Abstract
History has taught us that sometimes, when financial stability is at risk, public intervention is unavoidable because the private sector (shareholders, creditors, banks) cannot bear the costs alone. Financial stability is a public good and a priority for governments. The Italian experience has shown that the regulatory framework for public interventions in banking crises is still incomplete, not fully effective and hampered by concerns relating to competition rules.
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Notes
- 1.
Among others, see STANDARD & POOR’S, Continued Bank Bail-outs Stretch The Credibility of Europe’s Resolution Framework, February 2020; T. PHILIPPON, A. SALORD, Bail-ins and Bank Resolution in Europe: A Progress Report, Geneva Reports on the World Economy Special Report 4, CEPR, ICMB International Center for Monetary and Banking Studies, March 2017.
- 2.
Based on the definition provided by Article 1(1)(28) of the BRRD, ‘“extraordinary public financial support” means 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 of a group of which such an institution or entity forms part’.
- 3.
It was argued that the bail-in level (8% of liabilities) was set at a high value, in order to minimise the use of public intervention, considering that during the financial crisis, on average, the losses suffered by banks insolvent were far below that level. On the subject, V. COSTANCIO, Challenges for the European Banking industry, Lecture at the Conference on European Banking Industry: What’s Next?, University of Navarra, Madrid, July 2016.
- 4.
For more details on the legislation, see W.P. DE GROPEN, Precautionary Recapitalisation: Time for a review, Centre for European Policy Studies (CEPS), June 2017. The paper notes that precautionary recapitalisation was limited to two Greek banks and to MPS in Italy. It is also argued that: ‘While precautionary recapitalisation is a legitimate instrument for bank crisis management, the conditions set for it by BRRD are restrictive and have so far been effective to prevent its inappropriate use on insolvent banks. Nevertheless, the European Stability Mechanism should be empowered to participate in future precautionary recapitalisations’.
- 5.
The disbursement of public funds automatically determines the application of the rules on State aid and, consequently, of the rules on burden sharing provided for in the 2013 Commission Communication. In this regard, point 43 provides that, if the bank that has the capital shortfall has a capital ratio above the regulatory minimum, ‘the bank should normally be able to restore the capital position on its own, in particular through capital raising measures as set out in point 35’. If there are no other possibilities, including any other supervisory action such as early intervention measures or other remedial actions to overcome the shortfall as confirmed by the competent supervisory or resolution authority, then subordinated debt must be converted into equity, in principle before State aid is granted.
- 6.
The national compartments, into which the resources to be transferred to the central level flow, are destined to disappear at the end of the transitional period foreseen for the achievement of the target level of the SRF.
- 7.
The SRB completed the procedures for signing the framework agreements with the Eurozone countries in February 2017. In Italy, the 2016 Stability Law (Article 1(880-881) provided for the provision of bridging loans up to a maximum total amount of €5,753 million.
- 8.
EUROGROUP, Letter of the President of the Eurogroup to the President of the Euro Summit, 5 December 2019; EU COUNCIL, Remarks by Mário Centeno Following the Eurogroup meeting of 4 December 2019; EUROPEAN STABILITY MECHANISM, The reform of the European Stability Mechanism, Discussion Paper No 14, September 2020. See also Terms of reference of the common backstop to the Single Resolution Fund, 4 December 2018.
- 9.
Similar cases have recently been recorded in Europe, including the German bank Norddeutsche Landesbank (NordLb), the Portuguese Caixa Geral de Depósitos (Cgd) and the Romanian Cec Bank. NordLb is a commercial bank located in Lower Saxony, Saxony-AnhalteeMecklenburg-Western Pomerania. It performs the functions of a central bank and provides compensation for savings banks (Sparkassen). As such, in 2011 NordLb received around €500 million from Lower Saxony and around €100 million from the Associations of Savings banks. In 2019, the European Commission concluded that the business plan developed by the German public authorities to strengthen the equity position of NordLb did not constitute State aid, as the plan would be implemented under market conditions. An investment of approximately €2.8 billion of public funds was envisaged. Caixa Geral de Depósitos (Cgd) was the largest bank in Portugal and was wholly State-owned. In 2012, due to Cgd’s solvency problems, Portugal implemented recapitalisation measures with the subscription of newly issued ordinary shares of Cgd for €750 million, and the subscription of Cgd convertible instruments for €900 million. Private investors also participated in the recapitalisation. The Commission considered these measures to be State aid compatible with the internal market based on the restructuring plan. In 2016, Portugal informed the Commission that Cgd was unlikely to reach all the targets of the 2013 plan and notified the Commission of further recapitalisation measures and an updated business plan. Cec Bank was the seventh largest bank in Romania, owned by the State since 1864. In 2019, the European Commission declared that the recapitalisation of €200 million proposed by the State in Cec Bank did not constitute State aid, on the ground that it would be performed under market conditions.
- 10.
EUROPEAN COMMISSION, Communication from the Commission Temporary Framework for State aid Measures to Support the Economy in the Current COVID-19 Outbreak, 2020/C 91 I/01, March 2020.
- 11.
Transactions limited to injections necessary to address capital shortfalls established in stress tests at national, EU or Member State level, asset quality reviews or similar exercises conducted by the European Central Bank, EBA or national authorities, and confirmed by the competent authority.
- 12.
For a forecast of the impact of the Covid-19 pandemic on NPEs, see MALINCONICO (2020). The issue on how to deal with the possible increase of NPEs is at the centre of the political, economic and regulatory debate. It would be important to establish Asset Management Companies (AMCs) to acquire deteriorated loans at fair prices that would not diminish their value and safeguard the assets of the bank. On this, see A. ENRIA, Public Hearing at the Committee on Economic and Monetary Affairs, Brussels, October 2020. He stressed the need for a European initiative to set up a network of national AMCs through common funding mechanisms and prices.
- 13.
The resolution authority decides that a bridge bank is no longer such if: (a) the bridge bank merges with another entity; (b) the bridge bank ceases to meet the requirements of Article 40(2); (c) all or substantially all the assets, rights and liabilities of the bridge bank are sold to a third party; (d) the period referred to in paragraph 5 or, if applicable, in paragraph 6 expires; e. the bridge bank’s assets are completely liquidated and its liabilities are completely discharged.
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Boccuzzi, G. (2022). Public Intervention in Crises. In: Banking Crises in Italy. Palgrave Studies in Financial Instability and Banking Crisis Regulation. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-031-01344-7_11
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