10.4 Far-reaching restructuring needed? (II): lack of adequate own contribution

As was explained in the previous chapter, non-compliance with one of the IAC-criteria triggers the need for far-reaching restructuring. In particular, point 41 of the IAC stressed that a transfer value above the real economic value (REV) could only be accepted if accompanied by far-reaching restructuring. It should be recalled that setting the transfer value below the REV ensures that the bank bears the losses associated with the impaired assets to the maximum extent. This is known as ‘burden-sharing’ or as the ‘own contribution’ by the beneficiary bank. A transfer value that exceeds the REV means that there is insufficient burden-sharing. This can only be accepted if it is compensated for by far-reaching restructuring.

The principle that a lack of adequate own contribution has to be compensated for by far-reaching restructuring is also applicable outside the context of the IAC. Indeed, it is not only enshrined in the IAC; it can also be found in the other Communications. For instance, point 25 of the Restructuring Communication sets out that any derogation from an adequate burden-sharing ex ante which may have been exceptionally granted in the rescue phase for reasons of financial stability should be compensated for by a further contribution at a later stage of the restructuring, for example in the form of claw-back clauses and/or by farther-reaching restructuring including additional measures to limit distortions of competition.1

This also follows from point 31 of the Restructuring Communication which stipulates that the Commission will take into account the extent of the beneficiary bank’s own contribution, when assessing the need for compensatory measures. The relation between the own contribution and the need for compensatory measures is formulated as follows: “Generally speaking, where there is greater burden sharing and the own contribution is higher, there are fewer negative consequences resulting from moral hazard. Therefore, the need for further measures is reduced”.2

With respect to recapitalisation measures, points 15 and 44 of the Recapitalisation Communication explain that in duly justified cases, a lower remuneration can be accepted in the short-term for distressed banks on the condition that the lower remuneration will be reflected in the restructuring plan.3 This can be illustrated by the following recital:

In short, an inadequate remuneration triggers a need for in-depth restructuring. This principle is applied in several cases.5 In conclusion, the lower the degree of own contribution, the more far-reaching restructuring is required. This could indicate that own contribution and the other restructuring measures are ‘communicating vessels’.6

As was outlined in section 8.6, the Commission has always assessed whether the remuneration was adequate. In the context of the current chapter, the following observation can be made. The assessment whether the remuneration is adequate includes the assessment whether an inadequate remuneration should be compensated for by far-reaching restructuring. Thus, although the fact that the remuneration is inadequate is a relevant characteristic, it is not separately assessed by the Commission. Indeed, in every case, the Commission either concluded that the remuneration was adequate or concluded that the low level of remuneration had to be compensated for by far-reaching restructuring.