Public funding of failing banks in the European Union (LBF vol. 19) 2020/7.4.3.4:7.4.3.4 Synopsis

Public funding of failing banks in the European Union (LBF vol. 19) 2020/7.4.3.4

7.4.3.4 Synopsis

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When comparing the burden-sharing requirements under the State aid regime for the banking sector and the resolution framework, it turns out that these are not fully aligned.1 The following differences can be distinguished:

1.

Under the State aid regime for the banking sector, the burden-sharing principle applies as part of the assessment by the Commission of the State aid measure as proposed by the Member State. Under the resolution framework, the resolution authorities can (or have to, depending on the circumstances) exercise the PONV conversion power and/or apply the bail-in tool to impose the burden-sharing requirement (sections 7.4.1, 7.4.2 and 7.4.3.1);

2.

Burden-sharing under the resolution framework can include senior debt, while this is restricted to share capital and subordinated debt under the State aid regime for the banking sector (sections 7.4.1.1, 7.4.2.1 and 7.4.3.1);2

3.

The resolution framework requires a bail-in of 8% of total liabilities and own funds of the bank when certain public funding sources are used. When the ESM DRI or alternative financing sources are used, all unsecured, non-preferred liabilities, other than eligible deposits, have to be written down or converted in full. The State aid regime does not set any thresholds for burden-sharing (sections 7.4.2.2 and 7.4.3.2);

4.

It is possible to deviate from the burden-sharing requirement under the State aid regime for the banking sector when burden-sharing measures would endanger financial stability or lead to disproportionate results. The resolution framework does not provide for this possibility (sections 7.4.1.3, 7.4.2.3 and 7.4.3.3).

Ad 2: Bail-in of senior debt

The introduction of the possibility to bail-in senior debt under the resolution framework has had the effect that the layer of subordinated debt is increased and a further distinction is made within senior debt instruments. As a result, burden-sharing under the State aid regime for the banking sector and burden-sharing under the resolution framework may converge to the extent that there is practically no difference between the two, since bail-in of ordinary senior debt becomes a theoretical possibility. In that respect, it is still relevant whether the senior non-preferred debt (within the meaning of Article 108 BBRD II bis) falls within the scope of the burden-sharing principle under the State aid regime for the banking sector. Taking into account that these instruments are specifically issued with a cushion function, it seems to be reasonable to extend the bail-in under the State aid regime to these instruments. Does this make the bail-in tool under the resolution framework superfluous? In the author’s view, this question should be answered with no, since the fear – or commercial unattractiveness – of bail-in of senior debt may lead banks to change the liabilities side of their balance sheet in such a way that this is avoided to the greatest extent possible. If banks can ensure their resolvability by increasing the layers of subordinated debt and senior non-preferred debt, while protecting senior debt, this would, in the author’s view, serve the purposes of the resolution framework. Secondly, the bail-in requirements under the State aid regime only apply when there is an award of State aid. The resolution framework makes it possible to apply the bail-in tool also outside the situation in which State aid is awarded.

Ad 4: Financial stability exemption

The Commission may make an exception to the burden-sharing principle under the State aid regime for the banking sector, where that is justified by reasons of financial stability or in case of disproportionate results. The resolution framework does not provide for this exception. According to Iftinchi, it is therefore no longer possible to apply this exception in so far this would obstruct the exercise of the PONV conversion power or the application of the bail-in tool when EPFS is involved.3 The author agrees with this view. The exception could in that case only still be used when the burden-sharing requirements under the resolution framework in relation to the use of EPFS are complied with.4 In other words, if a Member State proposes an aid measure for a bank in resolution without the required burden-sharing under the State aid regime because of reasons of financial stability, the Commission should in its assessment take into account whether this violates intrinsically linked provisions of the resolution framework.5 As set out in Recital 57 BRRD, the minimum loss absorption requirement of 8% for the use of GFST is such an intrinsically linked provision.6

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