Public funding of failing banks in the European Union (LBF vol. 19) 2020/4.5.3.2:4.5.3.2 Specific conditions for the application of the sale of business tool and bridge institution tool

Public funding of failing banks in the European Union (LBF vol. 19) 2020/4.5.3.2

4.5.3.2 Specific conditions for the application of the sale of business tool and bridge institution tool

Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.

Where the sale of business tool and bridge institution tool are applied, the following conditions apply in addition to the general conditions:

a)

The transfer may involve shares, instruments of ownership, assets, rights or liabilities of the bank in resolution;

b)

The transfer has to take place on commercial terms, having regard to the circumstances;

c)

The transfer has to take place conform certain marketing require ments;

d)

The transfer has to take place to an authorized purchaser; and

e)

In the event of a partial transfer, the residual part of the bank in resolution should be wound up in normal insolvency proceedings.

Ad a: Scope

Both under the sale of business tool and bridge institution tool shares, instruments of ownership, or all or any assets, rights or liabilities of the bank in resolution may be transferred.

The scope of the liabilities transferred to Novo Banco was the subject of legal proceedings started by Goldman Sachs. Goldman Sachs had arranged for a loan to be extended to BES by Luxembourg-based vehicle Oak Finance in 2014, just before BES collapsed and was put in resolution under the Portuguese resolution regime that implemented the BRRD. Some assets and liabilities of BES were transferred to the bridge institution Novo Banco, while others remained with BES in order to be wound up. In December 2014, the Portuguese resolution authority, the Banco de Portugal, specified that the Oak liability was not eligible for transfer and had never been transferred to Novo Banco. The reason therefore was that under the Portuguese Banking Law, that implemented the BRRD, no liability could be transferred to a bridge institution, if it was owed to an entity holding more than 2% of the original bank’s share capital. This was the case for Goldman Sachs. Goldman Sachs started legal proceedings against Novo Banco for sums due in respect of the Oak loan before the English courts based on the jurisdiction clause in the facility agreement between BES and Oak Finance. In a judgment of 4 July 2018, the Supreme Court in England rejected the claim, because it followed from the agreed propositions of Portuguese law and from the requirement of Article 3(2) of the Reorganisation and Winding Up Directive that an English court must treat the Oak liability as never having been transferred to Novo Banco. Novo Banco was therefore never party to the jurisdiction clause.1

In respect of the bridge institution tool, it is specified that the total value of liabilities transferred to a bridge institution may not exceed the total value of the rights and assets transferred to the bridge institution from the bank in resolution or provided by other sources.2

Ad b: On commercial terms

Resolution authorities have to take all reasonable steps to obtain commercial terms for the transfer that conform with this valuation, having regard to the circumstances and the costs and expenses incurred in the resolution process.3 In order to establish that the transfer takes place on commercial terms, a valuation has to be carried out (Valuation 2).4

In respect of the bridge institution tool, the requirement that the transfer is made on commercial terms applies when the resolution authority seeks to sell the bridge institution or it assets, rights or liabilities.5

Ad c: The marketing requirements

The marketing requirements apply when the transfer takes place to a private sector purchaser. In the case of the sale of business tool, this transfer takes place between the bank in resolution and the private sector purchaser. In the case of the bridge institution tool, this transfer may take place between the bridge institution and a private sector purchaser.6

In relation to the sale of business tool, the marketing requirements entail that the marketing should be as transparent as possible, should not discriminate, should be free from any conflict of interest, should not confer any unfair advantage on a potential purchaser, should take account of the need to effect a rapid resolution action and should aim at maximizing, as far as possible the sale price for the shares or other instruments of ownership, assets, rights or liabilities.7 These marketing requirements do not prevent the resolution authority from soliciting particular potential purchasers.8

In addition, the resolution authority may apply the sale of business tool without complying with the marketing requirements, when it determines that compliance with this requirement would be likely to undermine one or more of the resolution objectives, and in particular, if it considers that (a) there is a material threat to financial stability arising from or aggravated by the failure or likely failure of the bank in resolution, and (b) compliance with the marketing requirement would be likely to undermine the effectiveness of the sale of business tool in addressing that threat or achieving the resolution objective of avoiding a significant adverse effect on the financial system/stability.9

In the case of Banco Popular the Spanish resolution authority, the FROB, had to start an open tender process to sell Banco Popular. The SRB notified the FROB that it had the option, in light of the gravity of the situation of Banco Popular, of determining existing market interest based on the non-binding offers that had been received in the private process of sale conducted by Banco Popular. The FROB subsequently analyzed the potential interest in Banco Popular based on the preliminary work that was conducted by Banco Popular during the private sale process. The outcome hereof was that the shares in Banco Popular were sold to Banco Santander.10

In relation to the bridge institution tool, the marketing requirements entail that the bridge institution or the relevant assets or liabilities are marketed openly and transparently by the resolution authorities, and that the sale does not materially misrepresent them or unduly favour or discriminate between potential purchasers.11

75% of the shares in Novo Banco, the bridge institution that acquired the good assets of BES, was sold to Lone Star after three years of efforts to sell the bank. The other 25% stays with the Portuguese resolution fund. A first attempt to sell Novo Banco failed in September 2015, when the Banco de Portugal rejected offers from a number of market participants because it considered the offers to be too low.12

If a bridge bank cannot be put back on the market it should be wound up in normal insolvency proceedings.13

Ad d: Authorisation requirement

The sale of business tool does not set aside the obligation for the purchaser to have the appropriate authorisation to carry out the business it acquires (by means of a transfer of assets, rights or liabilities) or to acquire a declaration of no-objection (DNO), if it acquires a qualifying holding in a bank (by means of a transfer of shares or other ownership rights). The competent authorities have to ensure that they consider an application in

a timely manner that does not delay the application of the transfer tool and prevent the resolution action from achieving the relevant resolution objectives.14

A bridge institution should dispose of the appropriate authorisation and comply with the requirements of CRR, CRD IV and MiFID II, as applicable, albeit that the bridge institution may be established and authorized without complying with CRD IV or MiFID II for a short period of time at the beginning of its operation.15 For the purposes of the ‘EU passport’, a bridge institution is considered to be a continuation of the bank in resolution. It may therefore continue to exercise the rights of the bank to provide services on a cross-border basis or through a branch in another Member State. This also applies to the rights of membership and access to payment, clearing and settlement systems, stock exchanges, investor compensation schemes and deposit guarantee schemes of the bank in resolution, provided that the bridge institution meets the criteria for participation in these systems.16 Also for other purposes, resolution authorities may consider the bridge institution to be a continuation of the bank in resolution.17

Deze functie is alleen te gebruiken als je bent ingelogd.