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To Bail-In, or to Bail-Out, that is the Question

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Abstract

The introduction of the bail-in tool in the EU legal framework will increase market discipline, reduce moral hazard and save taxpayers’ money through bank restructuring; it should therefore be positively assessed. However, it is unlikely that the use of this new instrument will automatically put an end to bail-outs. This is mainly because there could still be bank crises where public bail-outs might be more effective and less costly than bail-ins. Recent cases of Italian bank crises seem to be a clear confirmation of this assumption.

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Notes

  1. See Kokkoris and Olivares-Caminal (2016), p 316; see Ringe (2016), p 3, who defines as fundamental the objective of bail-in to avoid taxpayers’ rescue of banking institutions; see also Avgouleas and Goodhart (2015), pp 3–4, arguing that bail-in is aimed at protecting taxpayers by avoiding expensive bailouts.

  2. Between 2008 and 2015, the EU Commission approved State aid measures for the financial sector (such as: guarantees, asset relief interventions, capital injections and liquidity measures) amounting to EUR 4.966 trillion; see European Commission (2016).

  3. See European Central Bank (2015), p 80, underlining that ‘General government debt in the euro area increased by 4.8% of GDP over the period from 2008 to 2014 owing to financial sector assistance […]. The debt impact of financial sector support varied considerably across countries. Financial sector support led to a substantial increase in government debt of around 20% of GDP in Ireland, Greece, Cyprus and Slovenia. It also had a high impact in Germany, especially owing to measures taken at the onset of the crisis, and in Austria and Portugal, mainly as a result of more recent interventions. By contrast, government debt in Italy and France was hardly affected by financial sector support’.

  4. 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 [2014] OJ L 173/190; see Binder (2016), pp 25–26.

  5. Under Art. 2 para. 1(1) of the BRRD, ‘resolution’ means ‘the application of a resolution tool or a tool referred to in Article 37(9) in order to achieve one or more of the resolution objectives’ which, under Art. 31(2), are: ‘(a) to ensure the continuity of critical functions; (b) to avoid a significant adverse effect on the financial system, in particular by preventing contagion, including to market infrastructures, and by maintaining market discipline; (c) to protect public funds by minimising reliance on extraordinary public financial support; (d) to protect depositors covered by Directive 2014/49/EU and investors covered by Directive 97/9/EC; (e) to protect client funds and client assets’; see Armour (2015), p 453, who describes resolution as an ‘administrative process in which the goal is to protect the liquidity needs of short-term creditors, especially depositors, and to manage financial assets in a way that preserves their value and the franchise value of the failing institutions’; see also Ringe (2016), p 7, defining resolution as ‘an umbrella term that describes the process of handling a distress bank, based on the objective of minimizing the societal costs of a bank failure’.

  6. Recital 67 of the BRRD states that ‘An effective resolution regime should minimise the costs of the resolution of a failing institution borne by the taxpayers’.

  7. This is also underlined in Recital 1 of the BRRD, where it is said that during the crisis Member States were forced to save banks by using taxpayers’ money; see Lastra and Olivares-Caminal (2011), p 310.

  8. See Lupo-Pasini and Buckley (2015), p 208, arguing that a bail-out occurs when ‘it is the government—usually the Treasury—that rescues the failing bank through the use of taxpayers’ money’.

  9. See LaBrosse (2009), p 222.

  10. See Ringe (2016), p 19, pointing out that bail-in was perceived as a substitute to bail-out.

  11. See Conlon and Cotter (2014), passim, arguing that the application of bail-in during the financial crisis would have allowed to significantly reduce the use of taxpayers’ money to rescue banks.

  12. This concept is clearly underlined by Recital 1 of the BRRD which states that ‘The financial crisis has shown that there is a significant lack of adequate tools at Union level to deal effectively with unsound or failing credit institutions and investment firms (“institutions”). Such tools are needed to prevent insolvency or, when insolvency occurs, to minimise negative repercussions by preserving the systemically important functions of the institution concerned’.

  13. Normal insolvency proceedings are defined, according to Art. 2 para. 1(47) of the BRRD, as ‘collective insolvency proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator or an administrator normally applicable to institutions under national law and either specific to those institutions or generally applicable to any natural or legal person’.

  14. See Ringe (2016), p 5, who argues that there is consensus about the fact that traditional bankruptcy procedures are not appropriate to deal with failing global banks as they are usually long and complicated and therefore can undermine market confidence and destabilize the financial system; see also Shleifer and Vishny (2011), p 29.

  15. Critical functions are defined by Art. 2 para. 1(35) of the BRRD as ‘[…] activities, services or operations the discontinuance of which is likely in one or more Member States, to lead to the disruption of services that are essential to the real economy or to disrupt financial stability due to the size, market share, external and internal interconnectedness, complexity or cross-border activities of an institution or group, with particular regard to the substitutability of those activities, services or operations’.

  16. Recital 4 of the BRRD also adds that they are inappropriate because they do not ensure ‘the preservation of financial stability’, whilst, according to Recital 45: ‘A failing institution should in principle be liquidated under normal insolvency proceedings. However, liquidation under normal insolvency proceedings might jeopardise financial stability, interrupt the provision of critical functions, and affect the protection of depositors. In such a case it is highly likely that there would be a public interest in placing the institution under resolution and applying resolution tools rather than resorting to normal insolvency proceedings. The objectives of resolution should therefore be to ensure the continuity of critical functions, to avoid adverse effects on financial stability, to protect public funds by minimising reliance on extraordinary public financial support to failing institutions and to protect covered depositors, investors, client funds and client assets’.

  17. See Schillig (2013), p 754, arguing that ‘traditional banks perform quasi-utility function’ being the primary source of liquidity for many financial and non-financial institutions.

  18. See Arner (2007), p 72, who defines financial stability as ‘the primary target in preventing financial crises and reducing the severe risks of financial problems which do occur from time to time’; see Andenas and Chiu (2013), pp 342–343, defining it as a general policy objective that should guide regulators and policymakers; see also Lastra (2006), pp 92 and 302, saying that it is an evolving concept that ‘encompasses a variety of elements’.

  19. See Ringe (2016), p 6, who argues that ‘bankruptcy entails a court-supervised process that is designed to protect the substantive and procedural rights of all creditors without particular regard for broader public interests’.

  20. See Calello and Erwin (2010), passim, arguing that a 15% haircut of Lehman senior debt would have avoided its collapse by recapitalizing the bank; additionally, the US Federal Deposit Insurance Corporation (FDIC) has argued that the resolution of Lehman—instead of its submission to bankruptcy proceeding—would have produced losses of only 3% on the dollar versus losses of 79% on the dollar under bankruptcy proceeding; see Federal Deposit Insurance Corporation (2011); see Wojcik (2016), p 92, arguing that the fact that Lehman was not bailed out has ‘made visible the risks such failures entail for the financial system’.

  21. See Huertas (2013), pp 167–168.

  22. See Guynn (2012), pp 121, 137–140, arguing that bankruptcy intervention produces erosion of the financial institution’s value exacerbating the losses for creditors.

  23. See European Central Bank (2015), p 80.

  24. See Financial Stability Board (2011a), p 3; see also Ringe (2016), p 5, who talks about ‘political will to end taxpayer-funded bailouts’.

  25. Recital 5 of the BRRD states that ‘The regime should ensure that shareholders bear losses first and that creditors bear losses after shareholders, provided that no creditor incurs greater losses than it would have incurred if the institution had been wound up under normal insolvency proceedings in accordance with the no creditor worse off principle as specified in this Directive’.

  26. See Krugman (2009), p 63, defining moral hazard as ‘any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly’.

  27. Similarly see Biljanovska (2016), pp 105–106, arguing that ‘market discipline and financial stability cannot be achieved simultaneously’.

  28. It is also said that, due to bail-in, shareholders and creditors are incentivized to keep their bank under control as they have to bear the losses in case of insolvency, see Biljanovska (2016), p 121.

  29. In the opposite case, if the crisis of a bank is not able to generate financial instability, for instance because it is very small and not closely interconnected with many other financial institutions, such a bank can be submitted to winding down or normal insolvency proceedings—according to the law of its jurisdiction—as there is no public interest in resolving it.

  30. This general principle is clearly explained by Recital 49 of the BRRD, under which: ‘The resolution tools should therefore be applied only to those institutions that are failing or likely to fail, and only when it is necessary to pursue the objective of financial stability in the general interest. In particular, resolution tools should be applied where the institution cannot be wound up under normal insolvency proceedings without destabilising the financial system and the measures are necessary in order to ensure the rapid transfer and continuation of systemically important functions and where there is no reasonable prospect for any alternative private solution, including any increase of capital by the existing shareholders or by any third party sufficient to restore the full viability of the institution’.

  31. Under Art. 15 para. 1 of the BRRD, ‘An institution shall be deemed to be resolvable if it is feasible and credible for the resolution authority to either liquidate it under normal insolvency proceedings or to resolve it by applying the different resolution tools and powers to the institution while avoiding to the maximum extent possible any significant adverse effect on the financial system, including in circumstances of broader financial instability or system-wide events, of the Member State in which the institution is established, or other Member States or the Union and with a view to ensuring the continuity of critical functions carried out by the institution’.

  32. However, Ringe (2016), p 16, argues that, due to the fact that banks hold a significant amount of each other’s debt, the bail-in of liabilities held by other financial institutions can ease the contagion and spread systemic risk. For this reason, the Financial Stability Board has drafted some new principles requiring the Authorities to limit the amount of bail-inable liabilities that banks can hold in other banks; see Financial Stability Board (2015), pp 7–8.

  33. Some criteria have been elaborated, for example, the Bank of England has established some thresholds which act as a guide to choose between modified insolvency proceedings and resolution. These thresholds are: a) amount of assets exceeding 15 billion pounds; and b) a number of transactional accounts exceeding 40,000. See Bank of England (2016), p 14. Differently, in 2015, the Bank of Italy submitted to resolution a bank (Carichieti) with just EUR 4.7 billion of assets. See Banca d’Italia (2015), passim.

  34. See Goodhart (2004), passim, arguing that ‘the window of opportunity between closing a bank so early that the owners may sue and so late that the depositors may sue may have become vanishingly small’.

  35. See Sommer (2014), p 208, arguing that Wilson Ervin, a banker working for Credit Suisse, created the concept of bail-in.

  36. See Ringe (2016), p 3.

  37. See Bates and Gleeson (2011), p 264.

  38. See Armour (2015), p 471.

  39. This means that the power that Resolution Authorities can exercise, in relation to the application of the bail-in tool, is relevant. For this reason, Ferran (2014), p 14, defines such a power as ‘near-dictatorial’.

  40. Art. 3 of Commission Delegated Regulation (EU) 2016/860 of 4 February 2016 [2016] OJ L 144/11, distinguishes between: (1) direct contagion, which is ‘a situation where the direct losses of counterparties of the institution under resolution, resulting from the write-down of the liabilities of the institution, lead to the default or likely default for those counterparties in the imminent’ and (2) indirect contagion which is ‘a situation where the write-down or conversion of institution’s liabilities causes a negative reaction by market participants that leads to a severe disruption of the financial system with potential to harm the real economy’.

  41. See Bodellini (2017a), p 432.

  42. Even more in general, Avgouleas and Goodhart (2015), p 3, argue that ‘one of the key principles of a free market economy is that owners and creditors are supposed to bear the losses of a failed venture’.

  43. In addition, Biljanovska (2016), p 121, argues that the mandatory involvement of shareholders and creditors in the losses can make them more active in controlling their bank.

  44. These private sector measures include the early intervention powers of the authorities and the write down of Common Equity Tier 1 and/or the write down and/or conversion of Additional Tier 1 and Tier 2 capital instruments according to Art. 59 of the BRRD. In this regard, see Schillig (2014), p 89, stressing that ‘Regulation (EU) No 575/2013 now requires that all Additional Tier 1 instruments must allow for a write down, or conversion into CET1 instruments, when the CET1 capital ratio of the institution falls below 5.125%’.

  45. According to Art. 32 para. 5 of the BRRD: ‘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’. See Wojcik (2016), p 98, arguing that the authorities have to assess if the submission of the failing bank to resolution can achieve the resolution objectives better than its winding down under normal insolvency proceedings. Obviously such an assessment involves a significant degree of discretion.

  46. Under Art. 2 para. 1(28) of the BRRD, extraordinary public financial support is defined as ‘State aid within the meaning of Article 107(1) TFEU, or any other public financial support at supra-national level, which, if provided for at national level, would constitute State aid, that is provided in order to preserve or restore the viability, liquidity or solvency of an institution or entity referred to in point (b), (c) or (d) of Article 1(1) or of a group of which such an institution or entity forms part’.

  47. See European Banking Authority (2015), p 3.

  48. This is the mechanism for transferring shares or other instruments of ownership issued by an institution under resolution or assets, rights or liabilities of an institution under resolution to a bridge institution.

  49. This is the mechanism for effecting a transfer by a resolution authority of assets, rights or liabilities of an institution under resolution to an asset management vehicle.

  50. This is the mechanism for effecting a transfer by a resolution authority of shares or other instruments of ownership issued by an institution under resolution, or assets, rights or liabilities, of an institution under resolution to a purchaser that is not a bridge institution.

  51. Consob is the acronym for Commissione Nazionale per le Società e la Borsa. It is the public authority responsible for regulating the Italian financial markets.

  52. See Consob (2017), p 8.

  53. Ibid.

  54. It provides that: ‘[e]veryone has the right to own, use, dispose of and bequeath his or her lawfully acquired possessions. No one may be deprived of his or her possessions, except in the public interest and in the cases and under the conditions provided for by law, subject to fair compensation being paid in good time for their loss. The use of property may be regulated by law in so far as is necessary for the general interest’.

  55. It provides that ‘1. Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. 2. The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties’.

  56. See Wojcik (2016), p 118.

  57. See ECtHR, Sovtransavto Holding v. Ukraine, Appl. No. 48553/99, judgment of 25 July 2002, para. 92; see ECtHR, Fomin and Others v. Russian Federation, Appl. No. 34703/04, judgment of 26 February 2013, para. 25.

  58. See CJEU, Kotnik and Others v. Državni zbor Republike Slovenije, Case C-526/14, judgment of 19 July 2016, ECLI:EU:C:2016:570, para. 75 ‘The scale of losses suffered by shareholders of distressed banks will, in any event, be the same, regardless of whether those losses are caused by a court insolvency order because no State aid is granted or by a procedure for the granting of State aid which is subject to the prerequisite of burden-sharing’; para. 78 ‘It follows from point 46 that the burden-sharing measures on which the grant of State aid in favour of a bank showing a shortfall is dependent cannot cause any detriment to the right to property of subordinated creditors that those creditors would not have suffered within insolvency proceedings that followed such aid not being granted’; and para. 79 ‘That being the case, it cannot reasonably be maintained that the burden-sharing measures, such as those laid down by the Banking Communication, constitute interference in the right to property of the shareholders and the subordinated creditors’.

  59. See Recital 67 of the BRRD.

  60. See Schillig (2014), pp 90–91, arguing that in such a case ‘the bail-in tool may be exercised only if there is a realistic prospect that the application of bail-in in conjunction with other measures implemented in accordance with a business reorganisation plan by an administrator appointed for that purpose will achieve, not only the relevant resolution objectives, but will restore the institution to financial soundness and long term viability. Where these conditions are not fulfilled, resolution authorities may use any of the other resolution tools and the bail-in tool in order to capitalise a bridge institution (only)’.

  61. A definition of ‘systemic crisis’ is provided also by Art. 2 para. 1(30) of the BRRD, according to which it means ‘a disruption in the financial system with the potential to have serious negative consequences for the internal market and the real economy. All types of financial intermediaries, markets and infrastructure may be potentially systemically important to some degree’.

  62. Often it is even difficult to distinguish between illiquidity and insolvency, particularly in times of crisis. See Cochrane (2014), pp 197 and 205, pointing out that ‘illiquidity and insolvency are essentially indistinguishable in a crisis’, and that illiquidity can easily bring about insolvency. Also see Mitts (2015), pp 51–52, who argues that banks that are considered illiquid often are insolvent as well.

  63. See Ringe (2016), pp 4 and 7, who, more generally, argues that the capacity of the administrator to provide liquidity to the failing institution to keep the critical functions working is one of the crucial elements of resolution. The author also points out that the bail-in tool should be applied to both insolvent and illiquid institutions, however the current rules do not deal with the provision of liquidity as they only focus on the recapitalization of the failing bank.

  64. For this reason, Ringe (2016), p 14, correctly argues that banks must have bail-inable liabilities otherwise the bail-in tool cannot work.

  65. At the EU level, Art. 45 of the BRRD provides that: ‘Member States shall ensure that institutions meet, at all times, a minimum requirement for own funds and eligible liabilities. The minimum requirement shall be calculated as the amount of own funds and eligible liabilities expressed as a percentage of the total liabilities and own funds of the institution’. The minimum requirement for own funds and eligible liabilities of each institution will be determined by the resolution authority, after consulting the competent authority, on the basis of a number of criteria. These requirements have been further specified by the European Banking Authority (EBA) in its Regulatory Technical Standards (RTS), see European Banking Authority (2016), p 1; in this regard see Ringe (2016), p 14, arguing that ‘there is presently disagreement between EBA and the Commission on these RTS’.

  66. The Financial Stability Board published some principles for prescribing a certain amount of TLAC that Global Systemically Important Banks (G-SIBs) are required to hold, see Financial Stability Board (2015), p 3. Similarly, see International Monetary Fund (2012), p 4.

  67. See Financial Stability Board (2011b), p 1, arguing that: ‘SIFIs are financial institutions whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity. To avoid this outcome, authorities have all too frequently had no choice but to forestall the failure of such institutions through public solvency support. As underscored by this crisis, this has deleterious consequences for private incentives and for public finances’. The Financial Stability Board and the Basel Committee on Banking Supervision have identified a group of 30 globally systemically important banks; see Basel Committee on Banking Supervision (2013), p 1. In addition, the Basel Committee on Banking Supervision and Financial Stability Board have created the category of Domestic Systemically Important Banks (D-SIBs), see Basel Committee on Banking Supervision (2012), p 1. In implementing these guidelines, the EU Institutions have adopted the definition of Other Systemically Important Institutions (O-SIIs), see European Banking Authority (2014), p 1.

  68. See Financial Stability Board (2015), p 7; see also Tröger (2015), p 588, arguing that: ‘Once implemented, the bail-in instrument must not destabilise markets. In order to prevent knock-on effects, the bail-inable instruments have to be held outside the banking sector by investors with sufficient loss-bearing capacity (e.g., insurance companies, pension funds, high-net worth individuals, hedge funds). Under these conditions, a bank failure may become a non-disruptive event that does not imperil market participants’ trust in the financial sector’.

  69. Art. 44 para. 3 of the BRRD provides: ‘In exceptional circumstances, where the bail-in tool is applied, the resolution authority may exclude or partially exclude certain liabilities from the application of the write-down or conversion powers where: (a) it is not possible to bail-in that liability within a reasonable time notwithstanding the good faith efforts of the resolution authority; (b) the exclusion is strictly necessary and is proportionate to achieve the continuity of critical functions and core business lines in a manner that maintains the ability of the institution under resolution to continue key operations, services and transactions; (c) the exclusion is strictly necessary and proportionate to avoid giving rise to widespread contagion, in particular as regards eligible deposits held by natural persons and micro, small and medium sized enterprises, which would severely disrupt the functioning of financial markets, including of financial market infrastructures, in a manner that could cause a serious disturbance to the economy of a Member State or of the Union; or (d) the application of the bail-in tool to those liabilities would cause a destruction in value such that the losses borne by other creditors would be higher than if those liabilities were excluded from bail-in’.

  70. This is confirmed by Recital 4 of the Commission Delegated Regulation (EU) 2016/860 of 4 February 2016 specifying further the circumstances where exclusion from the application of write-down or conversion powers is necessary under Art. 44(3) of the BRRD which states that: ‘The decision to use the bail-in tool (or other resolution tools) should be taken to achieve the resolution objectives in Article 31(2) of Directive 2014/59/EU. In the same vein, those resolution objectives should also inform the decisions regarding the use of the tool, including the decision to exclude a liability or class of liabilities from the application of bail-in in a given case’.

  71. Art. 8 of the Commission Delegated Regulation (EU) 2016/860 of 4 February 2016 provides that: ‘When considering exclusions based on the risk of direct contagion pursuant to Article 44(3)(c) of Directive 2014/59/EU, resolution authorities should assess, to the maximum extent possible, the interconnectedness of the institution under resolution with its counterparties. The assessment referred to in the first subparagraph shall include all of the following: (a) consideration of exposures to relevant counterparties with regard to the risk that bail-in of such exposures might cause knock-on failures; (b) the systemic importance of counterparties which are at risk of failing, in particular with regard to other financial market participants and financial market infrastructure providers. When considering exclusions based on the risk of indirect contagion pursuant to Article 44(3)(c) of Directive 2014/59/EU, the resolution authority shall assess, to the maximum extent possible, the need and proportionality of the exclusion based on multiple objective relevant indicators. Indicators which may be relevant to the case include the following: (a) number, size and interconnectedness of institutions with similar characteristics as the institution under resolution, insofar as that could give rise to widespread lack of confidence in the banking sector or the broader financial system; (b) the number of natural persons directly and indirectly affected by the bail-in, visibility and press coverage of the resolution action, insofar as that has a significant risk of undermining overall confidence in the banking or broader financial system; (c) the number, size, interconnectedness of counterparties affected by the bail-in, including market participants from the non-banking sector, and the importance of critical functions performed by these counterparties; (d) the ability of the counterparties to access alternative service providers for functions which have been assessed as substitutable, given the specific situation; (e) whether a significant number of counterparties would withdraw funding or cease making transactions with other institutions following the bail-in, or whether markets would cease functioning properly as a consequence of the bail-in of such market participants, in particular in the event of generalised loss of market confidence or panic; (f) widespread withdrawal of short-term funding or deposits in significant amounts; (g) the number, size or significance of institutions which are at risk of meeting the conditions for early intervention, or meeting the conditions of failing or likely to fail pursuant to Article 32(4) of Directive 2014/59/EU; (h) the risk of a significant discontinuance of critical functions or a significant increase in prices for the provision of such functions (as evident from changes in market conditions for such functions or their availability), or the expectation of counterparties and other market participants; (i) widespread significant decreases in share prices of institutions or in prices of assets held by institutions, in particular where they can have an impact on the capital situation of institutions; (j) general and widespread significant reduction in short or medium term funding available to institutions; (k) significant impairment to the functioning of the interbank funding market, as apparent from a significant increase of margin requirements and decrease of collateral available to institutions; (l) widespread and significant increases in prices for credit default insurance or deterioration in credit ratings of institutions or other market participants which are relevant for the financial situation of institutions’.

  72. According to Art. 102 of the BRRD: ‘Member States shall ensure that, by 31 December 2024, the available financial means of their financing arrangements reach at least 1% of the amount of covered deposits of all the institutions authorised in their territory. Member States may set target levels in excess of that amount.’

  73. According to Art. 101 of the BRRD: ‘The financing arrangements established in accordance with Article 100 may be used by the resolution authority only to the extent necessary to ensure the effective application of the resolution tools, for the following purposes: (a) to guarantee the assets or the liabilities of the institution under resolution, its subsidiaries, a bridge institution or an asset management vehicle; (b) to make loans to the institution under resolution, its subsidiaries, a bridge institution or an asset management vehicle; (c) to purchase assets of the institution under resolution; (d) to make contributions to a bridge institution and an asset management vehicle; (e) to pay compensation to shareholders or creditors in accordance with Article 75; (f) to make a contribution to the institution under resolution in lieu of the write down or conversion of liabilities of certain creditors, when the bail-in tool is applied and the resolution authority decides to exclude certain creditors from the scope of bail-in in accordance with Article 44(3) to (8); (g) to lend to other financing arrangements on a voluntary basis in accordance with Article 106; (h) to take any combination of the actions referred to in points (a) to (g).’

  74. Since 1 January 2016, euro-area countries participating in the Single Supervisory Mechanism (SSM) have been subject to the Single Resolution Mechanism (SRM) according to Regulation (EU) 2014/806 [2014] OJ L 225/1, which provides for the establishment of a Single Resolution Fund (SRF). Pursuant to the provisions of the Regulation (EU) 2014/806, Member States must contribute their national funds to the SRF starting from 1 January 2016. SRF is initially subdivided into national compartments that are distinct for accounting purposes; over an eight-year transitional period the percentage allocated to the national compartments will be gradually reduced, while the pooled compartment will be increased until all the resources have been transferred to it. At the end of the transitional period, the SRF will have resources equal to 1 per cent of covered deposits, corresponding to around EUR 55 billion.

  75. See Ringe (2016), p 36.

  76. The bail-in tool provisions entered into force just the 1st of January 2016.

  77. See Banca d’Italia (2015), passim. About the burden sharing principle, see Lo Schiavo (2014), p 442, arguing that the State aid has to be limited to the minimum necessary amount and beneficiary institution has to undertake ‘own contribution’.

  78. See Reuters (2017b); and Reuters (2017a).

  79. See European Commission (2015), passim.

  80. See Banca d’Italia (2015), passim.

  81. See Banca d’Italia (2016a), passim.

  82. See Banca d’Italia (2016c), passim.

  83. See Banca d’Italia (2016a), passim.

  84. Ibid.

  85. Ibid., where it is underlined that ‘for 2015, the ordinary contribution amounted to approximately EUR 588 million’.

  86. See Ringe (2016), p 36, arguing that the Single Resolution Fund is not a credible support for the resolution of a significant bank. Similarly, see also Gordon and Ringe (2015), pp 1354–1358.

  87. Recital 21 of the Commission Delegated Regulation (EU) 2016/860 of 4 February 2016 states that ‘Preventing contagion to avoid a significant adverse effect on the financial system is a further resolution objective which may justify an exclusion from the application of the bail-in tool. In any event, exclusion on this basis should only take place where it is strictly necessary and proportionate, but also where the contagion is so severe that it would be widespread and severely disrupt the functioning of financial markets in a manner that could cause a serious disturbance to the economy of a Member State or of the Union’.

  88. See Dewatripont (2014), p 40, pointing out that the EU is ‘the only jurisdiction in the world with State Aid Control policies’.

  89. See Lo Schiavo (2014), pp 435–438.

  90. The so-called ‘Crisis Communications’ are: (1) Communication from the Commission of 25 October 2008 on the application of State aid rules to measures taken in relation to financial institutions in the context of the current global financial crisis (‘2008 Banking Communication’) [2008] OJ C 270/8; (2) Communication from the Commission of 15 January 2009 on the recapitalization of financial institutions in the current financial crisis: limitation of aid to the minimum necessary and safeguards against undue distortions of competition (‘Recapitalization Communication’) [2009] OJ C 10/2; (3) Communication from the Commission of 26 March 2009 on the treatment of impaired assets in the Community financial sector (‘Impaired Assets Communication’) [2009] OJ C 72/1; (4) Communication of the Commission of 19 August 2009 on the return to viability and the assessment of restructuring measures in the financial sector in the current crisis under the State aid rules (‘Restructuring Communication’) [2009] OJ C 195/9; (5) Communication from the Commission of 7 December 2010 on the application, from 1 January 2011, of State aid rules to support measures in favour of financial institutions in the context of the financial crisis (‘2010 Prolongation Communication’) [2010] OJ C 329/7; and (6) Communication from the Commission of 6 December 2011 on the application, from 1 January 2012, of State aid rules to support measures in favour of financial institutions in the context of the financial crisis (‘2011 Prolongation Communication’) [2011] OJ C 356/7.

  91. About the new Banking Union, see Moloney (2014), p 1610; Binder (2015), p 467; Nielsen (2015), p 805; Gortsos (2015), p 402; Tröger (2014), p 450; Nieto (2015), p 540; Ferrarini (2015), p 514.

  92. Communication from the Commission of 30 July 2013 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’) [2013] OJ C 216/1.

  93. See Lo Schiavo (2014), p 442, arguing that ‘burden sharing entails that the aid shall be limited to the minimum necessary and that the beneficiary undertakes the required level of “own contribution” in order to receive the State aid’.

  94. See Dewatripont (2014), p 42.

  95. See Micossi et al. (2014), p 4.

  96. See Communication from the Commission of 30 July 2013 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, point 45.

  97. See Kokkoris (2013), pp 392-393.

  98. Art. 57 of the BRRD states that ‘Member States may, while complying with national company law, participate in the recapitalisation of an institution […] by providing capital to the latter in exchange for the following instruments, subject to the requirements of Regulation (EU) No 575/2013: (a) Common Equity Tier 1 instruments; (b) Additional Tier 1 instruments or Tier 2 instruments […]’.

  99. Art. 58 of the BRRD states that ‘Member States may take an institution […] into temporary public ownership’. To reach this purpose, they ‘may make one or more share transfer orders in which the transferee is: (a) a nominee of the Member State; or (b) a company wholly owned by the Member State’.

  100. See Tröger (2015), p 590, arguing that the fact that such stabilization tools can be used only after the application of bail-in at least to 8% of the liabilities may have destabilizing effects by accelerating ‘the ride to Armageddon’. Interestingly, the author suggests that the extent to which bail-in is used should be subject to a systemic exception.

  101. See Lannoo (2014), pp 630–632.

  102. Art. 37 para. 10 of the BRRD also adds that these tools can be used in the very extraordinary situation of a systemic crisis.

  103. Art. 107(1) TFEU provides for a general prohibition of any aid granted by a member state: ‘save as otherwise provided in the Treaties, 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’. Art. 107(2) and (3) of the TFEU regulate the exceptions to the prohibition of State aid. Art. 107(2) provides that ‘the following shall be compatible with the internal market: (a) aid having a social character, granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the products concerned; (b) aid to make good the damage caused by natural disasters or exceptional occurrences; and, (c) aid granted to the economy of certain areas of the Federal Republic of Germany affected by the division of Germany, in so far as such aid is required in order to compensate for the economic disadvantages caused by that division. Five years after the entry into force of the Treaty of Lisbon, the Council, acting on a proposal from the Commission, may adopt a decision repealing this point’. Art. 107(3) of the TFEU establishes that ‘the following may be considered to be compatible with the internal market: (a) aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment, and of the regions referred to in Article 349, in view of their structural, economic and social situation; (b) aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State; (c) aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest; (d) aid to promote culture and heritage conservation where such aid does not affect trading conditions and competition in the Union to an extent that is contrary to the common interest; and, (e) such other categories of aid as may be specified by decision of the Council on a proposal from the Commission.’

  104. See Micossi et al. (2016), p 3.

  105. See Banca d’Italia (2016b), p 1.

  106. Actually, the health conditions of the Italian banking system are even more serious as, according to a survey published by Mediobanca on the basis of the 2015 balance sheets, there would be 114 banks with an amount of NPLs from 2 times to 8 times the value of their regulatory capital; see Mediobanca (2015), passim. See also the International Monetary Fund (2015), p 9, pointing out that NPLs are a serious problem for many financial institutions, which is particularly common in countries that rely mainly on bank financing, as is the case in the euro area. Huge amounts of NPLs in the banks’ balance sheets reduce their profitability, by increasing funding costs and tying up the capital. This in turn negatively impacts credit supply and ultimately the growth of the entire economic system; in Italy the NPLs’ problem is particularly serious as their amount in 2015 was around EUR 360 billion, i.e. 17% of all loans; see Jassaud and Kang (2015), passim. About the problems that Monte dei Paschi experienced, see De Groen (2016), p 2.

  107. The first two banks had been asked to increase the capital of EUR 3.3 billion and EUR 3.1 billion, respectively, whilst the third one of EUR 8.8 billion; see Reuters (2017d); see also Reuters (2017c).

  108. All these three banks, being significant, were supervised by the European Central Bank.

  109. See Micossi et al. (2016), p 7, who clearly define this legal tool as the only way under the new legal framework to provide public assistance to banks without the need to write down liabilities or convert them into equity.

  110. According to Art. 32(4)(d) of the BRRD, in order to remedy a serious disturbance in the economy of a Member State and preserve financial stability, the extraordinary public financial support can take the form of a precautionary recapitalisation, which is ‘an injection of own funds or purchase of capital instruments at prices and on terms that do not confer an advantage upon the institution’ where the institution is not failing or likely to fail. These measures ‘shall be confined to solvent institutions and shall be conditional on final approval under the Union State aid framework […] 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’. Precautionary recapitalisations ‘shall be limited to injections necessary to address capital shortfall established in the national, Union or SSM-wide stress tests, asset quality reviews or equivalent exercises conducted by the European Central Bank, EBA or national authorities, where applicable, confirmed by the competent authority’.

  111. According to the Banking Communication, burden sharing can be excluded when implementing the Communication would endanger financial stability or lead to disproportionate results (point 45); see Micossi et al. (2014), p 4, arguing that ‘on the basis of these criteria, it is reasonable to expect that the prudential recapitalisation of a solvent bank, following a stress test, would not entail the risk of losses for junior creditors even where, due to general market conditions, there is a need for some temporary public support’.

  112. See Olivares-Caminal and Russo (2017), p 13.

  113. See European Commission (2017a), passim, where it is underlined that ‘the Commission has approved state aid in the amount of €5.4 billion for a precautionary recapitalisation of Monte dei Paschi di Siena (MPS), which follows the agreement in principle reached on 1 June 2017 between Commissioner Vestager and Pier Carlo Padoan, Italy’s Minister of Economy and Finance, on the restructuring plan of MPS. The two conditions for this agreement are now both fulfilled, namely the European Central Bank, in its supervisory capacity, has confirmed that MPS is solvent and meets capital requirements, and Italy has obtained a formal commitment from private investors to purchase the bank’s non-performing loan portfolio’.

  114. See European Central Bank (2017), passim.

  115. See Single Resolution Board (2017), passim.

  116. See European Commission (2017b), passim.

  117. See Gardella (2015), p 373.

  118. Similarly, see Wojcik (2016), p 138, arguing that ‘although bail-in will alleviate the burden on taxpayers substantially, it will not make public interventions obsolete’.

  119. See Dewatripont (2014), p 37; see also Micossi et al. (2016), pp 16–17, calling for a ‘a Treaty-compatible scheme’ allowing the Member States to recapitalize solvent banks with public money on a precautionary and temporary basis in light of the difficulties the European banking sector is still experiencing.

  120. Similarly, see Schillig (2014), p 102, arguing that where such resolution funds turn ‘out to be insufficient, only taxpayers can provide the necessary cash’.

  121. See Bodellini (2017b), p 161.

  122. See Shakespeare (1793), p 156, where it reads ‘To be, or not be, that is the question’.

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    Marco Bodellini

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Bodellini, M. To Bail-In, or to Bail-Out, that is the Question. Eur Bus Org Law Rev 19, 365–392 (2018). https://doi.org/10.1007/s40804-018-0102-x

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