Policy brief

Precautionary recapitalisation: time for a review?

While precautionary recapitalisation is a legitimate instrument for bank crisis management, the conditions set for it by BRRD (Bank Recovery and Resol

Publishing date
13 July 2017
Authors
Nicolas Véron

This paper was provided at the request of the European Parliament’s Economic and Monetary Affairs Committee, in advance of the public hearing with the Chair of the Single Resolution Board on 11 July 2017. The opinions expressed in this document are the sole responsibility of the author 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. For helpful feedback on an early draft, the author thanks Alexander Lehmann, André Sapir, Dirk Schoenmaker and Guntram Wolff at Bruegel, and several other experts and stakeholders.

The Bank Recovery and Resolution Directive (BRRD) of 2014, together with the initiation of banking union in the euro area, represent a regime change in EU banking sector policy. The BRRD replaces the prior assumption of public reimbursement of a failing bank’s claimants (or bail-out) with one of mandatory burden sharing (or bail-in), thus reinforcing market discipline. The shift of preference from bail-out to bail-in represents major progress for the EU financial sector policy framework, and deserves continued support.

Longstanding financial crisis experience suggests, however, that this shift cannot be absolute. The BRRD, accordingly, maintains the possibility of public support through government guarantees and through precautionary recapitalisation, which is the focus of this paper. Keeping open the option of precautionary recapitalisation is justified both by transitional considerations, as offering flexibility on the long and treacherous path towards a more complete banking union, and permanent considerations, as an available option for public intervention in dire crisis scenarios such as that experienced in the early autumn of 2008.

The conditions set by the BRRD for precautionary recapitalisation are fairly restrictive. They include conditions on the viability and balance sheet testing of the bank in question, the competitive impact, the economic and financial stability environment and general principles that the intervention should be precautionary, temporary and proportionate.

There have been only few actual cases of precautionary recapitalisation under the BRRD so far: two Greek banks in late 2015, whose precautionary recapitalisations using ordinary shares and contingent convertible bonds can currently be viewed as broadly successful, and very recently Monte dei Paschi di Siena in Italy. It was also requested by Banca Popolare di Vicenza and Veneto Banca, also in Italy, but not granted, suggesting the conditions for access to precautionary recapitalisation are meaningfully enforced by EU authorities.

There is no immediate need for legislative reform of the parts of the BRRD that establish the possibility of precautionary recapitalisation, beyond making corrections to a few words in Article 32 that appear to result from hasty drafting. Implementation practice can be expected to draw lessons from early experience, including the need for an asset quality review as a prerequisite for precautionary recapitalisation in all cases except those where circumstances would make it practically infeasible. The broad review of the BRRD scheduled in 2018 should provide another opportunity to consider any need to amend the legislative basis for precautionary recapitalisation, possibly based on more lessons from practical experience in the meantime.

About the authors

  • Nicolas Véron

    Nicolas Véron is a senior fellow at Bruegel and at the Peterson Institute for International Economics in Washington, DC. His research is mostly about financial systems and financial reform around the world, including global financial regulatory initiatives and current developments in the European Union. He was a cofounder of Bruegel starting in 2002, initially focusing on Bruegel’s design, operational start-up and development, then on policy research since 2006-07. He joined the Peterson Institute in 2009 and divides his time between the US and Europe.

    Véron has authored or co-authored numerous policy papers that include banking supervision and crisis management, financial reporting, the Eurozone policy framework, and economic nationalism. He has testified repeatedly in front of committees of the European Parliament, national parliaments in several EU member states, and US Congress. His publications also include Smoke & Mirrors, Inc.: Accounting for Capitalism, a book on accounting standards and practices (Cornell University Press, 2006), and several books in French.

    His prior experience includes working for Saint-Gobain in Berlin and Rothschilds in Paris in the early 1990s; economic aide to the Prefect in Lille (1995-97); corporate adviser to France’s Labour Minister (1997-2000); and chief financial officer of MultiMania / Lycos France, a publicly-listed online media company (2000-2002). From 2002 to 2009 he also operated an independent Paris-based financial consultancy.

    Véron is a board member of the derivatives arm (Global Trade Repository) of the Depositary Trust and Clearing Corporation (DTCC), a financial infrastructure company that operates globally on a not-for-profit basis. A French citizen born in 1971, he has a quantitative background as a graduate from Ecole Polytechnique (1992) and Ecole Nationale Supérieure des Mines de Paris (1995). He is trilingual in English, French and Spanish, and has fluent understanding of German and Italian.

    In September 2012, Bloomberg Markets included Véron in its second annual 50 Most Influential list with reference to his early advocacy of European banking union.

     

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