Public funding of failing banks in the European Union (LBF vol. 19) 2020/7.5.2.2:7.5.2.2 Lack of clarity on ‘going concern’ solutions

Public funding of failing banks in the European Union (LBF vol. 19) 2020/7.5.2.2

7.5.2.2 Lack of clarity on ‘going concern’ solutions

Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.

As discussed in section 7.2.1.1, the resolution framework only sets out the criteria for the restructuring process of a bank in resolution, when the bail-in tool is applied with the objective of restoring the capital of the failing bank to enable it to continue to operate as a going concern. The reason behind this may be that the bail-in tool is the only resolution tool considered a ‘going concern’ tool.

However, if the application of the bridge bank tool or sale of business tool leads to the transfer of all shares in the failing bank to a bridge bank or third party, respectively, this could also be seen as a ‘going concern’ solution in the author’s view. The bank itself will, after all, not be impacted by the share transfer, although its new shareholder(s) may want to reorganize the bank. It is not clear whether, in that situation, restructuring of the bank in resolution is triggered under the resolution framework.

For example, on 7 June 2017, the SRB transferred all shares of Banco Popular to Banco Santander. According to a press release on the website of the SRB, this means that “Banco Popular continued to operate under normal business conditions as a solvent and liquid member of the Santander Group with immediate effect”.1 Although the exercise of the PONV conversion power led to the write down of all shares, the conversion of the AT 1 capital instruments into shares and the subsequent write down thereof, no other restructuring obligations can be derived from the resolution of the Spanish resolution authority (the FROB).2 The SRB decision mentions that the FROB is entitled to remove and replace the management body, but the FROB does not seem to have exercised this power.3 No State aid was involved, so no restructuring obligations were imposed from that angle. The transfer of the shares in Banco Popular to Banco Santander also constituted a concentration within the meaning of Article (3)(1)(b) of the Merger Regulation4 and was therefore also assessed by the Commission in its role as competition authority.5 Also from that perspective, no restructuring obligations were imposed.

In addition, the resolution framework does not provide any guidance in relation to the application of the asset separation tool. For example, the asset separation tool could be applied to transfer impaired assets from a failing bank to an AMC, while the critical functions remain with the failing bank. In that case, the application of the asset separation tool has to be accompanied by the bail-in tool6, taking into account that the asset management tool cannot be used as a stand-alone resolution tool. It is not clear whether the bail-in tool can, in that case, only be used to convert to equity or reduce the principal amount of claims or debt instruments transferred to the AMC, or that it can also be used to recapitalise the failing bank. Article 43 BRRD does not seem to exclude the bail-in tool being used in that case to recapitalise the failing bank. It seems to be logical that,, in both cases, the failing bank has to restructure, since it will remain active on the market. The resolution framework however only requires restructuring when the bail-in tool is used to recapitalise the failing bank.7

An example in which the asset separation tool was used as a going concern solution is the case of MKB Bank, see section 6.4.4.4. Taking into account that the resolution of MKB Bank took place prior to the introduction of the bail-in tool, this was not used. However, the shareholder of MKB Bank (the Hungarian State) was fully diluted. There were no subordinated debt-holders.

The situation is different if the asset separation tool is used to transfer the impaired assets to an asset management vehicle and subsequently sold or liquidated, while the critical functions are transferred under the sale of business tool or bridge bank tool, after which the residual entity is liquidated. In such a case, the asset separation tool is used as a gone concern solution.

Deze functie is alleen te gebruiken als je bent ingelogd.