12.6.3.3 Remaining at the bad bank or bank in liquidation

In some cases, the bank is split-up into a bad bank and a good bank. The good bank is usually transferred to another bank, while the bad bank is wound-down or liquidated under normal liquidation procedures. In these cases, the shareholders and subordinated debt holders usually remain at the bad bank or bank in liquidation.

How burdensome is remaining at the bad bank for subordinated debt holders? This depends on the financial situation of the bad bank. Furthermore, it depends on the ranking of the subordinated debt holders. To give an example, in the decision on Banca Romagna Cooperativa (BRC), the Commission noted that “while the subordinated debt holders are in principle entitled to the proceeds from the liquidation, the FDGCC has first claim on repayment of the cost of the intervention before other creditors will be served”.1 The Commission concluded that it was not very likely that the subordinated debt holders would benefit from the proceeds of the liquidation.2

In the case of the Portuguese bank Banif, the ‘sale of business tool’ and the ‘asset separation tool’ were applied: Banif was split-up into a clean bank (to be sold) and a remaining bank (to be wound-down), while a separate asset bundle had been carved out in resolution into an Asset Management Company. In addition, the bail-in tool – which under the Portuguese implementation law of the BRRD was already applicable in 2015 – was applied.3 All subordinated creditors of the bank would be left in the Remaining Bank, subordinated to the claims of the resolution authority on the remaining assets so that they would effectively absorb losses.4 The Commission concluded that as a result, subordinated debt holders have contributed to the maximum extent possible, thereby satisfying the burden-sharing requirement.5

This form of burden-sharing was not always possible. For instance, in the decision on Caja Castilla-La Mancha (CCM), the Commission noted that due to legal constraints, subordinated debt holders had to be transferred to the acquiring bank (Banco Liberta).6 Nevertheless, in most cases in the S/T/W- context, the subordinated debt was not transferred, thus ensuring burden- sharing by subordinated debt holders.