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Critical functions and public interest in banking services: Need for clarification?

What is the role that the concepts of critical functions and public interest play in Member States’ decision to grant liquidation aid? Silvia Merler looks at the recent liquidation of two Italian banks to show how resolution and liquidation differ substantially when it comes to the scope of legislation applicable to the use of public funds.

By: Date: December 18, 2017 Topic: Banking and capital markets

This material was originally published in a paper provided at the request of the Committee on Economic and Monetary Affairs of the European Parliament and commissioned by the Directorate-General for Internal Policies of the Union and supervised by its Economic Governance Support Unit (EGOV). The opinions expressed in this document are the sole responsibility of the authors and do not necessarily represent the official position of the European Parliament. The original paper is available on the European Parliament’s webpage (here). © European Union, 2017

Under the current EU frameworks for dealing with banking problems, resolution is seen as an exception to be granted only if liquidation under national insolvency proceedings would not be warranted. This is most notably the case when the bank provides critical functions to the economy, or when its liquidation may have sizeable effects on financial stability.

The two options – resolution and liquidation – differ substantially when it comes to the scope of legislation that is applicable to the use of public funds. Resolution is covered by the EU Bank Recovery and Resolution Directive, liquidation is regulated by national insolvency laws; the use of public funds in resolution would be subject to both BRRD scope and State Aid scope, whereas the use of public funds in liquidation is only subject to the State aid scope.

The liquidation of Veneto Banca S.p.a. and Banca Popolare di Vicenza S.p.a. highlights how this two-tier framework raises some important questions in the context of Banking Union. The first question is whether the definition of critical functions and of “public interest” – key elements in the context of liquidation – should be clarified. A second question is whether the current legal and regulatory situation within the Banking Union ensures that similar banks can expect a predictable equal treatment in case of failure, or whether there may be a need for legal or regulatory clarification or harmonization.

The author argues that more clarity would be warranted as to the role that the concepts of critical functions and public interest play in Member States’ decision to grant liquidation aid, as the current situation may give lead to outcomes in which the view of national authorities seems to contradict the SRB’s assessment. While the purpose of this paper is not to provide a comprehensive overview of different national insolvency regimes across the EU, the author argues that the current diversity is a source of uncertainty about the outcome of a liquidation procedure, for all actors involved. For Banking Union to function effectively, the framework should be changed so as to provide the same level of certainty in liquidation as there is expected to be in resolution.

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