Public funding of failing banks in the European Union (LBF vol. 19) 2020/4.4.2.1:4.4.2.1 To ensure the continuity of critical functions

Public funding of failing banks in the European Union (LBF vol. 19) 2020/4.4.2.1

4.4.2.1 To ensure the continuity of critical functions

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The first resolution objective is to ensure the continuity of critical functions. Critical functions are the activities, services or operations the discontinuance of which is likely in one or more Member States to lead to the disruption of services that are essential to the real economy or to disrupt financial stability due to the size, market share, external and internal interconnectedness, complexity or cross-border activities of a bank or group, with particular regard to the substitutability of those activities, services or operations.1 In accordance with the definition in the BRRD, criticality should not be assessed only on its direct impact on the real economy but also on its impact on financial markets.2

The concept of critical function has been further detailed in Delegated Regulation (EU) 2016/778. Pursuant to this delegated regulation, a function shall be considered critical if (a) it is provided by a bank to third parties not affiliated to the bank or group, and (b) the sudden disruption of that function would likely have a material negative impact on the third parties, give rise to contagion or undermine the general confidence of market participants due to the systemic relevance of the function for the third parties and the systemic relevance of the bank or group in providing the function.3 In order for a function to be qualified as critical, it should in addition thereto not be possible to substitute the function on acceptable terms within a reasonable timeframe.4

Examples of critical functions can include deposit taking, lending and loan services, payment, clearing, custody and settlement services, wholesale funding markets activities, and capital markets and investments activities.5

In the resolution of Banco Popular resolution action was considered necessary by the SRB to achieve this resolution objective (alongside the resolution objective of avoiding adverse effects on financial stability). It was considered that Banco Popular’s critical functions, consisting of deposit taking from households and non-financial corporations, lending to SMEs and payment and cash services should be ensured by the transfer to Banco Santander.6

In the case of Veneto Banca, the SRB considered that the deposits taking and lending activities and payment services were not critical functions, since they were only provided to a limited number of third parties and could be replaced in an acceptable manner and within a reasonable timeframe.7 The SRB reached the same conclusion on the same grounds in relation to Banca Popolare di Vicenza.8 In relation to ABLV Bank, the SRB also concluded that the functions performed by the bank, e.g. deposit-taking, lending activities and payment services, were not critical. In this case, the motivation for this conclusion was however that their discontinuance would lead neither to the disruption of services that are essential to the real economy of Latvia nor to the disruption of financial stability in Latvia or in other Member States.9 The same motivation was given for the conclusion of the SRB in relation to the activities of ABLV Bank Luxembourg. These were not considered to be critical, because their discontinuance would lead neither to the disruption of services that are essential to the real economy of Luxembourg nor to the disruption of financial stability in Luxembourg or in other Member States.10

It is considered in literature that the resolution objective of continuity of critical functions partly overlaps with the second resolution objective of avoiding significant adverse effects on financial stability, because both objectives consider contagion or spillover effects.11 This can, for example, be seen in the case of ABLV Bank and ABLV Bank Luxembourg.

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