5.3.4 EPFS as a trigger for recovery?

As set out in section 5.3.2, the award of EPFS triggers resolution, provided that the other conditions for resolution are also met, with the exception of precautionary guarantees and precautionary recapitalisation. Although these do not trigger resolution, they may still trigger the recovery of a bank. In fact, that is what they are designed to do.

Banks and banking groups are required to draw up and maintain recovery plans providing for the measures to be taken by the bank or the group to restore their financial position following a significant deterioration of their financial situation.1 These recovery plans may not assume any access to or receipt of EPFS, or expose taxpayers to the risk of loss.2

In relation to recovery, no triggers are defined in the resolution framework. Each recovery plan has to include a framework of indicators established by the bank or group which identifies the points at which recovery actions may be taken. These indicators have to be agreed by the competent authority. The EBA has explained that, although precautionary guarantees and precautionary recapitalisation are no trigger for resolution, they may be a trigger for recovery.3 The use of precautionary guarantees and/or precautionary recapitalisation may therefore be identified as a trigger in the recovery plan of a bank for the execution of recovery actions by the bank in question.

The intervention by deposit guarantee schemes beyond their statutory pay-out function deserves special attention. In accordance with Article 11(3) DGS Directive, Member States may allow deposit guarantee schemes to use available financial means for ‘alternative measures’ in order to prevent the failure of a bank, provided that, inter alia, the resolution authority has not taken any resolution action.4 However, in case a deposit guarantee scheme intervenes beyond its statutory pay-out function, which is the case when the deposit guarantee scheme takes alternative measures, this may qualify as State aid as this may fulfil a public policy mandate at the discretion of the Member States involved.5 In that case, the alternative measures qualify as EPFS, since they prevent the failure of the bank.

When a deposit guarantee scheme takes alternative measures that qualify as State aid, the resolution of the bank is triggered, provided that the other conditions for resolution are also met. This outcome does create the – undesirable – situation that alternative measures from deposit guarantee schemes that qualify as State aid are, in practice, not available as they trigger resolution, while they can only be taken when the resolution authority has not taken any resolution action. This outcome seems to be unintended. This would only be different if the alternative measures taken by deposit guarantee schemes in accordance with Article 11(3) DGS Directive never qualify as an FOLTF indicator, similar to precautionary guarantees and precautionary recapitalisation. This would require amendment of the BRRD and SRMR.