into by a bank with a counterparty which protects the bank and in particular ensures its liquidity and solvency to avoid bankruptcy where necessary.1

50% of the total number of banks in the Eurozone are members of an IPS, representing 10% of the total assets of the Eurozone banking system.2 According to Véron, German savings and cooperative banks are practically exempt from the application of the BRRD by the IPS to which they belong.3 The reason is that the second resolution condition will never be met, if the IPS is able to prevent the failure of the bank. At the time of writing this dissertation, the use of IPS is assessed by the Commission in respect of the support plan of Nord/LB. In this plan, the existing shareholders of Nord/LB, which are the State of Lower Saxony and the State of Saxony-Anhalt, intend to contribute to a capital injection in the bank, besides the Sparkassen Finanzgruppe, which is an IPS.4 The outcome of this assessment, including potential qualification as State aid, is still unknown at the time of writing this dissertation.

A supervisory action would, for example, be an early intervention measure.5 A supervisory action also includes the exercise of the PONV conversion power, as further discussed in section 4.5.2.6

Within the SRM, an assessment of this condition should be made by the SRB or, where applicable, the national resolution authorities, in close cooperation with the ECB or the national competent authority.7 Under the BRRD, this assessment should be made by the national resolution authority in consultation with the national competent authority.8

For example, in the case of Banca Popolare di Vicenza, the ECB considered that there were no effective supervisory measures or early intervention measures available which would restore the compliance with capital regulatory requirements. It considered that an effective and timely implementation of the plan to recapitalise Banca Popolare di Vicenza and Veneto Banca, merge them and create the conditions for a new viable business model in the future was implausible. In addition, Banca Popolare di Vicenza had shown to be incapable of raising capital in the open market.9

In the case of ABLV Bank Luxembourg, the SRB considered that no alternative private measures and supervisory actions could prevent the failure of the bank taking into account several elements, including the bank’s inability to obtain financial support from its parent company (ABLV Bank), the lack of other implementable measures in the group recovery plan, the absence of available supervisory or early intervention measures that could restore the liquidity position of the bank and the inability of a write-down and conversion of capital instruments to prevent the failure of the bank.10

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