Public funding of failing banks in the European Union (LBF vol. 19) 2020/7.1:7.1 Introduction

Public funding of failing banks in the European Union (LBF vol. 19) 2020/7.1

7.1 Introduction

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After the resolution authority (the SRB or the national resolution authority) has put the bank in resolution, the resolution of the bank starts. The application of the resolution tools may trigger restructuring of the bank, but this is not necessarily so. When resolution involves the award of State aid, e.g. through the use of GFST, the restructuring process under the State aid regime for the banking sector may also apply. As a result, the restructuring process of a failing bank has become multi-faceted after the introduction of the resolution framework. After all, a failing bank may not only be faced with the restructuring process under the State aid regime for the banking sector, but also under the resolution framework. Although these restructuring processes may be triggered at the same time, they may differ and impose different restructuring obligations on the bank.

Prior to the introduction of the resolution framework, the restructuring (or liquidation) of a bank was the domain of the Commission, being the State aid authority, and the Member State, working together with the beneficiary bank and the competent authority, assuming that the restructuring process was triggered by the award of State aid. Under the resolution framework another actor has been introduced on stage: the resolution authority. The Commission, in its role as the State aid authority, will have to work together with the resolution authorities and vice versa in order to ensure an efficient restructuring process.

Within the SRM, the Commission also acts as resolution authority (see section 6.2.2). In this chapter, references to the Commission should be read as references to the Commission acting in its role as State aid authority, unless otherwise indicated.

This chapter discusses the impact of the resolution framework on the restructuring process of a failing bank. It is structured as follows. Section 7.2 first describes the restructuring processes that a failing bank can be subject to after the introduction of the resolution framework. Section 7.3 subsequently assesses the competences of the different authorities in the restructuring process of a failing bank. Section 7.4 pays particular attention to the burden-sharing obligation in case a failing bank receives public funding after the introduction of the resolution framework. Section 7.5 further analyses the impact that the resolution framework has on the restructuring process of a failing bank and identifies any challenges in this process. Section 7.6 concludes this chapter.

This chapter only applies to the restructuring of banks that started after the resolution framework entered into force. The restructuring of banks that started prior to the introduction of the resolution framework remains managed by the national authorities on the basis of the State aid regime for the banking sector only.1 The situation where a bank is not restructured but wound up in normal insolvency proceedings is not discussed in this chapter.

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