4.4.1 State aid as a trigger of resolution

Can Member States grant aid to banks without triggering resolution under BRRD or the SRM?

It should be recalled that one of the conditions for resolution is that the bank is ‘failing or likely to fail’. This condition is further specified in Art. 32(4) BRRD.1 Pursuant to Art. 32(4)(d) BRRD2, a bank will be deemed to be ‘failing or likely to fail’3when extraordinary public financial support is required. ‘Extraordinary public financial support’ is defined in point 28 of Article 2(1) BRRD as State aid. Thus, as general rule, the need for extraordinary public financial support to a bank triggers the resolution of the bank.

There are, however, three exceptions (listed in Art. 32(4)(d)(i)-(iii) BRRD). According to this provision, State aid does not trigger resolution when the State support takes the form of:

The three exceptions only apply to solvent banks. Furthermore, the measures must be of a precautionary and temporary nature and must be proportionate to remedy the consequences of the serious disturbance.5Art. 32(4) BRRD also stresses that the measures must be conditional on final approval under the Union State aid framework.

The decision of 27 January 2015 in the case SA.40480 (eleventh prolongation of the Polish guarantee scheme) illustrates the second exception. The Commission noted that the Polish guarantee scheme was limited to solvent institut ions. The guarantees granted under the scheme were of a temporary nature since the window of their issuance was limited to six months and their maturity was limited to five years (or seven years in case of covered bonds) and were of a precautionary nature since they only covered newly issued liabilities. The guarantees granted under the scheme were also proportionate to remedy the consequences of the serious disturbance. Therefore the Commission concluded that the aid measure does not violate the intrinsically linked provisions of the BRRD.6

An illustration of the third exception can be found in the decisions that the Commission adopted in 2015 in the cases of Alpha Bank, Eurobank, NBG and Pireaus Bank.7 Since the aid measures in these cases met the conditions of Art. 32(4)(d)(iii) BRRD, the aid measures did not trigger the ‘failing or likely to fail’-criterion and could thus be implemented outside resolution. In the decisions, the Commission listed the following nine conditions that would have to be met in order for the State aid to fall under the exception of Art. 32 (4)(d)(iii) BRRD.

The Commission noted that the compatibility-assessment had already shown that the measures were granted to remedy a serious disturbance in the Greek economy and to preserve financial stability in the Greek banking sector.

The Commission noted that the aid measures did not confer an undue advantage to the bank in question. An ‘undue advantage’ was specified as an ‘advantage incompatible with the internal market under State aid rules’. This was ensured by the compliance with the compatibility conditions for restructuring aid, in particular the level of remuneration and the depth of the restructuring.

The Commission noted that the banks complied with the capital requirements when the aid measures were granted, following in particular the private capital increase and the 2015 LMEs, and as assessed by the competent supervisory authority.

The Commission noted that that the compatibility-assessment had already shown that the measures were compatible

In the case of NBG, the Commission noted that this was ensured by the fact that a high proportion of the aid (75%) was granted in the form of a repayable capital instrument, i.e. CoCo’s.8 In the case of Alpha Bank, the aid measure was of a precautionary and temporary nature, because it expired automatically as Alpha Bank successfully covered the capital shortfall and did not lead to any pay-out of capital by the HFSF.9

In each of the four decisions, the Commission noted that it had already con-cluded in the decision that the aid was proportionate to remedy the consequences of the serious disturbance in the Greek economy.

The Commission noted that the aid was not used to offset losses that the bank had incurred or was likely to incur in the near future.

The Commission noted that the aid measures were limited to the injections necessary to cover the capital shortfall arising under the adverse scenario of the stress test, as identified by the ECB and disclosed on 31 October 2015, after the capital shortfall arising under the AQR and the baseline scenario of the stress test had been covered by private means (i.e. capital raising from private investors, the 2015 LME and the conversion into common equity of instruments not included in the 2015 LME).

The Commission noted that the supervisory authority, the ECB, approved the capital raising of the bank and that the bank managed to raise an important part of the capital shortfall from private investors. Furthermore, the aid measures for the bank were limited to the injections necessary to cover the capital shortfall arising under the adverse scenario of the stress test, after the capital shortfall arising under the AQR and the baseline scenario of the stress test has been covered by private means. The ECB noted in the report of the 2015 CA that covering the shortfalls by raising capital would then result in the creation of prudential buffers in the four Greek banks, keeping thus an adequate level of solvency. Therefore, the Commission concluded that there were no objective elements to indicate that any of the circumstances referred to in point (a), (b) or (c) of Article 32(4)(d) BRRD were met. As regards the circumstances referred to in Article 59(3) BRRD, the Commission noted that all additional Tier 1 and Tier 2 instruments held by the bank were subject to conversion into ordinary shares and would fully contribute to covering capital needs of the bank before State aid was injected.

These cases demonstrate that it is possible to grant State aid without triggering the resolution of the bank. However, as has also been remarked in the literature, the three exceptions are quite limited in scope.10 Thus in most cases, granting State aid would trigger resolution.11

A related question is the following: can Member States still grant aid to banks without triggering the write-down and conversion tool? It should be recalled that this tool can be used in combination with the resolution tools or outside a resolution action.12 The write-down or conversion of capital instruments is required in the situations listed in Art. 59(3) BRRD and Art. 21(1) SRM- Regulation. One of these situations is the situation that extraordinary public financial support is needed, except in any of the circumstances set out in point (d)(iii) of Article 32(4) BRRD and point (d)(iii) of Article 18(4) SRM-Regulation.13 Thus only a so-called “precautionary recapitalisation” does not trigger the write-down and conversion tool.