1.3.1 Terminology

This dissertation uses the terms ‘public funding’ and ‘failing bank’, al though they are not defined as such in the resolution framework or the State aid regime for the banking sector. The reason for using these terms is that the resolution framework and the State aid regime for the banking sector both apply their own terms for public funding (e.g. State aid, re structuring aid, rescue aid, liquidation aid, resolution aid, extraordinary public financial support (EPFS), emergency liquidity assistance (ELA), precautionary recapitalisation, government financial stabilisation tools) and failing banks (e.g. banks in difficulty, banks with a capital shortfall, banks that are ‘failing or likely to fail’, banks that are not solvent, or banks that face a significant deterioration of their financial position). The terms that are used in the resolution framework and State aid regime are subject to specific legal interpretations, which may not always concur with the common usage of these terms, as will be explained in more detail later on in this dissertation.1 The terms ‘public funding’ and ‘failing bank’ are there fore introduced in this dissertation as neutral terms without any special connotation under the resolution framework or the State aid regime for the banking sector.

The term ‘public funding’ in this dissertation refers to funding that is made available by Member States or supranational authorities or through resources that they control. Public funding can even stem from private resources, if these are under the control of a Member State or supranational authority. It is not restricted to State aid. Public funding can be used to pursue public policy objectives or commercial objectives. For example, saving a failing bank can have a public policy objective (e.g., if it is intended to safeguard financial stability) or a commercial objective (e.g., if a Member State provides a guarantee or a loan on commercial terms to a failing bank). Public funding can take different forms. The funding can be directly provided by a Member State (e.g. through capital injections, guarantees or liquidity support) or indirectly through other public or private bodies or public undertakings (e.g. through national resolution funds or deposit guarantee schemes).2 It can also be made available by or through supranational authorities, such as the SRB and the ECB, or the European Stability Mechanism (ESM). 3

A bank can fail in many ways. It can be unable to pay debts or other liabilities as they fall due (illiquidity), its assets can be less than its liabilities (balance-sheet insolvency) or it can violate the regulatory capital requirements (regulatory insolvency).4 The term ‘failing bank’ in this dissertation covers all these situations.

Depending on the type of failure, different consequences can or will be triggered under the resolution framework. If the financial position of a bank ‘significantly deteriorates’ this may trigger recovery actions to be imposed by the bank itself. If a bank ‘infringes, or is likely to infringe in the near future’ on (certain) requirements of CRR, CRD IV, the Markets in Financial Instruments Directive II (MiFID II)5 or the Markets in Financial Instruments Regulation (MiFIR)6, early intervention measures can be taken by the competent authority. If a bank is ‘failing or likely to fail’ this may trigger the bank being put in resolution or being wound up in normal insolvency proceedings.7

The type of failure also dictates which public funding resources are apt to remedy such a failure of a bank. If a bank has, for example, a shortage of liquidity, a loan facility or guarantee on senior debt instruments can be more efficient than a capital injection.

Lastly, the financial difficulties of a bank govern which public funding resources are available. Under the 2004 R&R Guidelines rescue and re structuring aid was only available for banks that were ‘in difficulty’. The Commission considered a bank as being in difficulty where it was unable, whether through its own resources or with the funds it was able to obtain from its owners/shareholders or creditors, to stem losses which, without outside intervention by the public authorities, would almost certainly condemn it to going out of business in the short or medium term.8 In other words: the bank would have been subject to collective insolvency proceedings, but for the State aid granted. Only in such a situation would the bank gain access to rescue and restructuring aid. No similar criterion is included in the State aid regime for a banking sector. Indeed, during the GFC many banks were supported not because they were in difficulty, but in order to prevent them from further restricting their lending exposure to the real economy.9 The 2013 Banking Communication does, however, provide that certain State aid measures are only available for banks without a ‘capital shortfall’.