Public funding of failing banks in the European Union (LBF vol. 19) 2020/5.3.5.4:5.3.5.4 Access to GFST under the BRRD

Public funding of failing banks in the European Union (LBF vol. 19) 2020/5.3.5.4

5.3.5.4 Access to GFST under the BRRD

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The BRRD introduces the peculiar concept of government financial stabilisation tools (GFST). The GFST do not constitute resolution tools, but set conditions for Member States under which they can award public funding to banks in resolution. It is up to the discretion of the Member States to implement the GFST in national law.1

The GFST include the ‘public equity tool’ and the ‘temporary public ownership tool’.2 Under the application of the public equity tool, Member States may, while complying with national company law, participate in the recapitalisation of a bank or group by providing capital to the latter in exchange for CET 1, AT 1 or Tier 2 instruments.3 Under the application of the temporary public ownership tool, Member States may take a bank or group into temporary public ownership (in other words, the bank is nation-alised). For that purpose, a Member State may make one or more share transfer orders in which the transferee is a nominee of the Member State or a company wholly owned by the Member State.4

Nationalisation itself does not constitute a form of State aid, since the TFEU is neutral with regard to the form of ownership. However, any capital injections or other aid measures that take place in relation thereto may indeed form State aid.5

The GFST can be applied for the purpose of participating in the resolution of a bank or group, including by intervening directly, in order to avoid its winding up, with a view to meeting the resolution objectives in relation to the relevant Member State or the EU as a whole.6 The provision of EPFS through the GFST has to take place under the leadership of the competent ministry or the government of the relevant Member State in close cooperation with the relevant resolution authority. In order to give effect to the GFST, the competent ministries or governments should have the relevant resolution powers specified in Articles 63 to 72 BRRD in accordance with Articles 66, 68, 83 and 117 BRRD.7 It is up to the discretion of the relevant Member State to use the GFST; it cannot be forced by the resolution authority in that respect.8

At the time of writing this dissertation, the GFST have not yet been applied by a Member State.

The resolution authority may only seek funding from a Member State through the use of the GFST, if the following ‘access criteria’ are met.9

Access criterion 1: Systemic crisis

There should be the very extraordinary situation of a systemic crisis. A systemic crisis is defined in Article 2(1), point (30) BRRD as “a disruption in the financial system with the potential to have serious negative consequences for the internal market and the real economy. All types of financial intermediaries, markets and infrastructure may be potentially systemically important to some degree”.

Access criterion 2: Last resort

The GFST should be used as a last resort after having assessed and exploited the resolution tools to the maximum extent practicable whilst maintaining financial stability.10 The GFST can only be applied, when one of the following conditions is met:

a)

the competent ministry or government and the resolution authority, after consulting the central bank and the competent authority, have determined that the application of the resolution tools would not suffice to avoid a significant adverse effect on the financial system; or

b)

the competent ministry or government and the resolution authority have determined that the application of the resolution tools would not suffice to protect the public interest, where ELA has previously been given to the bank; or

c)

in respect of the temporary public ownership tool, the competent ministry or government, after consulting the competent authority and the resolution authority, has determined that the application of the resolution tools would not suffice to protect the public interest, where public equity support through the public equity tool has previously been given to the bank.11

Access criterion 3: Bail-in

The GFST may only be used provided that a contribution to loss absorption and recapitalisation equal to an amount not less than 8% of total liabilities, including own funds of the bank in resolution, measured at the time of resolution action, has been made by the shareholders and the holders of other instruments of ownership, the holders of relevant capital instruments and other eligible liabilities through write down, conversion, or otherwise.12

It is not entirely clear whether in addition to this access criterion the conditions set out in Article 44(7) BRRD, as further discussed in section 5.3.5.6, should also be met. Pursuant to this article, in extraordinary circumstances, the resolution authority may seek further funding from alternative financing sources after, (a) a contribution of the resolution financing arrangement of 5% of the total liabilities including own funds of the institution under resolution, measured at the time of resolution action, has been made, and (b) all unsecured, non-preferred liabilities other than eligible deposits, have been written down or converted in full. Gardella seems to take the stance that these conditions do not apply to the GFST.13 In the author’s view, it can however not be excluded that Article 44(7) BRRD should also be applied in case of the use of the GFST, taking into account that the GFST are considered alternative financing sources, as can be derived from Article 37(10) BRRD. As will be seen in section 5.3.5.7, the ESM DRI is also only available, if the conditions set out in Article 27(9) SRMR, which are the same as the conditions set out in Article 44(7) BRRD, are met. If one assumes that the GFST are not available as a funding means within the SRM, as further discussed in section 5.3.5.5, it seems to be arbitrary that the access conditions to the GFST are less strict than those to the ESM DRI, taking into account that both instruments have the same purpose: recapitalisation of the bank in resolution.

On the other hand, the GFST may only be applied in the very extraordinary situation of a systemic crisis (access criterion 1). It is precisely in such a situation that the application of strict bail-in requirements may be difficult, for example, if the investors to be bailed-in are also in a financially difficult position and bail-in may cause their financial position to significantly deteriorate. Depending on the type of investor, this may further contribute to the situation of the systemic crisis that the GFST is trying to remedy.14 There may, therefore, be reason to introduce some type of flexibility in the bail-in requirement. For example, an option could be that the national resolution funds are allowed to contribute to part of the required bail-in of 8%. Or an exception to the bail-in requirement could be introduced when implementing these measures would endanger financial stability or lead to disproportionate results, similar to the exemption to the burden-sharing requirements under the State aid regime for the banking sector.15 This however requires further amendment of the BRRD.

Access criterion 4: Temporary solution

Member States have to ensure that the shareholding in the bank will be transferred to the private sector as soon as commercial and financial circumstances allow.16

Access criterion 5: The bank will be maintained as a going concern

Only when the resolution of a bank is aimed at maintaining it as a going concern, can the GFST be applied.17 This makes sense, because the purpose of the GFST is to recapitalise a bank. The GFST can therefore be used when the resolution entails the application of the bail-in tool to recapitalise the failing bank.18 Use of the GFST is however incompatible with the transfer of the bank’s operations to a new entity under a transfer tool, since this would lead to the old entity’s dissolution. However, if the transfer tool is used to transfer the bank’s ownership to a new owner, including a bridge bank, it is the author’s view that this should be seen as a ‘going concern’ solution, in which case it could be argued that the GFST could also be used in such a situation. Lastly, one could potentially argue that the GFST should also be available to fund a bridge bank, since a bridge bank itself should be operated as a viable going concern.19

Access criterion 6: Management on commercial and professional basis

Member States have to ensure – to the extent that the shareholding in a bank or group so permits – that the bank or group that is subject to the application of the GFST is managed on a commercial and professional basis.

Access criterion 7: Approval under the State aid regime

The GFST may only be used after receiving final approval under the Union State aid framework.20

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