Download publication

External Publication

Precautionary recapitalisations: time for a review

Precautionary recapitalisation, a tool for public intervention in the banking sector defined in the Bank Recovery and Resolution Directive (BRRD), 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. Outside of the scope of BRRD, the co-legislators should consider a reform of the EU audit framework to improve audit quality, and the European Stability Mechanism should be empowered to participate in future precautionary recapitalisations.

By: Date: July 12, 2017 Topic: European Parliament

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)[1], 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.

[1] The expressions ‘burden sharing’ and ‘bail-in’ should be viewed as semantically equivalent, even though recent practice has occasionally identified ‘burden sharing’ as referring to junior or subordinated debt, and ‘bail-in’ to senior debt.

 

View comments
Read article More on this topic More by this author

Podcast

Podcast

Italy's economic and political outlook

In this week's Sound of Economics, Bruegel affiliate fellow, Silvia Merler, is joined by Marcello Minenna, PhD lecturer at the London Graduate School and Head of Quants at Consob, as well as Lorenzo Codogno, LSE visiting professor, to discuss the Italian government's economic outlook in the European context.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: July 11, 2018
Read article More on this topic More by this author

Blog Post

The European Union must defend Andreas Georgiou

Andreas Georgiou’s case raises disturbing questions about the integrity of European statistical processes. Forceful action by EU authorities on Mr Georgiou’s case is long overdue. The European Union also needs to consider reforming its statistical framework to ensure a similar scandal cannot recur.

By: Nicolas Véron Topic: European Macroeconomics & Governance Date: June 26, 2018
Read article More on this topic

Blog Post

European bank mergers: domestic or cross-border?

As the European economy recovers from the global financial crisis, bank mergers are back on the agenda. While cross-border mergers have been predicted before, most European bank mergers have been domestic until now. What are the odds of cross-border mergers in the upcoming bank-consolidation wave?

By: Patty Duijm and Dirk Schoenmaker Topic: Finance & Financial Regulation Date: June 21, 2018
Read article Download PDF More on this topic More by this author

Working Paper

EU financial services policy since 2007: crisis, responses and prospects

This paper presents a holistic overview and assessment of the European Union (EU)’s financial services policy since the start of its financial crisis in mid-2007. Its emphasis is on public policy initiatives and developments at the European level, including those specific to the euro area.

By: Nicolas Véron Topic: Finance & Financial Regulation Date: June 21, 2018
Read article More on this topic

Blog Post

Mini-BOT in the government programme of the Five Star Movement and the League

The economic evaluation of mini-BOT very much depends on its specific characteristics. Overall it appears to be a blend of an inferior security and inferior money. More important than its specific characteristics is the message that the implementation of the mini-BOT would send about Ital-exit: inevitably, given what the League and its representatives have said and written, the mini-BOT would be seen as a first step in the exit of Italy from the euro, rekindling denomination risk attached to Italian securities.

By: Francesco Papadia and Alexander Roth Topic: Finance & Financial Regulation Date: June 5, 2018
Read article More on this topic More by this author

Blog Post

Italian populism calls for hard choices

The economic agenda of Italian populists is likely to exacerbate rather than alleviate Italy’s longstanding problems. But the piecemeal, small-step approach followed by European and national ruling elites, while perhaps tolerable for countries under normal economic conditions, is insufficient for an Italy stuck in a low-growth-high-debt equilibrium. If defenders of the European project want to regain popularity, they will need to present a clear functioning alternative to setting the house on fire.

By: Alessio Terzi Topic: European Macroeconomics & Governance Date: May 31, 2018
Read article Download PDF

External Publication

The changing fortunes of central banking

What are the major challenges of central banks today? This book discusses the developing role of central banks and the policies they pursue in seeking monetary and financial stabilisation, while also giving suggestions for model strategies.

By: Philipp Hartmann, Haizhou Huang and Dirk Schoenmaker Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: May 29, 2018
Read article More on this topic

Opinion

How worried should we be about an Italian debt crisis?

Political backlash to slow growth and immigration has produced the least cooperative government imaginable in Italy, a coalition between the left-populist Five Star Movement (M5S) and the right-populist Lega. And borrowing costs have started to rise in reaction. Does this mean that a crisis is imminent? If so, how bad would it be?

By: Silvia Merler, Olivier Blanchard and Jeromin Zettelmeyer Topic: Finance & Financial Regulation Date: May 28, 2018
Read article Download PDF

External Publication

Central banking in turbulent times

Central banks came out of the Great Recession with increased power and responsibilities. Indeed, central banks are often now seen as 'the only game in town', and a place to put innumerable problems vastly exceeding their traditional remit. These new powers do not fit well, however, with the independence of central banks, remote from the democratic control of government.

By: Francesco Papadia and Tuomas Valimaki Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: May 22, 2018
Read article More on this topic More by this author

Podcast

Podcast

Director's Cut: Post-crisis prognosis for macroeconomics

The global financial crisis prompted the field of macroeconomics to rethink its methods. In this Director's Cut of 'The Sound of Economics', Bruegel deputy director Maria Demertzis addresses the changes made and the problems still unresolved, in conversation with Nicola Viegi, South African Reserve Bank professor of monetary economics at the University of Pretoria, and Frank Smets, director general of economics at the European Central Bank.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: May 15, 2018
Read article More by this author

Blog Post

Europe needs a broader discussion of its future

When thinking about what will determine the prosperity and well-being of citizens living in the euro area, five issues are central. This column, part of VoxEU's Euro Area Reform debate, argues that the important CEPR Policy Insight by a team of French and German economists makes an important contribution to two of them, but leaves aside some of the most crucial ones: European public goods, a proper fiscal stance and major national reforms. It also argues that its compromise on sovereign debt appears unbalanced.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: May 4, 2018
Read article More on this topic More by this author

Blog Post

Global income inequality is declining – largely thanks to China and India

Income inequality among citizens of 146 continues to fall, though at a somewhat reduced pace, according to the updated Bruegel dataset. Income convergence of China and India accounts for the bulk of the decline in global income inequality from 1988-2015.

By: Zsolt Darvas Topic: Global Economics & Governance Date: April 19, 2018
Load more posts