10.5.2 “Proportionate assessment” under the Second Prolongation Communication

The Second Prolongation Communication was adopted in December 2011 and it is the sixth Communication of the Crisis Framework.1 As the name of the Second Prolongation Communication indicates, it extended the temporal scope of the Crisis Framework. In addition – and in the context of the current chapter: more importantly – the Second Prolongation Communication introduced the so-called “proportionate assessment”.

A proportionate assessment means that the Commission will lighten its requirements as regards restructuring. For instance, in the decision on Alpha Bank, the Commission noted that “as the aid measures are less distortive, the measures taken to limit distortions of competition should therefore be proportionately softened”.2

The introduction of the proportionate assessment by the Second Prolongation Communication should be seen in the context of the sovereign debt crisis of 2011. Growing tensions on the sovereign debt markets lead to problems on the bank funding markets. At the Euro Summit of 26 October 2011, the EU Heads of State or Government agreed on several issues (such as the governance structure of the euro area, the stability mechanisms (EFSF) and the PSI3 in Greece).4 In addition, a ‘banking package’ was adopted, which required a capitalisation of banks: by 30 June 2012, a capital ratio of 9% of the highest quality capital5 should be attained after accounting for market valuation6 of sovereign debt exposures.

As a reaction to the sovereign debt crisis, the Second Prolongation Communication introduced a proportionate assessment of restructuring plans.7 Because of the tensions in sovereign debt markets, even banks with a viable business model might require State aid in the form of capital injections. The Second Prolongation Communication stresses that also with respect to those banks, a restructuring plan is required.8 However, pursuant to point 14 of the Second Prolongation Communication, the Commission will undertake a proportionate assessment of the viability of those banks, “taking full account of elements indicating that banks can be viable in the long term without the need for significant restructuring”. The following three conditions have to be met:

In total, the proportionate assessment was applied in 8 cases. Two of them related to Portugal (CGD and BPI), four of them related to Greece (Eurobank, Alpha Bank, NBG and Pireaus Bank), one to Italy (MPS) and one to Germany (NordLB). In addition, the proportionate assessment was mentioned in the decision on BayernLB (5 December 2013, para. 189).9

The decisions on the Portuguese banks CGD and BPI were adopted on 24 July 2013. Interestingly, on 30 August 2013 (so only one month later), in the decision on another Portuguese bank – Banco Comercial Português (BCP) –, the Commission did not investigate whether a proportionate assessment should be taken.

The difficulties faced by Greek banks came mainly from the Greek sovereign crisis and the deep recession in Greece. The Commission noted that the capital needs of the Greek banks stemmed mainly from the participation in the PSI programme and not from the mismanagement or excessive risk-taking from existing investors. In its decision on Piraeus Bank and in its decision on Eurobank and in its decision on NBG, the Commission noted that the bank’s exposure to the sovereign risk of its domestic country was larger than the exposure of other banks in Greece.10 As a result, not all the losses on GGBs (the loss on the PSI programme) could be attributed to the regular exposure of a financial institution to the sovereign risk of its domestic country. By contrast, in the case of Alpha Bank, the Commission noted that the bank’s exposure to the sovereign risk of its domestic country was smaller than the exposure of other banks in Greece.11 Consequently, this bank cannot be considered to have accumulated an excessive exposure to sovereign debt.

The proportionate assessment was applied in two Portuguese cases. The Commission considered that Caixa Geral de Depositos (CGD) and Banco BPI met the three criteria. As a result, the Commission undertook a proportionate assessment.12 With respect to the second criterion, the Commission noted that the capital needs were not directly caused by the impact of marking sovereign bonds to market. However, the underlying reason was comparable, because EBA required banks to establish a ‘sovereign buffer’. This is a buffer related to the amount of sovereign bonds held on the balance sheet. 13As a consequence of the requirement to establish this sovereign buffer, the minimum capital requirements increased.

With respect to the third criterion, the Commission noted that the sovereign debt was acquired by doing carry trade transactions. The Commission added that although under certain circumstances, such transactions could be considered as above-average risk-taking, the acquired bonds represented eligible collateral and the relevant rating notations were well above investment grade (AA- for Portugal).14

In the case of the Italian bank MPS, the Italian State argued that the State aid to MPS should be subject to a proportionate assessment.15 The Commission considered that the first two criteria were met. The capital shortfall of MPS was identified following the EBA “EU capital exercise”.16 Without the requirement for a sovereign buffer and on the basis of historic accounting treatment there would have been no shortfall.17 The compliance with the third criterion – did the bank take excessive risk in acquiring sovereign debt? – was less clear, however. The Commission noted that MPS had been acquiring Italian governments bonds not only before the outbreak of the sovereign crisis in 2010, but also during the sovereign crisis.18 The Commission considered that acquiring government bonds before the outbreak of the sovereign crisis did not amount to excessive risk-taking. The status of the strategy of acquiring government bonds after the outbreak of the sovereign crisis was less clear. The Commission noted, however, that the Italian State only sought partial application of the proportionate assess-ment.19

During the crisis, NordLB remained profitable (with the financial year 2009 as the only exception). Furthermore, NordLB was able to obtain finance from the market without any state support.20 The Commission noted that the recapitalisation measures for NordLB were all related to EBA requirements (which were, in turn, related to the confidence crisis on sovereign debt). The Commission therefore concluded that there was less need for significant restructuring, meaning that compensatory measures may in principle be limited.21

The proportionate assessment means that the Commission lightens its restructuring requirements. It usually concerns the need for burden-sharing measures and compensatory measures.

For instance, in the decision on Alpha Bank, the Commission noted that the own contribution and burden-sharing by Alpha Bank was much lower than what the Commission would usually consider sufficient. However, the Commission went on to observe the following:

This recital illustrates that the Commission lightened its burden-sharing requirements. The proportionate assessment also had implications for the compensatory measures. This is illustrated by the following recital:

The basic idea behind the proportionate assessment is that if the bank’s difficulties are mainly due to external factors, then there should be less need for far-reaching restructuring than when the difficulties are due to internal factors. While point 14 of the Prolongation Communication addresses a very specific type of situation, the more general principle can also be seen in the decisional practice of the Commission. This will be discussed in the following subsection.