The prudential requirements of credit institutions and investments firms (hereinafter together: 'institutions') became stricter both on global and on European Union level based on the lessons learnt from the financial and economic crisis started in 2008.
In 2014, a directive aiming to establish a single recovery and resolution framework within the European Union (EU) has been established (Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms, 'BRRD') which main driving force was to resolve the eventually failure or likely failure of institutions with the minimalization of recourse to extraordinary public financial support, mainly through the burden sharing of the shareholders and creditors. BRRD has built strongly on the Communication from the Commission on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis (Banking Communication), which Stated that 'Adapting the Crisis Communications can help to ensure a smooth passage to the future regime under the Commission's proposal for a directive for the recovery and resolution of credit institutions (BRRD) by providing more clarity to markets. The adapted Crisis Communications can also ensure more decisive restructuring and stronger burden-sharing for all banks in receipt of State aid in the entire single market'[1].
The changes of the burden sharing rules significantly influenced the crisis management measures implemented after the adoption of BRRD, therefore the current study is aiming to present the impacts of the gradual coming into force of the provisions of BRRD on the implemented crisis management measures applied regarding individual failures and the waivers introduced concerning the COVID 19 pandemic.
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Providing State aid is prohibited as a rule in the EU. The Commission is entitled exclusively to examine the compliance of State aid with the internal market. Based on the Treaty on the Functioning of the European Union (TFEU) State aid is incompatible with the internal market when the following 4 conditions are jointly met[2]:
- 'any aid granted by a Member State or through State resources in any form whatsoever
- which distorts or threatens to distort competition
- by favouring certain undertakings or the production of certain goods shall, in so far as
- it affects trade between Member States, be incompatible with the internal market'.
TFEU sets out that under certain circumstances the provided State aid is not considered as incompatible with the internal market by course of law / Article 107 (2)/ or based on the investigation and discretionary power of the Commission /Article 107 (3)/, including when certain aid aims to remedy serious disturbance in the economy of a Member State /point b) of Article 107 (3)/. The legal basis for the aid approved by the Commission regarding credit institutions went into difficulty is based on that point[3]. Regarding the qualification of an individual situation as serious disturbance in the economy, the Commission presupposes that the global financial crisis can create a serious disturbance in the economy of a Member State and that measures can remedy the disturbance[4]. Although the Banking Communication underlines that this waiver can only be applied under exceptional circumstances, in case of crisis situations which threaten the general financial stability[5], we note that the Commission did not interpret this exceptional rule strictly since it approved State aid also for small institutions with regional significance in certain countries. The so called 'resolution of the four small banks' of 2015 can be considered for example as such case in Italy, since the market share of these institutions did not reach 1 % in the Italian financial sector[6]. In 2020, as a response to the economic crisis regarding COVID-19, the Commission introduced a temporary framework for State aid measures to support the economy. It was declared in the Communication from the Commission on Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak (2020/C 91 I/01) (Covid Communication) that State aids provided regarding the COVID-19 outbreak can be justified based on point b) of Article 107 (3) of TFEU[7].
The Commission - based on the notification of the Member State - examines whether the tended aid is to be qualified as State aid. Regarding the conditions of State aid, the Commission considers widely what sources are
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imputable to the State based on several factors (non-exhaustively): decision could not be taken without taking into account the requirements of a public authority, factors of an organic nature which link the public undertaking to the State; the fact that the undertaking through which aid was granted had to take account of directives, the nature of the public undertaking's activities, the degree of supervision that the public authorities exercise over the management of the undertaking, etc.[8]. In that regard a decision in the case of Banca Tercas where the bank was capitalized by the Fondo Interbancario di Tutela dei Depositi (FITD), an Italian deposit guarantee scheme which is mandatory consortium established under private law that may, according to its constitution, takes measures to support other members of the consortium that are under special administration. In the opinion of the Commission, the intervention of FITD constituted State aid, however the Court of Justice of the European Union 'set a higher burden of proof' to consider a measure imputable to the State in case of private entities compared to public ones. It is not enough to assume that it is unlikely that public authorities do not have influence and control over certain private entities[9]. State resources include all resources of the public sector[10], in that regard it is to be pointed out that among others, the interventions of the resolution and deposit guarantee funds for restructuring are also within the scope of the State aid rules (points 63 and 64 of the Banking Communication). As a consequence, the prior approval of the Commission is necessary for the application of resolution actions funded by State aid.
An advantage is any economic benefit which an undertaking could not have obtained under normal market conditions in absence of State aid[11]. The Commission examines in the frame of the market economy operator test (MEO) which was elaborated by the European Court of Justice. It is examined whether a 'private investor of a comparable size operating in normal conditions of a market economy could have been prompted to make the investment in question'[12].
The criteria of selectivity ('by favouring certain undertakings or the production of certain goods') is interpreted broadly by the Commission, even an aid which addressed to the entire banking sector can be selective in nature[13]. Typically, the condition of selectivity was met in the opinion of the Commission, when the usage of the resolution financing arrangement was triggered by the decision of the resolution authority on the resolution measure, therefore this funding source was only available for the beneficiary institution even in the case where the beneficiary was a bridge institution established by the resolution authority[14].
A measure granted by the State is considered to distort or threaten to distort competition when it is liable to improve the competitive position of the recipient compared to other undertakings with which it competes. A distortion of competition within the meaning of Article 107(1) of the Treaty is Stated when the State provides a financial
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advantage to an undertaking in a liberalised sector where there is, or could be, competition.[15] In that regard, the financial services have liberalized nature[16].
In our view, the Banking Communication differentiates among 3 types of State aids: liquidity support, restructuring and liquidation aid. Based on BRRD, liquidity support can be granted for new liabilities backed by guarantees, restructuring aid through precautionary recapitalisation or in resolution process. The current article focuses on restructuring and liquidation aid since only these have relevance from the perspective of burden-sharing in resolution.
Restructuring aid can take the form of recapitalisation or impaired asset measure. The precondition for providing restructuring aid is that the State aid shall be decreased to the minimum necessary and therefore every effort shall be made to raise capital from own resources, including rights issues, voluntary conversion of subordinated debt instruments into equity on the basis of a risk-related incentive; capital-generating sales of assets and portfolios, securitisation of portfolios in order to generate capital from non-core activities[17]. These measures shall be underpinned by capital raising plan. State aid can only be granted for capital shortfall which cannot be covered by the above-mentioned measures. The Commission examines whether the institution has exploited all measures to the maximum extent to limit the aid to the minimum which shall be underpinned by a capital raising plan or included in the restructuring plan. Based on the Commission communication on the return to viability and the assessment of restructuring measures in the inancial sector in the current crisis under the State aid rules (2009/C 195/04) (Restructuring Communication), the main function of the restructuring plan is to demonstrate how to re-establish the long-term viability of the institution without recourse to State aid[18]. The Restructuring Communication contains the required elements of the restructuring plan in details including the reasons why the institution ran into dificulty, description of the State intervention and the assessment of the State aid, restoration of viability, burden-sharing, measures to limit the distortion to competition (structural measures and behavioural commitments)[19].
Beside the capital raising measures, a further important precondition for providing aid is the adequate burden-sharing of shareholders and creditors which means that the losses shall be borne by the shareholders irst (liabilities based on shareholder's rights), after them the owners of the hybrid capital instruments and then the subordinated debt-holders shall bear the losses[20]. In practice it means that the losses are borne
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by the own funds instruments (Common Equity Tier 1 - CET1; Additional Tier 1 - ATI, Tier2) and the subordinated liabilities not qualified as own funds (which rank senior to Tier2 capital elements in the hierarchy of claims in normal insolvency procedure). At the same time, the Commission does not require the burden sharing of senior bondholders and depositors[21].
When the institution still complies with the regulatory capital requirements, it shall be able to restore its capital position on its own applying capital raising measures, supervisory and early intervention measures. In the failure of these measures, it shall convert its subordinated loan to equity[22]. When the institution does not comply with the regulatory capital requirements, subordinated loan shall be converted to equity or written down before any State aid is granted. In cases where the bank no longer meets the minimum regulatory capital requirements, subordinated debt must be converted or written down, in principle before State aid is granted. 'State aid must not be granted before equity, hybrid capital and subordinated debt have fully contributed to offset any losses'[23].
It is important to note that the burden-sharing rules can only be set aside when they would endanger financial stability or would cause unproportionate results. The latter refer to cases where the aid is small compared to the risk weighted assets of the institution, the capital shortfall has decreased significantly in particular by the capital raising measures applied by the institution[24]. Regarding the COVID-19
outbreak, the Commission set out in the Covid Communication that the aid received in the form of extraordinary financial public support which is not to be qualified as a ground for failing or likely to fail such as precautionary recapitalisation to the extent that such measures are to address problems linked to the COVID-19 outbreak are exempted from the burden-sharing requirement by shareholders and subordinated creditors[25].
It is to be pointed out that the 'no creditor worse off' principle shall prevail meaning that the creditor shall not receive less reimbursement than what it would have received without State aid[26].
In order to minimise State aid and prevent the decrease of the own funding sources of the institution, the Commission requires certain measures to retain its funds, including dividend and coupon bans, repurchase of own funds and hybrid capital based on prior approval of the Commission, limitation of acquisition and advertising activities. Beside that in order to incentivise the implementation of the restructuring plan and the repayment of State aid a cap on remuneration shall also apply[27].
Regarding the compliance with the Communication (2009/C 72/01) from the Commission on the treatment of impaired assets in the Community banking sector (Impaired Asset Communication), the Commission examines the eligibility of the assets which means that the categories of impaired assets must be well defined which might cause systemic treat; (ii) transparency and disclosure of impairments
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(full ex-ante transparency and disclosure of impairments by the institution on the assets which will be under the scope of the measures; (iii) the management of the assets ('clear functional and organisational separation between the beneficiary and the assets to be transferred'); (iv) a correct and consistent approach to valuation; and (v) the appropriateness of the remuneration and burden-sharing[28]
Based on the Banking Communication, State aid which supports the liquidation of failing credit institutions may be considered as compatible aid provided that equity, hybrid capital and subordinated debt have fully contributed to offset any losses, when the liquidation of a credit institution in the absence of State support would not be feasible[29]. According to point 70 of the Banking Communication, the Commission assess the compatibility of resolution aid measures as set out in Sections 2, 3 and 4 of the Restructuring Communication which means that the restoring of the long-term viability, own contribution by the beneficiary and limiting distortion of competition are assessed. Limitation of liquidation costs means that the aid makes it possible to wind up the institution in an orderly manner and at the same time it limits the amount of aid to the minimum necessary[30]. The limitation of competition distortion is achieved when the winding up phase is limited necessary for the liquidation, new activities can only be pursued with existing customers in order to facilitate the improvement of the net present value of the assets. The pricing shall also encourage the customers to find more attractive alternatives, finally the newly established temporary institutions shall only serve the necessary activities for the orderly wind down and the banking licences shall also be withdrawn as soon as possible[31].
The sale of a credit institution during a liquidation procedure may entail State aid to the buyer, but it does not constitute State aid when it is carried out in an open and unconditional competitive tender and the assets are sold for the highest price. The Commission will examine whether: the sales process is open, unconditional and non-discriminatory; takes place on market terms, the sales price for the assets and liabilities is maximised[32].
BRRD does not provide an exact definition for resolution, however the Hungarian Act XXXVII of 2014 on the further development of the system of institutions strengthening the security of the individual players of the financial mediating system (Hungarian Resolution Act) sets out resolution as a restructuring procedure aiming to restructure an institution or a group which objectives are to secure the continuity of the in-
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stitution's basic functions, the preservation of the stability of the financial intermediary system and the partly or full restoration of the viability of the institution or the group[33]. It is important to note that resolution does not tend mainly to maintain the institution under resolution, but to preserve its assets, rights and liabilities which are necessary for the achievement of the envisaged resolution objectives.
An institution can be placed under resolution when the following conditions are jointly met:
- the institution is failing or likely to fail within 12 months;
- there is not any private sector measure, including supervisory measure such as early intervention measures or the write down or conversion of relevant capital instruments or eligible liabilities which can prevent the failure of the institution within a reasonable timeframe;
- the resolution action is necessary in the public interest in the context of resolution. 'A resolution action shall be treated as in the public interest if it is necessary for the achievement of and is proportionate to one or more of the resolution objectives' and 'winding up of the institution under normal insolvency proceedings would not meet those resolution objectives to the same extent'.[34].
In the course of resolution 4 resolution tools can be applied: sale of business, bridge institution tool, asset separation tool and the bail in. Recital 47 of the preamble of BRRD highlights that when the use of the resolution tools involves State aid, the measures should have to be assessed in accordance with the relevant State aid provisions[35].
State aid in accordance with TFEU at national or supranational level qualifies as extraordinary public financial support which is provided for the preservation and recovery of the viability, liquidity or solvency of the institution or group[36], as a consequence only those contributions qualify as extraordinary public financial support which aims to preserve and restore viability, liquidity or solvency. When planning a resolution action, it shall be taken into account that the protection of public funds by minimising reliance on extraordinary public financial support is a resolution objective which shall be achieved in a resolution process.
BRRD interprets the definition of failure wider than it is used in insolvency law. Every ground for revoking the licence for authorization justifies failure. In order to avoid the usage of extraordinary public financial support, it constitutes also a failure situation (the existence of the first resolution condition) in the context of resolution when an institution requires extraordinary public financial support with the
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exception of certain cases (certain types of central bank liquidity backed by guarantees, precautionary recapitalisation) prescribed by the law[37], therefore the resolution authorities shall - when the further conditions for resolution are met - implement the obligation of the burden-sharing of shareholders and creditors via the application of the write down and conversion power of capital instruments and eligible liabilities or through the bail-in tool before extraordinary public financial support is granted and the Member State shall undertake any commitments necessary to make the aid compliant with the internal market.
In the following paragraphs, the burden-sharing methods will be introduced based on the recent resolution cases which were conducted on the basis of BRRD.
The write down and conversion of capital instruments and eligible liabilities (WDCCI) can be applied independently or when the conditions for resolution are met. An important reason - among others - for its application out of a resolution process when the affected institution shall not be deemed as viable. Viability means that the first two conditions for resolution are met.
Requiring extraordinary public financial support triggers also the application of the write down and conversion power aside from certain cases when it is not a ground for failure or likely failure. In the frame of a resolution process, WDCCI is to be applied when the resolution authority decides to apply a resolution tool and that resolution action would result in losses being borne by creditors or their claims being con-verted[38].
WDCCI is to be applied regarding the relevant capital instruments (AT1 and Tier2) after CET1 had absorbed losses.
We would point out the resolution process of the Spanish Banco Popular Espanol S.A. (2017). Before the application of the sale of business tool, the WDCCI power had been applied in a way that the share capital was written down, AT1 were converted to shares first and after that written down and Tier2 instruments were converted fully to share capital[39]. Since no State aid was provided, further burden sharing was not necessary.
The essence of the bail-in tool is that after the burden-sharing of the holders of relevant capital instruments liabilities excluding own funds will be written down and converted into own funds based on administrative constrain in line with the hierarchy of claims under normal insolvency procedures. Bailinable liabilities are the liabilities and capital instruments that do not qualify as CET1, AT1 or Tier 2 instruments and
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that are not excluded from the scope of the bail-in tool by the course of law. Beyond that based on its discretionary power, the resolution authority can exclude liabilities partly or fully under exceptional circumstances.
The bail-in can be used for the direct recapitalisation of the institution under resolution or indirectly for the recapitalisation of the bridge bank or as capital contribution for the acquirer during the sale of business or the application of the asset separation tool.
In the international practice two types of bail-in are to be differentiated: direct and indirect bail-in. In the EU, both methods can be applied, direct bail-in is a special 'EU phenomenon' (Gleeson-Guynn) and structurally different from the indirect bail-in which has been applied by the US Federal Deposit Insurance Corporation (FDIC) in the USA since decades. Although, the application of both methods has the same results[40].
In the course of an indirect bail-in, mainly assets, liabilities to be preserved are transferred from the institution under resolution to a bridge bank which will be sold to market participants in a later stage. From the income of the sale, first the claims of the protected creditors will be repaid and after them the other creditors (subordinated to protected creditors)[41] if there is still funding for their repayment available. The indirect bail-in has been applied only to domestic, small institutions in the US. The application of the indirect bail-in in a situation when the institution under resolution has cross-border activity or a more complex business model as mentioned by Gleeson-Guynn is although doubtful since based on the characteristics of the banking sector, it is not possible in the practice to suspend the activities of the institution for days. They argue that above a certain size, an institution can be too large to divide their assets into good and bad ones within a such short period of time[42].
In case of a direct bail-in, the own funds and other bail-in-able liabilities of the institution under resolution are written down to the extent necessary for the loss absorption and then recapitalized to meet the authorisation requirements.
Based on the above the most direct burden-sharing of shareholders and creditors are linked to the write down and conversion power of capital instruments and the bail-in tool. The application of the bail-in tool provides lossabsorption and recapitalisation to the greatest extent since the liabilities of insured depositors above the coverage level can also be written down or converted into CET1.
According to the Banking Communication, the compliance of the interventions of resolution funds with the internal market shall be assessed by the Commission[43], therefore the usage of the resolution fund constitutes State aid as mentioned in point 1. Since adequate burden-sharing is a precondition for providing restructuring aid, therefore the shareholders and creditors of the institution under resolution shall also bear losses before State aid is provided. As of 1 January 2016, BRRD has prescribed a much stricter burden-sharing rule than required by the Banking Com-
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munication. It sets out that shareholders or holders of relevant capital instruments and other eligible liabilities shall contribute to the loss absorption and recapitalisation with an amount not less than 8 % of the total liabilities including own funds of the institution under resolution through write down, conversion or otherwise ('8 % rule'). Beside that 'the contribution of the resolution financing arrangement does not exceed 5 % of the total liabilities including own funds of the institution under resolution'[44]. Since bail-in might affect several interests, including retail investors, it seems that Member States tried to avoid its application. Out of the 15 resolution cases which were implemented since the transposition deadline of BRRD (31. December 2014), only 3 were initiated after the '8 % rule' had entered into force[45].
We would like to point out the resolution case of the HETA Asset Resolution AG which was an asset management vehicle and managed the divested non-performing assets of the Hypo Alpe-Adria Bank which was nationalized by the Austria in 2009[46] and later appointed as the resolution asset management vehicle in line with BRRD. Although, the Financial Market Authority (FMA) the resolution authority in Austria has placed HETA under resolution in 2015. It was among the first cases in the EU, where the bail-in tool was applied (2016). There was a two-year moratorium for liabilities which enabled the resolution authority to prepare for applying the bail-in tool[47] which also underpins that the preparation for the write down and conversion needed quite a long time. The Tier1 capital instruments and subordinated debt were written down to zero and the remaining bail-inable liabilities were written down with an application of a certain amount of hair-cut[48]. As a result of the successful portfolio downsize of HETA, a write up took place based on the administrative decision of FMA in 2019[49]. On 29 December 2021, FMA announced that the resolution of HETA was terminated and the bailed-in creditors received 86.3 % return on their claims in resolution instead of 45.3%, which was the estimated return on the claims in a liquidation procedure[50].
In the resolution process, no State aid had to be used. According to the press release of FMA the return of the claims affected by bail-in shows the justification of the resolution regime. It is also important to note that the litigations launched against the decisions of FMA regarding the resolution process were not successful.
The Danish resolution authorities have also applied the bail-in tool twice in cases of Andelskassen J.A.K. Slagelse (2015) and Kobenhaus (2018). Both cases are examples for the application of bail-in combined with the bridge institution tool since bridge institutions (Broinstitut I-II,) were established for each resolution cases which were owned by the Danish resolution fund. In the case of Andelskassen J.A.K. Slagelsee the bridge institution took over the ownership of the institution under resolution. The relevant capital instruments were written down to zero and the claims of creditors, including uninsured depositors were also written
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down or adjusted[51]. Finally, an open, transparent sale process was initiated, but the supervisory authority did not approve the transaction and the institution was wound down.
In the case of Kobenhaus a same strategy was followed. The newly established bridge institution (Broinstitut II) took over the ownership of the institution under resolution. Capital instruments were written down to zero, subordinated debt and other claims, including the not covered deposits of natural persons, micro-, small and medium-sized enterprises were affected by the bail-in. The Danish Guarantee Scheme for Depositors and Investors (Garantiformuen) has contributed to the funding[52]. After the application of bail-in, the resolution fund provided capital to the institution under resolution. The banking license was revoked in 2019 and the rest of the assets were wound down in a 'controlled liquidation process'[53].
Resolution authorities have the power to transfer to a purchaser that is not a bridge institution shares or other instruments, assets, rights or liabilities of an institution under resolution. Notwithstanding the State aid rules, BRRD prescribes that the sale shall be transparent as possible and shall not materially misrepresent the instruments to be transferred having regard to the circumstances and in particular the need to maintain financial stability; it shall not unduly favour or discriminate between potential purchasers; free from any conflict of interest; not confer any unfair advantage on a potential purchaser, it shall take account of the need to effect a rapid resolution action; it shall aim at maximising the sale price[54]. In that regard it shall be pointed out that the only relevant criterion for selecting the buyer should be the highest price[55]. In our view these criteria are quite similar to the ones which are to be taken into account to decide whether aid is provided to the buyer in case of liquidation aid.
The Greek bank Panellinia which was recapitalized during the economic crisis more times was resolved by the Bank of Greece as resolution authority via applying the sale of business tool in 2015. The Greek National Resolution Fund covered the "funding gap" between the value of the assets and the value of the liabilities transferred to the purchaser[56]. The beneficiary of the aid was the transferred activities of the institution which were continued by the acquirer. As mentioned above, the Commission has assessed whether the sale of the institution's activities entailed State aid based on the relevant rules of the Banking Communication regarding liquidation aid[57]. It is to be pointed out that although the resolution authority has contacted only the 4 largest banks, but it does not violate the open, non-discriminatory nature of the sale process since the four banks represented the total Greek banking sector and the foreign institutions showed limited interests[58]. The adequate burden-sharing was achieved since the claims of the shareholders remained in the institution which was wounded
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up. The burden-sharing was achieved since the shareholders were only entitled to proceeds from the liquidation of the institution after the claim of the resolution fund was repaid[59]. Due to the small size of the transferred activities compared to the total assets of the bank, the open sales process, and the inclusion of the institution's activities into the buyer, there are no undue distortions of competition.
A similar resolution process was taken place in the case of the cooperative bank Peloponnese where also the sale of business tool was applied and the resolution fund covered the funding gap. The Commission has examined the case based under the same aspects as in case of Panellinia. It shall also be noted that only customer claims and bank deposits were transferred to the acquirer, but not any economic activity. The finance of the funding gap, would constitute aid to the transferred assets and liabilities only if they together constituted an undertaking.
The compulsory elements of an undertaking in the context of State aid based on the view of the Commission does not contain that it has to have a legal status or a certain art of finance. It is to be assessed whether the transfer of the assets and liabilities entails the transfer of an economic activity[60]. 'Since the resolution measure did not allow the continuation of the economic activities, it does not constitute neither aid to the liquidated entity nor to the transferred liability[61].
Banco Popular Espanol - which has already been mentioned regarding the exercise of the WDCCI power - was resolved via the application of the sale of business (Banco Santander) in an open, transparent non-discriminatory sale process[62], therefore, the sale did not contain any State aid.
When applying the bridge institution tool, the resolution authority transfers shares or other instruments of ownership, all or any assets, rights or liabilities of one or more institutions under resolution to a bridge bank[63] with a view to maintain access to critical functions and selling the institution at a later stage under better market conditions[64].
The bridge institutions are established for a temporary period of time, 'the resolution authority shall terminate the operation of the bridge institution as soon as possible and in any event 2 years after the date on which the last transfer from an institution under resolution pursuant to the bridge institution tool was made'[65].
In our view, the application of the bridge institution tool has been very common in resolution cases (Andelskassen, 'four Italian small banks'), since its set up and transfer of assets and liabilities which are to be preserved can be achieved rapidly in order to have in particular continuous access to deposits and to the core business services without any interruption. The swift transfer is facilitated by BRRD since the bridge institution does not have to comply with some of the pre-conditions for authorisation provided that such waiver and the deadline for complying fully
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with the requirements Stated by the law is determined by the supervisory authority[66]. Further advantage of the bridge institution tool is that - similar to the sale of business tool - the resolution authority has the right to transfer back shares, assets and liabilities under certain conditions[67].
Regarding the State aid rules, BRRD sets out that the operation of the bridge institution shall be in accordance with the State aid rules and the resolution authority may specify restrictions on its operations[68].
Before the entry into force of the compulsory 8 % burden sharing rule regarding the usage of the resolution fund, four Italian small banks with an aggregate market share of 1 % had been resolved via the application of the bridge institution tool, therefore only the capital instruments were written down in the frame of the WDCCI, but senior bondholders and depositors did not need to bear losses[69]. The 'good' assets, liabilities were transferred to bridge institutions established individually for each institution under resolution and the 'bad assets, liabilities were divested from the bridge institution into asset separation vehicles. The resolution fund provided contributions for the capitalization of the bridge institutions and provided guarantee to the asset management vehicle[70].
The Commission considered the bridge institution as the beneficiary of the aid.[71] Since the resolution measures aimed to serve the orderly winding down of the bank, the Commission examined the compatibility of the measures with the requirements against liquidation aid[72], but also examined its compliance with the Restructuring Communication (because of the operation of the bridge institution) and with the Impaired Asset Communication (because of the asset separation). Regarding the burden sharing requirement it is to be highlighted that the beneficiary shall provide appropriate contribution to the costs of the wind down, particularly it is to be avoided that shareholders or subordinated debt holders receive from the aid. In that regard it is to be noted that the claims of the shareholders were fully written down and the subordinated debt remained in the residual entity[73].
In Poland, the bridge institution tool was applied in case of the resolution of Podkarpacki Bank Spóldzielczy w Sanoku (PBS w Sanoku) in 2020. A bridge institution (Bank Nowy BFG S.) was established and capitalized by the Resolution Fund where certain activities of the institution under resolution was transferred. It was sold to market participants in October 2021. Before that a tender process was not success-ful[74]. The provided State aid was under the scope of the Polish scheme for the resolution of cooperative banks and small commercial banks which was individually extended for a 6 months period to implement the termination of the bridge institution[75]. In that regard we note that the Commission authorises schemes for recapitalisation and restructuring of small institutions for a 6 months period, provided that the principles of the crisis communications are respected, in particular the burden-sharing requirements. It is restricted to
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banks with a balance-sheet not exceeding EUR 100 million. 'The sum of the balance-sheets of the banks that receive aid under the scheme must not exceed 1,5 % of the total assets held by banks in the domestic market of the Member State concerned'[76].
In the frame of the asset separation tool, resolution authorities can transfer assets, rights or liabilities of an institution under resolution or a bridge institution to one or more asset management vehicles[77]. The asset management vehicle shall manage the assets with a view to maximising their value through eventual sale or orderly wind down[78]. Similar to the other resolution tools, a transfer back to the institution under resolution is also possible.[79] In its decisions, the Commission recalls that 'banks ought to bear the losses associated with impaired assets to the maximum extent so as to ensure equivalent shareholder responsibility and burden-sharing'. Since asset separation cannot be applied separately, only together with another resolution tool, burden sharing is not examined solely on the basis of the Impaired Asset Communication. The Commission Stated in its relevant decisions that the burden sharing measures implemented for restructuring aid were adequate for the compliance of the Impaired Asset Communication as well[80], therefore, further cases are not detailed in that regard.
As mentioned above, State aid can be provided in case of a liquidation process as well. Important to note that BRRD sets out that a winding up of a failing institution shall always be considered before resolution tools are applied[81] which means in our understanding that normal insolvency procedures shall treated continuously as a general rule for handling failures and resolution can only applied in exceptional circumstances provided by the law. When the conditions for resolution are not met jointly, other winding up procedures shall apply under national law which are also under the scope of State aid.
Emblematic and debatable cases were the liquidations of the small Italian banks Veneto and Banca Popolare di Vicenza in 2017. These two banks required precautionary recapitalisation from the Italian State, but they were refused because of lack of solvency based on the assessment of the European Central Bank[82]. Although the conditions for resolution were not fully met, since the Single Resolution Board, the resolution authority within the banking union for certain systemic relevant institution and cross-border groups did not determine the public interest[83] because the institutions did not have critical functions, their operational and
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financial interconnectedness was low and the implementation of the resolution objectives, including the protection of depositors, investors and other clients were ensured in case of a liquidation process to the same extent. Instead of resolution the two banks were placed under liquidation procedures based on Italian national law[84]. It was avoided in that way the loss absorption and burden sharing of senior bondholders, including retail investors and large depositors. In the frame of the liquidation procedure assets were bought by Intesa San Paolo in an open, transparent, non-discrimantory procedure which therefore did not constituted aid to the buyer. The burden-sharing is achieved because the claims of the shareholders and subordinated debt holders remained in the residual entities and since the buyer and the State created large senior claims towards the entities, so it was unlikely that the shareholders and subordinated debt-holders will receive from the proceeds of the liquidation[85].
Based on BRRD a precautionary recapitalisation is a form of extraordinary public financial support, however it does not establish the determination of the failing or likely failure resolution condition provided that the injection of own funds is implemented at prices and on terms that do not confer an advantage upon the institution, where neither the institution to be qualified as failing or likely to fail nor triggering the conditions for the write down or conversion of capital instruments are met. Further conditions are that the precautionary recapitalisation shall be provided to solvent institutions and shall be conditional on final approval under the Union State aid framework. 'Those measures shall be of a precautionary and temporary nature and shall be proportionate to remedy the consequences of the serious disturbance and shall not be used to offset losses that the institution has incurred or is likely to incur in the near future.'[86] Support measures shall be limited to injections necessary to address capital shortfall established under certain stress tests provided by the law[87].
Regarding the abovementioned features, the following Statements shall be pointed out based on the study published by the European Parliament: The aim of this legal institution is to provide capital to an institution without placing it under resolution. The measure shall not confer advantage to the institution shall not mean that the capitalization shall be made on market terms, rather that the advantage shall not be incompatible with the internal market in the meaning of State aid. Moreover, BRRD does not provide a definition for solvency. In the interpretation of the European Banking Authority, it means that the conditions for the failure or likely failure of the institution are not met[88]. As mentioned above, an important precondition of the measure is the approval of the Commission. In Greece the Eurobank and the National Bank of Greece received precautionary recapitalisation in 2015 and Monte dei Paschi (2017) and Carige (2019) were Italian
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cases. In the followings we will describe how the Commission examined these cases from State aid perspective.
The Commission considered the aid provided to the banks as restructuring aid, in particular recapitalisation aid. In that regard the Commission examined whether the Member State has exploited all measures to the maximum extent to limit the aid to the minimum[89], this included cost cutting measures, fullrepayment of State-owned preference shares for example in the case of Eurobank[90], rationalisation of subsidiaries in the case of National Bank of Greece[91]. Beside that the capital shortfall shall be based on stress test, which can be national, Union or SSM-wide stress tests, asset quality reviews or equivalent exercises conducted by the European Central Bank[92]. A further requirement against the aid is that it shall not be used to offset losses that the institution has incurred or is likely to incur in the near future. 'This means that past losses as well as losses that the bank is going to incur with a high degree of certainty cannot be offset'[93], as a consequence, only the difference between the baseline and the stress scenarios of a stress test can be covered by State aid. In the case of Eurobank, the Commission exempted the institution from certain level of burden-sharing, since it did not require mandatory conversion of subordinated debt and hybrid capital at the moment of the aid measure because of its disproportionate results and it considered that the commitment of Greece to bail-in subordinated creditors before any capital support provided would be sufficient[94].
Hungary was among the first Member States which applied resolution tools based on BRRD. The resolution process of the domestic MKB Bank took place between December 2014 and June 2016. Since a detailed study[95] has already been published on the topic, therefore the current study focuses only on the State aid related issues. The sale of business and the asset separation tool were applied[96]. The assets which were appointed for divestment were tried to be sold on the market first and only those for which no market demand arose were separated by applying the asset separation tool. The founder of the resolution asset management vehicle was the Resolution Fund which provided funding for the resolution therefore the resolution measure constituted State aid. For the transferred assets, MKB Bank received a higher price than the market value, but it did not reach real economic value[97] which served to restore the capital position of the institution under resolution. 'The difference of the counter-value received for the transferred assets and their market value is considered as State aid.'[98] The Commission treated the form of the aid provided as an impaired asset measure[99]. In favour of burden-sharing
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the only shareholder of MKB Bank lost its ownership rights by transferring its shares to the resolution asset management vehicle. The Hungarian authorities committed behavioural and structural commitments in order to restore the long-term viability of the institution and to avoid the distortion of competition. Finally, the institution was sold to market participants and aid provided via the impaired asset measure was remunerated. Since the sale was implemented in an open, transparent and non-discriminatory process in June 2016, therefore it did not contain any State aid. The restructuring period was ended on 31 December 2019. Since the successful resolution of MKB Bank, there has not been any resolution process in Hungary.
At the beginning of the COVID-19 crisis, Hungary responded quickly to the potential challenges. and in a precautionary way adopted a Government Decree 187/2020 on mitigation of the economic effects of the coronavirus world pandemic and about the necessary measures strengthening the stability of the financial intermediary system which ensured the possibility for credit institutions for a precautionary recapitalisation. The measure could be resorted till 31 December 2020 at first, but the deadline was later extended till 30 June 2021 after the content of the decree became part of the Act LVIII of 2020 on the provisional rules regarding the termination of the emergency situation and on the epidemic preparedness. In the frame of the measure the Hungarian State would have bought Tier2 instruments issued by the affected institution with the maximum maturity of 7 years. The purpose of the measure was to prevent, alleviate and avert the harmful effect of the coronavirus world pandemic on the affected institution[100]. The law determined both the yield and upper thresholds which the State could have subscribed per institution moreover the aggregate amount which was available under the scheme. The conditions for requesting the measure were fully in line with the rules of BRRD on the precautionary recapitalisation. The State was responsible for the decision on implementing the measure, but the prior opinion of the governor of the Central Bank of Hungary on the request had to be acquired on the following issues: whether the relevant institution was not failing or likely to fail within 12 months, the measure aimed to terminate capital shortfall based on certain types of stress tests, the institution made every effort to minimise the capital shortfall, shall not be used to offset losses that the institution has incurred or is likely to incur in the near future[101]. Although the granting of the aid was bounded by the prior approval of the Commission, the law explicitly required the affected institution to impose restrictions on remuneration in line with the Banking Communication till the maturity of the bond[102]. Based on the precautionary recapitalisation scheme, no aid was required by any credit institution.
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The new single resolution framework had significant impact on the burden-sharing methods which highly relies on the State aid crisis communications elaborated by the Commission, however resolution authorities did not receive any power to evaluate their planned resolution action whether they comply with the internal market from the perspective of State aid, it remained at the sole discretion of the Commission. Parallel to the activation of the bail-in tool which embodies most significantly the burden sharing requirement, its compulsory application for recourse to the resolution financing arrangements is deemed as a stricter burden sharing requirement compared to the one prescribed by the crisis communications. Although, the bail-in tool is designed for the resolution of systemic relevant institution (S-II), only its indirect, US model (combined with the bridge institution tool) has been applied in case of small institutions in the EU as well, from which it is ensued that the direct bail-in has not been tested yet whether it is capable for resolving cross-border groups in practice. We note that a direct bail-in was effectively applied in case of HETA, but it was an exceptional case, since it contributed to the resolution of an asset management vehicle. In case of transfer tools (sale of business, bridge institution tool), liquidation aid had to be often provided to facilitate the economic activity transferred from the residual entity where it was sufficient burden-sharing when the shareholders and other subordinated debtholders remained at the entity which was wound down and did not receive proceed from the liquidation.
It is beyond the scope of the current article, but shall be mentioned briefly that there is a tendency in the literature for scrutinizing alternative measures to resolution such as the application of the DGS for purposes of crisis management in case of institutions where the public interest might not met (especially with smaller size). Although, in our opinion it shall be also examined whether BRRD can be amended in a way by easing the burden sharing requirements to enable its broaden application in resolution.
In the COVID-19 pandemic, the Commission introduced waivers against the State aid requirements which addressed primally the participants of the real economy, however it provided the possibility for precautionary recapitalisation with much less burden sharing requirements.
Hungary, in particular the Central Bank of Hungary adapted successfully to the new resolution regime and was in the in its successful application to MKB Bank by applying impaired asset measure to indirectly recapitalise the bank. It was also important that State aid was fully remunerated. Hungary responded quickly to the challenges of the COVID-19 pandemic in the field of crisis management of credit institutions by adopting the rules for providing precautionary recapitalisation. It was an evidence of the resilience of the Hungarian banking sector that this facility was not necessary to be applied. ■
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NOTES
[1] Banking Communication point 13
[2] TFEU Art 107 (1)
[3] Banking Communication point 3
[4] State Aid SA.43365 (2015/N) - Greece Amendment of the restructuring plan approved in 2014 and granting of new aid to National Bank of Greece recitals 127-129
[5] Banking Communication point 5
[6] SA.39543 Resolution of Banca delle Marche, SA. 41134 Resolution of Banca Popolare dell'Etruria, SA.41925 Resolution of Cassa di risparmio di Ferrera, SA.43547 Resolution of Cassa di risparmio della Provincia di Chieti
[7] Covid Communication point 18
[8] Commission Notice on the notion of State aid as referred to in Art 107(1) of the Treaty on the Functioning of the European Union (2016/C 262/01) (hereinafter: Commission notice) point 43
[9] Omran Orestis - Asimakopoulos Ioannis: New interplay between State Aid Rules and Bank Resolution in the EU: the Tercas case, DLA Piper, 2021: https://www.dlapiper.com/en/belgium/insights/publications/2021/03/new-interplay-between-State-aid-rules-and-bank-resolution-in-the-eu-the-tercas-case/ Downloaded: 31 January 2022
[10] Commission notice point 48
[11] Commission notice point 66
[12] Commission notice point 74
[13] Commission notice points 117-119
[14] SA.39543 (2015/N) par 55
[15] Commission notice point 187
[16] See Decision State aid SA.43977 (2015/N) -Portugal Resolution of Banif - Banco Internacional do Funchal S.A.par 97
[17] Banking Communication point 35
[18] Restructuring Communication point 7
[19] Restructuring Communication Annex
[20] Banking Communication point 41
[21] Banking Communication point 42
[22] Banking Communication point 43
[23] Banking Communication point 44
[24] Banking Communication point 45
[25] Covid Communication point 7
[26] Banking Communication point 46
[27] Banking Communication points 38, 47
[28] Decision SA.39543 (2015/N) par 117
[29] Banking Communication point 66
[30] Banking Communication point 72
[31] Banking Communication points 73-76
[32] Banking Communication points 79-80
[33] Hungarian Resolution Act Section 2 (1)
[34] BRRD Art 32 (5)
[35] See also Nicolaides Phenon: State aid after the Banking Union: serious disturbance and public interest, Journal of Banking Regulation: https://doi.org/10.1057/s41261-021-00173-1 Downloaded: 13 February 2021
[36] BRRD point 28 of Art 2 (1)
[37] BRRD point d) of Art 32 (4)
[38] BRRD Art 37 (2); See also EBA Q&A: Question ID: 2016 2720 Interaction between Articles 37(2) and 59(3)
[39] Fondo de Reestructuración Ordenada Bancaria (FROB): 7 June 2017 Resolution of the FROB Governing Committee adopting the measures required to implement the Decision of the Single Resolution Board in its Extended Executive Session of 7 June 2017 concerning the adoption of the resolution scheme in respect of Banco Popular Español, S.A., addressed to FROB, in accordance with Art 29 of Regulation (EU) No. 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No 1093/2010: https://www.frob.es/en/Lists/Contenidos/Attachments/419/ProyectodeAcuerdoreduci-do_EN_v1.pdf, Downloaded: 14 February 2022
[40] Gleeson Simon - Guynn Randall: Bank resolution and crisis management, Oxford University Press, Oxford 2016, pp 187
[41] Gleeson-Guynn i.m. pp 187
[42] Gleeson-Guynn i.m. pp 198-199
[43] Banking Communication point 64
[44] BRRD Art 44-45
[45] EBA: Notifications on resolution cases and use of DGS funds
[46] Lintner Pamela-Lincoln Johanna: Bank Resolution and "Bail-in" in the EU: Selected Case Studies Pre and Post BRRD, World Bank Group, 2016, pp 9: https://openknowledge.worldbank.org/bitstream/handle/10986/25975/112265-WP-P143745-PUBLIC-December-12-2016-FinSAC-BRRD-CaseStudies.pdf?sequence=5&isAllowed=y, Downloaded: 16 January 2022
[47] Lintner-Lincoln, i.m. pp 4
[48] FMA: ERsB-ORDNUNGSNR. 9110020375710; https://www.eba.europa.eu/sites/default/documents/files/documents/10180/1431314/a3eb7d47-5b46-4881-b646-c3864f1564f5/FMA%20decision.pdf?retry=1 Downloaded: 21 February 2022
[49] Mandatsbescheid III (26.03.2019): https://www.fma.gv.at/heta-asset-resolution-ag/ Downloaded: 16 January 2022
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[50] FMA press release: Geordnete Abwicklung der ehemaligen Hypo-Alpe-Adria-Gruppe erfolgreich abgeschlossen. Das neue europäische Abwicklungsregime hat sich bewährt: https://www.fma.gv.at/geordnete-abwicklung-der-ehemaligen-hypo-alpe-adria-gruppe-erfolgreich-abgeschlossen-das-neue-europaeische-abwicklungsregime-hat-sich-bewaehrt/ Downloaded: 16 January 2022
[51] Lintner-Lincoln, i.m. pp 24, 27
[52] Second decision by Finansiel Stabilitet on the resolution of Kobenhaus Andelskasse under kontrol dated 13 September 2018 In.: EBA: Notifications on resolution cases and use of DGS funds: https://www.eba.europa.eu/sites/default/documents/files/documents/10180/2386047/0e565d84-a113-45c1-b188-14e11ad276b0/Notification%20from%20Finansiel%20Stabilitet%20%282%29.pdf?retry=1 Downloaded: 17 January 2022
[53] International Monetary Fund: Denmark financial sector assessment program technical note - financial safety net and crisis management arrangements, August 2020
[54] BRRD Art 39 (2)
[55] Commission notice point 95 which refers to the Land Burgenland and Austria v Commission, Joined Cases T-268/08 and T-281/08, ECLI:EU:T:2012:90, par 87
[56] Decision SA.41503 (2015/N) - Greece Resolution of Panellinia Bank through a transfer order to Piraeus Bank par 26
[57] Decision SA.41503 (2015/N) par 60
[58] Decision SA.41503 (2015/N) par 62
[59] Decision SA.41503 (2015/N) par 83
[60] State aid No. SA.43886 (2015/N) - Greece Resolution of Cooperative Bank of Peloponnese par 36
[61] Decision SA.43886 (2015/N) par 37, par 44
[62] European Parliament: The resolution of Banco Popular: https://www.europarl.europa.eu/RegData/etudes/BRIE/2017/602093/IPOL_BRI(2017)602093_EN.pdf; Downloaded: 30 January 2022
[63] BRRD Art 40 (1)
[64] BRRD point b) of Art 40 (2)
[65] BRRD Art 41 (5)
[66] BRRD Art 41 (1)
[67] BRRD Art 40 (7)
[68] BRRD point g) of Art 41 (1)
[69] Micossi Stefano: Testing the EU Framework for the Recovery and Resolution of Banks: the Italian Experience, Luiss School of European Political Economy, Policy Brief, 15 February 2019 pp 6: https://sep.luiss.it/sites/sep.luiss.it/files/Testing%20the%20EU%20framework%20.pdf Downloaded: 22 January 2022
[70] Lintner-Lincoln i.m. pp 40
[71] Decision SA.39543 (2015/N) par 85
[72] Decision SA.39543 (2015/N) par 93
[73] Decision SA.39543 (2015/N) par 111
[74] Bankowy Fundusz Gwarancyjny: Resolution of Podkarpacki Bank Spóldzielczy w Sanoku: https://www.bfg.pl/en/resolution-of-podkarpacki-bank-spoldzielczy-w-sanoku/ Downloaded: 30 January 2022
[75] State Aid SA.63965 (2021/N) - Poland Deferral of the formal liquidation of Bank Nowy BFG: https://ec.europa.eu/competition/Stateaid/cases1/202147/SA_63965_20E7317D-0100-C74B-A24E-BD764EB4FBFF_75_1.pdf Downloaded: 30 January 2022
[76] Banking Communication point 54
[77] BRRD Art 42 (1)
[78] BRRD Art 42 (3)
[79] BRRD Art 42 (10)
[80] SA.39543 (2015/N) Recital 137
[81] BRRD Recital 46
[82] Commission press release (25 June 2017): http://europa.eu/rapid/press-release_IP-17-1791_en.htm; Downloaded: 10 February 2022
[83] About the different interpretation of the disturbance of financial stability by SRB and the Commission Directorate General for Competition regarding State aid see: Nicolaides im. pp 5
[84] SRB press release https://srb.europa.eu/sites/srbsite/files/23.6.2017_summary_notice_banca_popolare_di_vicenza_s.p.a._20.00.pdf, https://srb.europa.eu/sites/srbsite/files/23.6.2017_summary_notice_veneto_banca_s.p.a_20.00.pdf Downloaded: 10 February 2022
[85] State Aid SA. 45664 (2017/N) - Italy - Orderly liquidation of Banca Popolare di Vicenza and Veneto Banca - Liquidation aid points 117-122
[86] BRRD subpoint (iii) of point d) of Art 32 (4)
[87] BRRD subpoint (iii) of point d) of Art 32 (4)
[88] European Parliament: Precautionary recapitalisations under the Bank Recovery and Resolution Directive: conditionality and case practice, pp 2: https://www.europarl.europa.eu/RegData/etudes/BRIE/2017/602084/IPOL_BRI(2017)602084_EN.pdf Downloaded: 31 January 2022
[89] Banking Communication point 29
[90] State Aid SA.43363 (2015/N) - Greece Amendment of the restructuring plan approved in 2014 and granting of new aid to Eurobank
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[91] State Aid SA.43365 (2015/N) - Greece Amendment of the restructuring plan approved in 2014 and granting of new aid to National Bank of Greece (2015/N) points 127-129
[92] BRRD point d) of Art 32 (4)
[93] European Parliament: Precautionary recapitalisations under the Bank Recovery and Resolution Directive: conditionality and case practice im. pp 2, see also SA.43365 (2015/N) decision, footnote of pp 2
[94] SA.43363 (2015/N) recital 97
[95] Földényiné Láhm Krisztina-Kómár András-Stréda Antal-Szegedi Róbert: Bank resolution as a new MNB function -resolution of MKB Bank, Hitelintézeti Szemle, Vol. 15 Issue 3., September 2016, pp. 5-26.
[96] Földényiné Láhm-Kómár-Stréda-Szegedi im pp 15
[97] Impaired Asset Communication point 40
[98] Földényiné Láhm-Kómár-Stréda-Szegedi im pp 18-19
[99] State aid SA.40441 (2015/N) - Hungary Restructuring of Magyar Kereskedelmi Bank Zrt. par 123
[100] Act LVIII of 2020 Section 20
Lábjegyzetek:
[1] The Author is doctoral candidate, Doctoral School of the Law at the University of Pécs.
Visszaugrás
