4.4.1.3 Resolution is necessary in the public interest

At the time of writing this dissertation, the SRB has taken five decisions in relation to the application of the ‘public interest test’. In four of these decisions, it decided that resolution was not in the public interest and that the banks should be wound up in normal insolvency proceedings.

The only decision in which the SRB stated that resolution was in the public interest so far, is the case of Banco Popular. The SRB assessed that Banco Popular provides critical functions, consisting of deposit taking from households and non-financial corporations, lending to SMEs and payment and cash services. In addition, it considered that the situation of Banco Popular entailed an increased risk of significant adverse effects on financial stability in Spain. In this assessment, it took into account the size and nature of the business of Banco Popular. Lastly, the SRB concluded that the resolution actions would meet the other resolution objectives at least to the same extent as insolvency proceedings.3

In relation to Veneto Banca, the SRB assessed that the bank did not provide critical functions. In addition, the SRB assessed that the failure of the bank, on a standalone basis, was not likely to result in significant adverse effects on financial stability in Italy, because it size was rapidly declining, the bank had not been classified as systemically important by the Banca d’Italia, the relatively low financial and operational interconnections with other financial institutions and there would be no significant impact at national level, although a potential adverse impact on retail customers and SMEs in certain regions could not be excluded. In addition, it was assessed that the protection of investors and depositors, client funds and client assets could be achieved to the same extent in normal insolvency proceedings.4 The SRB made the same assessment in relation to Banca Popolare di Vicenza. It also considered that the simultaneous failure of Veneto Banca and Banca Popolare di Vicenza might have an impact on financial stability, but that this would likely not be significant, due to the low interconnectedness of the banks with other financial institutions, the highly diversified funding structure of the banks, the small combined market share for lending and deposit-taking, the diminishing role of the banks for credit supply, the deteriorating market share of the banks without having a measurable impact and the fact that market perception of the banks had already deteriorated significantly.5

In relation to ABLV Bank and ABLV Bank Luxembourg, the SRB assessed that resolution was not in the public interest, because neither of the banks provide critical functions, and their failure is not expected to have a significant adverse impact on financial stability in Latvia, Luxembourg or other Member States. For ABLV Bank Luxembourg, the SRB considered relevant in that respect the limited size of the bank and the absence of ties to the Luxembourgish real economy. For ABLV Bank, the SRB considered that the low financial and operational interconnections with other financial institutions justified the outcome that the failure of the bank was not likely to result in significant adverse effects on financial stability in Latvia or in other Member States.6 The decisions of the SRB are challenged by ABLV Bank before the CI.7 ABLV Bank, inter alia, argues that the SRB lacks the competence for the decision as to liquidation. At the time of writing this dissertation, the CI had not yet assessed the case.

In its decisions in respect of Veneto Banca and Banca Popolare di Vicenza, the SRB referred to the banks’ score for systemic relevance in accordance with the EBA O-SII Guidelines as one of the indicators it took into account in its assessment whether there was a significant adverse effect on financial stability in Italy.11 In relation to ABLV Bank, the SRB mentioned the low financial and operational interconnections with other financial institutions.12 In respect of ABLV Bank Luxembourg, the SRB took into account the limited size of the bank and the absence of ties to the Luxembourgish real economy.13

The Bank of Greece concluded that, in view of the current fragile political and financial environment in Greece and despite the fact that Bank of Peloponnese is not a systemic credit institution, the winding up of that bank in normal insolvency proceedings, with the subsequent loss of the uncovered deposits, would pose a significant threat to financial stability. It would exacerbate even further the disarray among market participants and depositors. The Bank of Peloponnese was therefore put in resolution.14

The Bank of Italia came to the same conclusion in relation to BancaEtruria, Cassa di Risparmio di Ferrara (Carife) and Cassa di Risparmio della Provincia di Chieti (Carichieti). Notwithstanding the small size of each of the banks involved (it was estimated that, in the aggregate, the four banks accounted for approximately 1% of total deposits in Italy), it held that a resolution action was ‘necessary in the public interest’.15

Binder sees a risk in the application of the resolution toolbox to small or even medium-sized institutions taking into account that the resolution action should be proportionate to one or more resolution objectives and winding up of the bank in normal insolvency proceedings would not meet the resolution objectives to the same extent. He takes the stance that this could normally not be said about cases involving smaller or even medium-sized institutions.16 Lannoo acknowledges that there is not a single definition of a systemic bank. He takes the stance that resolution tools are applicable to a bank that is systemic and if they don’t qualify for the label, the bank should be allowed to fail.17 He however does not further address when a bank should qualify as systemic. In the author’s view, a distinction should be made between an idiosyncratic shock and a systemic crisis. In a systemic crisis, there may be a public interest to put even small banks in resolution due to the contagion risk. This may be different in case of an idiosyncratic shock. See also section 7.5.4.3. As long as no further clarity is given in that respect, interpretations may differ (between the SRB and the national resolution authorities) as a result of which resolution of a bank may be justified by merely regional considerations.