12.6.3.5 Consistent application of the burden-sharing principle?

The principle of equal treatment requires that burden-sharing by subordinated debt holders is interpreted consistently by the Commission. The 2013 Banking Communication contributed greatly to a consistent application of the burden- sharing principle, since it raised the minimum requirements for burden-sharing. By contrast, in the pre-2013 Banking Communication era, several indications can be found that point at an inconsistent application of the burden-sharing principle. This inconsistency can occur at two levels.

In the first place, the previous subsections have shown that there are different types of burden-sharing measures (i.e. LME, full write-down, remaining at the bank in liquidation, coupon ban). These different types are not equally burdensome. This is most evident with respect to the coupon ban. As discussed in the previous subsection, there are some cases in which the Commission accepted the coupon ban as the only burden-sharing measure. That situation was put to an end by the 2013 Banking Communication.

In the second place, it should be recalled that the level of burden-sharing depends on the modalities of the burden-sharing measure. However, it can be observed that the modalities are not always taken into account in the burden- sharing assessment. This can be illustrated by contrasting the decision on Eurobank with the decision on Piraeus Bank. The assessment of the LME in the case of Piraeus Bank is almost similar to that of Eurobank. However, the description of the LME indicates that the cases differ on some of the aspects of the LME. For instance, recital 123 of the Eurobank-decision indicates that the acceptance rate of the 2013 LME was 48%. Piraeus Bank, only achieved an acceptance rate of 20% when it conducted a LME in 2013.1 So there is a difference, but this difference did not lead to a different conclusion: in both decisions, the Commission concluded that there was sufficient burden-sharing by the subordinated debt holders. Admittedly, the acceptance rate is not the only aspect of a LME and the conclusion was based on all the LME-transactions performed by the bank. Nonetheless, the fact that the difference on this aspect of the LME did not lead to a different conclusion, raises the question whether the approach of the Commission towards burden-sharing by means of a LME was consistent.

In the 2013 Banking Communication era, burden-sharing by subordinated debt holders is in principle always required. A low level of burden-sharing is thus no longer allowed. Nevertheless, there can be a justification for a low level (or absence) of burden-sharing.2 In that regard, it should be noted that in a few cases, there was no burden-sharing by subordinated debt holders: in the case of CCB and MKB Bank, there was no LME or any other form of burden-sharing by subordinated debt holders. This can, however, be explained by the simple fact that there were no outstanding subordinated debt instruments in these cases. The absence of burden-sharing by subordinated debt holders in these cases does therefore not amount to an inconsistency.

Another justification can be found in the decision of 26 November 2015 on Alpha Bank. The background of that case was as follows: the comprehensive assessment conducted in the context of the SSM revealed a capital shortfall. Alpha Bank would try to raise capital from private investors, while the Hellenic Financial Stability Fund (“HFSF”) would act as a backstop. Effectively, this backstop was an underwriting commitment (i.e. a commitment to provide the amount of capital needed to cover the capital shortfall in case it was not provided by private investors). In that context, Greece made the commitment to bail-in subordinated creditors before any capital support would have been actually paid out to the bank by the HFSF. In the end, Alpha Bank successfully raised enough private capital to cover the capital shortfall determined by the comprehensive assessment. Consequently, the bail-in of the subordinated debt did not take place.

The underwriting by the HFSF constituted State aid, but the burden-sharing by subordinated debt holders would only take place in case of a recapitalisation by the HFSF. In that regard, the Commission considered on the basis of point 45 of the 2013 Banking Communication that disproportionate results would follow if the bail-in of subordinated debt and hybrid capital had to occur already at the moment of the underwriting commitment. The commitment by Greece to bail-in subordinated creditors before any capital support would have been actually paid out to the bank is therefore sufficient to ensure proper burden- sharing.3

It is noteworthy that in the decision on Alpha Bank, the Commission referred to point 45 of the 2013 Banking Communication. Point 45 provides for an exception to the burden-sharing requirements (laid down in points 43 and 44). This exception can be made when burden-sharing would endanger financial stability or lead to disproportionate results. Point 45 further explains that this exception could cover cases where the aid amount is small in comparison to the bank’s RWA and the capital shortfall has been reduced significantly in particular through capital raising measures.4

When there is no justification for a low level (or even a total absence) of burden-sharing, the Commission will not authorise the State aid. This can be illustrated by the case of Banca Tercas. In this case, the subordinated debt was not converted nor written-down. The parties claimed that “the option of bailing-in the subordinated debt was not legally feasible under the then applicable Italian legislation and that debt can be written down only in case of compulsory administrative liquidation”.5 The Commission did not accept this argument. The Commission concluded that the subordinated creditors had not contributed to the maximum extent possible.6 In other words: the burden-sharing requirement was not met. Moreover, Italy did not submit a restructuring plan for Banca Tercas. As a result, the State aid was incompatible and the Commission ordered the recovery of the aid.

To conclude, in the 2013 Banking Communication era, burden-sharing by subordinated debt holders is in principle always required. Authorising State aid without requiring proper burden-sharing by subordinated debt holders would thus be inconsistent. However, as illustrated by the case of Alpha Bank, there is no inconsistency if there is a justification for a low level of burden-sharing.