Public funding of failing banks in the European Union (LBF vol. 19) 2020/4.3.2:4.3.2 The three phases covered by the resolution framework and the alternative phase

Public funding of failing banks in the European Union (LBF vol. 19) 2020/4.3.2

4.3.2 The three phases covered by the resolution framework and the alternative phase

Documentgegevens:

mr. M. Louisse-Read, datum 01-06-2020

Datum: 01-06-2020
Auteur: mr. M. Louisse-Read
JCDI: JCDI:ADS214089:1
Vakgebied(en): Financieel recht / Europees financieel recht
Staatssteun (V)

The resolution framework that is formed by the BRRD and SRMR does not only cover the resolution of banks (hereinafter referred to as the resolution phase).1 It also covers the preparation of recovery and resolution plans of banks and banking groups (hereinafter referred to as the preparatory phase) and the recovery of banks (hereinafter referred to as the recovery phase).2

In the preparatory phase, the banks prepare for recovery and resolution by drafting a recovery plan and by assisting the resolution authorities in drafting a resolution plan. Preparing these plans should ensure the resolvability of banks.3 Resolvability means that it is feasible and credible for the resolution authority to either wind up the bank (or its group) in normal insolvency proceedings or to resolve it by applying the different resolution tools and powers to the bank while avoiding to the maximum extent possible any significant adverse effect on the financial system, including in circumstances of broader financial instability or system-wide events, of the Member State in which the bank is established, or other Member States or the Union and with a view to ensuring the continuity of critical functions carried out by the bank.4

Recovery is mainly an internal process of a bank that is supervised by the national competent authorities or the ECB on the basis of the recovery plans that are prepared by the banks. Recovery should lead to the restoration of the financial position of a bank following a significant deterioration thereof.5 If the own actions of the bank are not sufficient in that respect, recovery can also take place through intervention by the competent authorities, e.g. by taking early intervention measures or supervisory measures.6 It is not necessary for a bank to go through the recovery phase, before it comes in the insolvency or resolution phase.

Resolution is the situation in which a bank is failing or likely to fail, while there is no alternative private sector measure or supervisory action to prevent such failure, and public interest necessitates the application of one or more of the resolution tools by the resolution authorities to achieve one or more of the resolution objectives.7 These resolution tools are the sale of business tool, the bridge institution tool, the asset separation tool and the bail-in tool.8

Lastly, an ‘alternative phase’ can be distinguished. The alternative phase concerns a phase that is not covered by the resolution framework, namely the insolvency phase.9 If the financial position of a bank cannot be restored, the winding up of a failing bank through normal insolvency proceedings should always be considered before resolution tools are applied.10 Once a resolution authority has taken the decision to put a bank in resolution, normal insolvency proceedings should be excluded, except if they need to be combined with the use of the resolution tools and at the initiative of the resolution authority.11 The winding up of a bank through normal insolvency proceeding can therefore also be part of the resolution process.

The focus of this dissertation is on the resolution phase. One should bear in mind that in the preparatory and recovery phase (in other words, the pre-resolution phase) already actions can be taken, by the bank itself or the authorities involved, to prevent the need for public funding in solving future problems of the bank. Although section 7.2.1.3 covers this to some extent, the author refers to existing literature for a more extensive discussion.12

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This dissertation focuses on banks. The resolution framework, as laid down in the BRRD and SRMR however also applies to other institutions, such as investment firms and certain financial institutions. See section 4.3.4.

For completeness sake, the author notes that the preparation of recovery and resolution plans and the recovery of banks is also covered by certain provisions in CRD IV (See Article 74(4), 86(11), 104 CRD IV).

As Bierens mentions, the requirement that a bank is resolvable is a going concern requirement. It is not a direct applicable norm, but a described situation (Bierens Ondernemingsrecht 2017, p. 3).

Article 15(1), second paragraph BRRD.

The author refers to the definition of recovery capacity in point (103) of Article 2(1) BRRD, in the absence of a definition of recovery.

See sections 2.4.7 and 2.5.4.

Point (1) of Article 2(1) BRRD, in combination with Article 32 BRRD.

Article 37(3) BRRD. As further discussed in section 4.4.3.

Harmonization of national insolvency regimes is a topic that is discussed in the framework of the Capital Markets Union, as discussed in section 1.4.2.

10.

Recital (36) BRRD.

11.

Recital (44) BRRD.

12.

See e.g. Haentjens and Wessels 2014, ch. 2; Ordónez 2014; Campbell and Moffatt 2019. In all phases there may be a need for public funding. See also Grünewald 2014, p. 30-47.