3.5.6.2 Liquidation aid

In the event that a bank cannot be credibly restored to viability, it should be wound up in an orderly fashion. In that case, the bank may have access to liquidation aid.1

The bank that is to be wound up will normally continue to carry out some economic activities, also when limited to those necessary for winding up the bank in an orderly manner within a limited period of time. In that case it can be considered an aid beneficiary. For liquidation aid that assists in the winding up of the bank to be approved by the Commission, certain specific assessment criteria have been set in Section 6 of the 2013 Banking Communication; these are discussed below.

Criterion 1: Winding up of a bank in an orderly manner

The Member State should provide a comprehensive and detailed winding up plan that indicates how the bank can be wound up in an orderly fashion.3 The goal of the orderly liquidation must be the cessation of the ailing bank's activity over a limited period of time. That goal implies that no new third party business may be undertaken. However, it does not prevent existing business from being executed if doing so reduces the liquidation costs. Moreover, liquidation must, as much as possible, aim at selling off parts of the business or assets by means of a competitive process. The orderly liquidation procedure requires that the proceedings of any sale of assets contribute to the liquidation costs.4

Criterion 2: Limitation of liquidation cost to the minimum necessary

Member States should demonstrate that the aid enables the bank to be effectively wound up in an orderly fashion, while limiting the amount of aid to the minimum necessary to keep it afloat during the liquidation in view of the objective pursued.5 In other words, it should be demonstrated that the chosen winding up scenario is the least costly option, in particular that an immediate liquidation or bankruptcy would be more costly and would present more systemic risk.6 This should be set out in the plan for the orderly liquidation of a bank. This does not have to prove the viability of the bank.7

Criterion 3: Burden-sharing

In the context of liquidation, particular care has to be taken to minimise moral hazard, notably by excluding shareholders and possibly certain types of creditors from receiving the benefit of any aid in the context of the controlled winding up procedure.8 Therefore, the claims of shareholders and subordinated debt holders must not be transferred to any continuing economic activity. The same capital raising and burden-sharing measures should be complied with as for restructuring aid.9

Criterion 4: Measures to limit the distortion of competition

To avoid undue distortions of competition, the winding up phase should be limited to the period strictly necessary for the orderly liquidation.10 As long as the beneficiary bank continues to operate, it must not actively compete on the market or pursue any new activities. Its operations must in principle be limited to continuing and completing activities pending for existing customers. Any new activity with existing customers must be limited to changing the terms of existing contracts and restructuring existing loans, provided that this improves the respective asset's net present value.11 In addition, the pricing policy of the bank to be wound up must be designed to encourage customers to find more attractive alternatives. Where a banking license is necessary, for example for a rump bank or a temporary institution created for the sole purpose of orderly liquidation of a bank (‘bridge bank’), it should be limited to the activities strictly necessary for the winding up. The banking license should be withdrawn as soon as possible by the competent authority.12

The liquidation of the bank may involve the sale of (parts of) that bank. In that case, the economic activity to be sold can be the beneficiary of the State aid if the functional identity of the activity continues to exist and is considered as an entity that perpetuates the commercial activity of the bank.13 The compatibility of this aid is subject to an individual examination on the basis of the 2013 Banking Communication. The 2013 Banking Communication does not further specify which assessment criteria are used, except for criterion 1 below. In addition, criteria 2, 3 and 4 below can be derived from the Commission’s decision practice.

Criterion 1: Viability of the integrated entity

The Commission verifies the viability of the entity resulting from the sale. In its viability assessment, the Commission takes into due consideration the size and strength of the buyer relative to the size and strength of the business acquired.14

Criterion 2: Limitation of aid to the minimum necessary

The aid is limited to the minimum necessary providing the sales process is carried out in a transparent, objective and non-discriminatory manner and the activities sold are sold at the highest price possible, while preserving the long-term viability of the purchaser.15

Criterion 3: Burden-sharing

Burden-sharing is considered to be sufficient when the shareholders have lost control of the bank and all financial stakes therein without any compensation. The wipe-out of the shareholders and subordinated debt holders constitutes the maximum possible own contribution in the restructuring of the bank.16

Criterion 4: Measures to limit the distortion of competition

The Commission takes into account whether the sale of activities of the bank is undertaken in an open, transparent and non-discriminatory manner. In addition, it assesses the amount of aid, the period of time during which the economic activity benefitted from the aid, and the scope of activities to be transferred.17

If the liquidation entails the sale of the bank or parts of it to a buyer, it should be assessed whether any aid granted in that respect benefits the buyer. The sale of a bank during an orderly liquidation procedure may entail State aid to the buyer, unless the sale is organised via an open and unconditional competitive tender and the assets are sold to the highest bidder.18 The competitive tender should, where appropriate, allow for sale of parts of the bank to different bidders. In particular, when determining if there is aid to the bank’s buyer or parts of it, the Commission examines whether: