Public funding of failing banks in the European Union

Preface VII
List of abbreviations XXIII
List of abbreviations of bank names XXVII
List of tables XXXI

Chapter 1 Introduction 1
1.1 The GFC and its revelations 1
1.2 Changes in the institutional and regulatory framework for the banking sector 4
1.2.1 The introduction of an EU network of supervision 4
1.2.2 The introduction of the European Banking Union 6
1.2.3 The reform of the State aid regime for the banking sector 8
1.3 Research question 10
1.3.1 Terminology 11
1.3.2 Scientifi c and social relevance of the research question 14
1.3.3 Research methodology 15
1.3.4 Restrictions 16
1.4 More changes ahead 18
1.4.1 Completion of the European Banking Union 19
1.4.1.1 The Banking Package 19
1.4.1.2 Proposal for the EDIS as third pillar of the European Banking Union 21
1.4.1.3 The introduction of a common backstop to the SRF 21
1.4.1.4 Package to address NPLs 22
1.4.1.5 An enabling framework for the development of SBBS 23
1.4.2 Proposal for a Capital Markets Union 24
1.4.3 Proposal for an adjusted ESAs framework 25
1.4.4 Moving towards a Fiscal Union? 27
1.5 Structure of the dissertation 29

PART 1 Moving towards resolvable banks 33

Chapter 2 A bank and its balance sheet 35
2.1 Introduction 35
2.2 The term ‘bank’ 36
2.2.1 The defi nition of credit institution in banking regulation 36
2.2.2 The business model of a bank 37
2.3 The funding profi le of a bank 40
2.3.1 The balance sheet of a bank 40
2.3.2 Reasons for special prudential treatment of banks 43
2.4 Regulatory capital requirements 44
2.4.1 Introduction 44
2.4.2 Pillar 1 requirements 46
2.4.2.1 CET 1 capital 47
2.4.2.2 AT 1 capital 50
2.4.2.3 Tier 2 capital 51
2.4.3 Combined buffer requirement 52
2.4.4 Pillar 2 requirement 52
2.4.5 Leverage ratio 54
2.4.6 Liquidity ratios 54
2.4.7 Measures in case of breach of the regulatory capital requirements 55
2.4.7.1 Supervisory measures 55
2.4.7.2 Early intervention measures 56
2.4.7.3 Enforcement measures 57
2.4.7.4 Special measures for breach of combined buffe requirement 59
2.5 The MREL 61
2.5.1 Calculation of MREL 61
2.5.1.1 MREL approach of the SRB 62
2.5.2 Composition of MREL 64
2.5.2.1 Own funds 65
2.5.2.2 Eligible liabilities 65
2.5.3 Changes under the Banking Package 66
2.5.3.1 Distinction between ‘resolution entities’ and ‘entities that are not resolution entities’ 66
2.5.3.2 Changes in the defi nition of eligible liabilities 67
2.5.3.3 The introduction of the TLAC requirement for G-SIBs 70
2.5.3.4 Changes to MREL under BRRD II and SRMR II 71
2.5.4 Measures in case of breach of MREL 75
2.6 Restoring the balance sheet of a bank in fi nancial diffi culties 77
2.6.1 Funding instruments in times of fi nancial diffi culties 77
2.6.1.1 Funding by new or existing market investors and lenders 78
2.6.1.2 Member State support 80
2.6.1.3 Central bank support 81
2.6.1.4 Contributions by deposit guarantee schemes 82
2.6.1.5 National resolution funds 82
2.6.1.6 Supranational funding instruments 82
2.6.2 Asset measures in times of fi nancial diffi culties 85
2.6.2.1 NPE strategy options 86
2.6.2.2 Member State support 86
2.6.2.3 National resolution funds 87
2.6.2.4 Supranational asset measures 87
2.7 Conclusion 88

Chapter 3 The State aid regime for the banking sector 91
3.1 Introduction 91
3.2 The development of a State aid regime for the banking sector 92
3.2.1 The 2004 R&R Guidelines as a fi rst resort 95
3.2.2 Diffi culties in the application of the 2004 R&R Guidelines in banking cases 96
3.2.3 The development of the Crisis Communications 98
3.3 The concept of State aid 99
3.3.1 Intervention by a Member State or through Member State resources 100
3.3.1.1 State resources 101
3.3.1.2 Imputability 103
3.3.1.3 Qualifi cation of support measures in the banking sector as State resources imputable to a Member State 105
3.3.2 Advantage 114
3.3.2.1 Market economy investor principle 115
3.3.2.2 Market economy creditor principle 117
3.3.2.3 Private vendor principle 119
3.3.3 Selectivity 120
3.3.4 Undertakings 121
3.3.5 Distorts or threatens to distort competition and affect trade between Member States 122
3.4 The State aid regime for the banking sector 124
3.4.1 The legal outline 124
3.4.1.1 The primary law sources 124
3.4.1.2 The secondary law sources 127
3.4.2 The geographical scope 130
3.4.3 The material scope 130
3.4.3.1 State aid benefi ciaries 130
3.4.3.2 State aid measures 134
3.5 The State aid assessment by the Commission 136
3.5.1 The procedural outline 137
3.5.1.1 Preliminary examination 137
3.5.1.2 Formal investigation 139
3.5.1.3 Council assessment in exceptional circumstances 140
3.5.2 The legal basis for the State aid assessment 142
3.5.2.1 The balancing test under Article 107(3)(b) TFEU 145
3.5.3 The principles governing the State aid assessment 147
3.5.3.1 Appropriateness 148
3.5.3.2 Necessity 153
3.5.3.3 Proportionality 153
3.5.4 Assessment criteria for rescue aid 153
3.5.4.1 Funding guarantees and liquidity support 154
3.5.4.2 Rescue recapitalisations 156
3.5.4.3 Rescue asset relief measures 160
3.5.5 The assessment criteria for asset relief measures 161
3.5.6 The assessment criteria for restructuring and liquidation aid 166
3.5.6.1 Restructuring aid 166
3.5.6.2 Liquidation aid 168
3.5.7 Ad hoc cases, individual cases and schemes 171
3.5.7.1 Additional assessment criteria for aid schemes 174
3.6 Granting State aid to a group 176
3.6.1 Determination of the aid benefi ciary within a group 176
3.6.2 Cost allocation within a group 178
3.6.3 Cooperation between Member States 179
3.6.4 Cooperation with third country authorities 182
3.7 Treatment of the benefi ciary bank 183
3.7.1 Restructuring 184
3.7.1.1 The restructuring plan 186
3.7.1.2 The capital raising plan 196
3.7.2 Liquidation 200
3.7.2.1 The winding up plan 200
3.7.2.2 The integration plan 200
3.8 Third party treatment 201
3.8.1 Measures implemented in cooperation between the bank and its stakeholders 202
3.8.2 Measures imposed by Member States through national legislation 203
3.8.2.1 Compatibility with the ‘no creditor worse off’ principle 204
3.8.2.2 Compatibility with the Second Company Law Directive 204
3.9 Judicial protection 206
3.9.1 Actions of an interested party 207
3.9.2 Legal proceedings before the EU Courts 208
3.9.2.1 Ad (i): Actions of annulment 208
3.9.2.2 Ad (iii): Preliminary rulings 216
3.9.3 Legal proceedings before national courts 217
3.10 Conclusion 217

Chapter 4 The resolution framework for the banking sector 219
4.1 Introduction 219
4.2 The development of a resolution framework for the banking sector 220
4.2.1 Member States develop own resolution regimes 220
4.2.2 Need for harmonization 222
4.3 The resolution framework for the banking sector 225
4.3.1 The legal outline of the resolution framework 225
4.3.1.1 The primary law sources 225
4.3.1.2 The secondary law sources 230
4.3.2 The three phases covered by the resolution framework and the alternative phase 235
4.3.3 The geographical scope of the resolution framework 237
4.3.4 The material scope of the resolution framework 237
4.3.4.1 Material scope of the BRRD 238
4.3.4.2 Material scope of the SRMR 241
4.3.4.3 Summary of material scope of BRRD and SRMR 243
4.3.5 The relationship between the BRRD and the SRMR 244
4.4 The concept of resolution 247
4.4.1 The conditions for resolution 247
4.4.1.1 The determination that the bank is failing or is likely to fail has been made 248
4.4.1.2 The failure of the bank cannot be prevented within a reasonable timeframe 250
4.4.1.3 Resolution is necessary in the public interest 252
4.4.2 The resolution objectives 256
4.4.2.1 To ensure the continuity of critical functions 257
4.4.2.2 To avoid a significant adverse effect on the financial system 259
4.4.2.3 To protect public funds 261
4.4.2.4 To protect depositors and investors 261
4.4.2.5 To protect client funds and client assets 263
4.4.3 The resolution tools 263
4.4.3.1 The sale of business tool 264
4.4.3.2 The bridge institution tool 266
4.4.3.3 The asset separation tool 268
4.4.3.4 The bail-in tool 270
4.5 The resolution process 274
4.5.1 The procedural outline 274
4.5.1.1 The decision to put the bank in resolution 274
4.5.1.2 The implementation of the resolution decision 277
4.5.2 Exercise of the PONV conversion power 279
4.5.2.1 Triggers for the exercise of the PONV conversion power 280
4.5.2.2 Exercise of the PONV conversion power is not a resolution action 282
4.5.2.3 PONV conversion power is exercised in relation to relevant capital instruments 282
4.5.2.4 No discretion in exercise of the PONV conversion power 283
4.5.3 Application of the resolution tools 283
4.5.3.1 General conditions for the application of the transfer tools 284
4.5.3.2 Specific conditions for the application of the sale of business tool and bridge institution tool 287
4.5.3.3 Specific conditions for the application of the asset separation tool 291
4.5.3.4 Conditions for the application of the bail-in tool 293
4.5.4 Exercise of resolution powers 299
4.5.5 The principles and safeguards governing the resolution process 300
4.6 Group resolution 305
4.6.1 SPE or MPE strategy 305
4.6.2 Coordination between resolution authorities in case of a cross-border banking group 307
4.6.2.1 Coordination between resolution authorities under the BRRD 307
4.6.2.2 Coordination within the SRM 310
4.6.3 Resolution of groups with third country presence 311
4.6.3.1 Coordination with third country authorities under the BRRD 311
4.6.3.2 Coordination with third country authorities within the SRM 314
4.7 Treatment of the bank in resolution 315
4.7.1 Restructuring 315
4.7.1.1 Recovery and resolution plan 315
4.7.1.2 Business reorganisation plan 316
4.7.1.3 Removal or replacement of the management body and senior management 318
4.7.1.4 Continuity arrangements 319
4.7.2 Winding up under normal insolvency proceedings 320
4.8 Third party treatment 321
4.8.1 Transfer of shares, other instruments of ownership, assets, rights or liabilities 321
4.8.1.1 Consent and procedural requirements 322
4.8.1.2 Consideration 322
4.8.1.3 Partial transfer 323
4.8.1.4 Safeguards 324
4.8.2 The exercise of the PONV conversion power and the application of the bail-in tool 325
4.8.2.1 Exercise of resolution powers 325
4.8.2.2 Procedural requirements 327
4.8.2.3 DNO requirement 328
4.8.2.4 Safeguards 329
4.8.3 Cancellation and modifi cation of contractual terms 329
4.8.3.1 Safeguards 330
4.8.4 Further restrictions of rights 330
4.8.4.1 Removal of right to acquire further shares 331
4.8.4.2 Suspension of payment and delivery obligations 331
4.8.4.3 Suspension of termination rights 332
4.8.4.4 Restriction on the enforcement of security rights 333
4.8.4.5 Exclusion of certain contractual terms 334
4.9 Judicial protection 334
4.9.1 Judicial protection against decisions of national resolution authorities 335
4.9.1.1 Ex ante judicial approval 335
4.9.1.2 Legal proceedings before national courts 336
4.9.1.3 Reference for preliminary ruling to ECJ 338
4.9.1.4 Decisions of national resolution authorities within the SRM 339
4.9.2 Judicial protection against decisions of the SRB 341
4.9.2.1 Access to the Appeal Panel of the SRB 341
4.9.2.2 Legal proceedings before the EU courts 342
4.9.2.3 Suspected misuse of the SRF 345
4.10 Conclusion 345

PART 2 From State aid regime to EPFS policy 347

Chapter 5 The impact of the resolution framework on the access to public funding for failing banks 349
5.1 Introduction 349
5.2 The concepts of EPFS and ELA 350
5.2.1 The concept of EPFS 350
5.2.1.1 Supranational EPFS 350
5.2.1.2 To preserve or restore viability, liquidity or solvency 353
5.2.2 The concept of ELA 355
5.2.2.1 Standard and extraordinary monetary policy operations 357
5.3 Access to EPFS under the resolution framework 359
5.3.1 The assessment framework 359
5.3.2 EPFS as a trigger for resolution 359
5.3.2.1 Precautionary guarantees and precautionary recapitalisation 360
5.3.2.2 Access criteria 365
5.3.2.3 Relevance of precautionary guarantees and recapitalisation 372
5.3.3 EPFS as a trigger for the exercise of the PONV conversion power? 374
5.3.4 EPFS as a trigger for recovery? 375
5.3.5 Access to EPFS in resolution 377
5.3.5.1 No assumption of EPFS in the resolution plan 377
5.3.5.2 Access to contributions from national resolution funds or the SRF 381
5.3.5.3 Access to resolution fi nancing by deposit guarantee schemes 384
5.3.5.4 Access to GFST under the BRRD 385
5.3.5.5 Access to GFST within the SRM? 389
5.3.5.6 Access to other Member State support than GFST (alternative fi nancing sources) 390
5.3.5.7 Access to the ESM DRI within the SRM 392
5.3.6 Access to EPFS in insolvency? 396
5.3.6.1 Resolution action is not necessary in the public interest 396
5.3.6.2 Resolution is combined with normal insolvency proceedings 399
5.4 Access to ELA under the resolution framework 399
5.4.1 The assessment framework 400
5.4.1.1 Solvency 400
5.4.1.2 Central bank independence 402
5.4.1.3 No interference with the single monetary policy of the Eurosystem 403
5.4.1.4 Compatibility with the State aid regime 404
5.4.2 ELA as a trigger for resolution? 404
5.4.3 ELA as a trigger for the exercise of the PONV conversion power? 405
5.4.4 ELA as a trigger for recovery? 405
5.4.5 Access to ELA in resolution 405
5.4.5.1 No assumption of ELA in the resolution plan 405
5.4.5.2 The award of ELA in resolution 406
5.4.6 Access to ELA in insolvency 406
5.5 Access to public funding after the introduction of the resolution framework 407
5.5.1 Impact of the resolution framework on the access to public funding for failing banks 407
5.5.1.1 Access restriction 407
5.5.1.2 Access differentiation 411
5.5.2 Hurdles in restricting the access to public funds 414
5.5.2.1 Concepts of EPFS and ELA need further refi nement 414
5.5.2.2 Lack of access to liquidity support in resolution 415
5.5.2.3 Financial stability as the overriding goal 416
5.5.2.4 Member States are still the ultimate backstop 418
5.5.2.5 Fiscal sovereignty of Member States 423
5.6 Conclusion 424

Chapter 6 The impact of the resolution framework on the exercise of State aid control by the commission 427
6.1 Introduction 427
6.2 The different roles of the Commission 428
6.2.1 The Commission in its role as State aid authority 428
6.2.1.1 References to State aid (regime) in the resolution framework 429
6.2.1.2 Introduction of supranational EPFS 432
6.2.2 The Commission in its role as co-resolution authority within the SRM 433
6.2.3 Another role for the Commission in the resolution process? 436
6.3 Changes in the State aid assessment procedure 437
6.3.1 The introduction of the term ‘resolution aid’ 437
6.3.2 Compliance with intrinsically linked provisions of the resolution framework 438
6.4 The assessment of resolution aid 442
6.4.1 The procedural outline of the assessment of resolution aid 442
6.4.2 The legal basis for the assessment of resolution aid 443
6.4.3 The principles governing the assessment of resolution aid 443
6.4.4 The assessment criteria for resolution aid 443
6.4.4.1 Example 1: The capital injection from a resolution fund to a bridge bank 444
6.4.4.2 Example 2: Sale following the application of the bridge bank tool 447
6.4.4.3 Example 3: Contribution by national resolution fund / Member State to funding gap under the sale of business tool 452
6.4.4.4 Example 4: The transfer of non-performing assets to an AMC under the asset separation tool 455
6.4.5 The assessment of resolution schemes 462
6.4.6 The assessment of supranational EPFS 463
6.4.6.1 The assessment of SRF contributions 463
6.4.6.2 The assessment of the ESM DRI 467
6.4.7 Compatibility of resolution aid with the resolution framework 468
6.4.7.1 Resolution aid ad hoc 469
6.4.7.2 Resolution schemes 470
6.4.7.3 Supranational EPFS 470
6.5 The assessment of State aid outside resolution 471
6.5.1 Precautionary guarantees and precautionary recapitalisation 471
6.5.2 Liquidation aid 474
6.6 State aid control by the Commission after the introduction of the resolution framework 475
6.6.1 Impact of the resolution framework on State aid control by the Commission 475
6.6.2 Tension between the different roles 476
6.6.2.1 Commission cannot endorse assessment of resolution conditions 477
6.6.2.2 Cooperation in assessment of resolution objective ‘protection of public funds’ 477
6.6.2.3 Retail investor protection may be underlying rationale for decisions 479
6.6.2.4 Resolution and State aid control may serve different purposes 479
6.6.2.5 Distinction between DG COMP and DG FISMA 482
6.6.3 Tension between the different rules 482
6.6.3.1 Lack of coherence between State aid regime and resolution framework 483
6.6.3.2 State aid regime for the banking sector is outdated 485
6.6.3.3 Lack of harmonisation of national insolvency proceedings 486
6.7 Conclusion 486

Chapter 7 The impact of the resolution framework on the restructuring process of a failing bank 489
7.1 Introduction 489
7.2 The restructuring process of a failing bank 490
7.2.1 The restructuring process under the resolution framework 490
7.2.1.1 Restructuring in resolution 490
7.2.1.2 Restructuring outside of resolution 492
7.2.1.3 The introduction of ex ante restructuring 493
7.2.2 The restructuring process under the State aid regime for the banking sector 494
7.2.3 Co-existence of restructuring processes 496
7.2.3.1 Applicable restructuring processes 496
7.2.3.2 Comparison of restructuring obligations on the basis of the restructuring plan and the business reorganisation plan 500
7.2.3.3 Added value of ex ante restructuring under the resolution framework 502
7.3 The authorities in the restructuring process of a failing bank 502
7.3.1 Competences of the authorities 503
7.3.1.1 Competences in restructuring under the State aid regime for the banking sector 503
7.3.1.2 Competences in restructuring under the resolution framework 503
7.3.1.3 A combination of competences 505
7.3.2 Cooperation between the authorities 507
7.3.2.1 Cooperation in resolution 508
7.3.2.2 Cooperation outside of resolution 509
7.3.3 Judicial protection against decisions of authorities 510
7.4 Burden-sharing 514
7.4.1 Burden-sharing under the State aid regime 515
7.4.1.1 Burden-sharing cascade 515
7.4.1.2 Triggers for burden-sharing 516
7.4.1.3 Deviations from burden-sharing cascade 516
7.4.2 Burden-sharing under the resolution framework 516
7.4.2.1 Burden-sharing cascade 516
7.4.2.2 Triggers for burden-sharing 518
7.4.2.3 Deviations from burden-sharing cascade 520
7.4.3 Co-existence of burden-sharing requirements 520
7.4.3.1 Different triggers, scope and authorities 521
7.4.3.2 A closer look at public funding as trigger for burden-sharing 523
7.4.3.3 Deviation from the burden-sharing requirement 525
7.4.3.4 Synopsis 526
7.5 Restructuring of a failing bank after the introduction of the resolution framework 528
7.5.1 Impact of the resolution framework on the restructuring process of a failing bank 528
7.5.2 Challenges at the level of the restructuring processes 531
7.5.2.1 Divergence in restructuring processes 531
7.5.2.2 Lack of clarity on ‘going concern’ solutions 531
7.5.2.3 Loss of proportionality in restructuring 533
7.5.2.4 Loss of transparency in restructuring 534
7.5.3 Challenges at the level of competences 536
7.5.3.1 Colliding competences 536
7.5.3.2 Lack of cooperation provisions 537
7.5.3.3 Impediments to effective judicial protection 538
7.5.4 Challenges at the level of obligations of shareholders/ creditors 539
7.5.4.1 Undesirable outcomes of burden-sharing allocation 539
7.5.4.2 Restrictions in the ability of the bail-in tool to perform as intended 542
7.5.4.3 The (in)compatibility of burden-sharing and fi nancial stability 546
7.6 Conclusion 547

Chapter 8 Conclusion 551
8.1 Introduction 551
8.2 Moving towards resolvable banks 552
8.3 The access to public funding for failing banks 555
8.3.1 Impact of the resolution framework 555
8.3.2 Hurdles 557
8.4 The exercise of State aid control by the Commission 557
8.4.1 Impact of the resolution framework 558
8.4.2 Tensions 560
8.5 The restructuring process of a failing bank 561
8.5.1 Impact of the resolution framework 561
8.5.2 Challenges 563
8.6 Potential steps to address challenges 565
8.6.1 Further refi nement of concepts of EPFS and ELA 565
8.6.2 Introduction of an inclusive funding profi le 566
8.6.3 Preparation of a permanent State aid regime for the banking sector 567
8.6.4 Harmonisation of normal insolvency proceedings 569
8.6.5 Distinction between rescue and restructuring resolution 570
8.6.6 Business reorganisation plan for all ‘going concern’ solutions 571
8.6.7 The creation of an integrated restructuring process when EPFS is involved in resolution 572
8.6.8 Refi nement of burden-sharing requirements 573
8.7 Towards further centralisation of public funding (regulation) within the European Banking Union 575
8.7.1 Centralisation of public funding 575
8.7.2 Designation of the SRB as centralised public funding authority 576
8.7.3 Elimination of the role of Member States in the restructuring process 578
8.7.4 Introduction of a bank liquidation tool 578
8.8 Refl ection and fi nal thoughts 579
8.8.1 Breaking the link between banks and Member States 580
8.8.2 Addressing moral hazard 581
8.8.3 Safeguarding fi nancial stability 582
8.8.4 Synopsis 583

Summary 585
Samenvatting 591
Curriculum vitae 599
Index 601
Bibliography 619