4 Question raised
Since the scope of EU law regulating the use of public money in resolution and liquidation is different, a substantially similar operation conducted under these two different frameworks can lead to very different outcomes for (i) the acquiring bank; (ii) the banks’ creditors; and (iii) the taxpayers. The distinction between resolution and liquidation is ultimately based on the existence of public interest, an assessment that is the task of the SRB. In this section we look at the SRB’s assessments in the cases of Veneto Banca and Banca Popolare di Vicenza, and at the implications national insolvency frameworks might have on the clarity of EU rules in the context of banking union.
4.1 Critical functions and public interest
A closer look at the cases of Veneto Banca and Popolare di Vicenza reveals a friction in terms of the presence of a public interest as viewed by the SRB and as viewed by the Italian government.
A key element in the assessment of whether there is a public interest is the criticality of specific functions performed by the banks that are failing or likely to fail. Commission Regulation 2016/778 defines a function as critical when: (i) it is “provided by an institution to third parties not affiliated to the institution or group”; and (ii) “a sudden disruption of that function would likely have a material negative impact on third parties, give rise to contagion or undermine the general confidence of market participants because of the systemic relevance of the function for third parties and the systemic relevance of the institution or group in providing the function”.
The SRB decision, published on 23 June 2017, states that a public interest was not present in the cases of Veneto Banca and Popolare di Vicenza, because neither bank provides critical functions, and their failure would not be expected to have a significant adverse impact on financial stability. With respect to the functions identified by the institutions as critical – ie deposit taking, lending activities and payment services – the SRB concluded that these are provided to a limited number of third parties and can be replaced in an acceptable manner and within a reasonable timeframe.
The assessment of the financial stability implications largely looks at the extent of the two banks’ systemic relevance and interconnectedness. A previous SRB assessment – based on information available at the end of 2015 – deemed liquidation under normal insolvency procedure not credible, mostly because of the potential adverse impact on market confidence and the risk of contagion spreading to other credit institutions. For both banks, the SRB’s assessment changed in light of significant developments during 2016, which reduced the banks’ systemic relevance. In particular, the SRB highlighted that despite significant deposit outflows since the beginning of 2016, deposit volumes in Italy remained relatively stable, suggesting that the two banks’ deposit outflows were absorbed by other institutions in Italy. This is taken by the SRB also as evidence supporting the view that the deposit-taking function of the two banks was not critical, because it could be replaced within a reasonable timeframe by some of the active credit institutions in the regions concerned, limiting the potential damage to the real economy and the financial markets.
In looking at the effect of liquidation on financial stability, the SRB focused on Italy as a whole, but also stressed that:
In its assessment, the SRB thus excluded the notion that liquidation would have a systemic impact at national level, and also seemed to dismiss the possibility of a significant impact at the local level. The Italian Government’s Decree, published on 25 June and converted into law in July 2017, takes an opposite view. The introductory recitals in the Italian Decree (Italian Parliament, 2017) state that:
The view of the Italian government is reiterated in MEF (2017) where, in discussing the state aid measures implemented, the €3.5 billion support to Banca Intesa is described as “fundamental because it is precisely this intervention that guarantees the continuity of provision of credit to the present customers of the two banks (families, businesses, artisans)”. But this seems to contradict the SRB’s conclusion about the substitutability – even at the local level – of the banks’ functions. Ultimately, the justification for the state aid provided in the Italian case hinges on the government’s own assessment of local effects of liquidation. The wording of the decree seems to contradict the SRB’s own view about the banks’ critical functions: while the SRB identified no public interest that would justify resolution, the national government identified enough public interest to justify sizable state aid.
A first question raised by the Veneto Banca and Banca Popolare di Vicenza cases is thus whether the definition of critical functions and the applicable assessment criteria are sufficiently clear at EU level. Here a distinction is worth making. While the definition of critical functions seems to be clear insofar as it concerns the SRB’s assessment of the existence of public interest, it is not equally clear what role it plays in the EU discipline on liquidation aid, which is mostly contained in the Commission’s 2013 Communication. The rationale for allowing Member States to provide liquidation aid is laid out in European Commission (2017), according to which: “outside the European banking resolution framework, it is for Member States to decide whether they consider a bank exit to have a serious impact on the regional economy, e.g. on the financing of small and medium enterprises in the regional economy, and whether they wish to use national funds to mitigate these effects”. The 2013 Communication, however, does not include guidelines or on how this decision should be taken. In the absence of clarity on what constitutes a reasonable “serious impact on the regional economy” the rules on liquidation aid leave room for potentially controversial results. This in turn raises the question of whether the SRB itself should be tasked with providing an explicit assessment of the impact of liquidation at the local level. This would have an obvious benefit in terms of clarity of the assessments underlying decisions to grant liquidation aid, but it would be best complemented by a harmonisation of insolvency frameworks, which currently differ significantly at the national level (see next section).
4.2 What are normal insolvency proceedings?
In the BRRD and the SRMR, normal insolvency proceedings are the benchmark scenario against which the (exceptional) alternative of resolution is assessed. Article 74 of the BRRD and Article 15(1) of the SRMR state that “no creditor shall incur greater loss than would have been incurred if the entity had been wound up (...) under normal insolvency proceedings” (no creditor worse off principle). Article 20(16) and 20(17) SRMR provide for a valuation to be conducted to assess whether the treatment of shareholders and creditors under normal insolvency proceedings would differ from that under resolution. Importantly, Article 20(18) of the SRMR states that the valuation of the insolvency proceedings scenario should disregard any extraordinary public financial support.
Unlike resolution, however, insolvency remains regulated at national level by national insolvency laws. This creates two potential problems. First, the insolvency regimes of different countries differ (see McCormack et al, 2014, for a detailed legal perspective). As mentioned in section 3, Italian law provides for several insolvency procedures, where banks and other financial institutions – as well as other selected types of enterprises – are subject to a regime called “forced administrative liquidation” (Liquidazione Coatta Amministrativa, LCA). Under the LCA framework, liquidators are nominated by the Bank of Italy, which enjoys a high degree of oversight over the process. Unlike other procedures – and unlike what happens in other countries such as Spain – there is no delegated judge, and the LCA is mainly administrative in nature (Baker McKenzie, 2017; see Box 1 for details). This probably reflects the intention to ensure a swift liquidation for entities that are perceived as critical, taking them out of the traditionally long Italian judicial procedure. The Italian Parliament voted on 11 October 2017 on a new law that will streamline insolvency and bankruptcy in Italy. Among other changes, the new law reduces the scope of the LCA, but does not change its applicability to banks and financial institutions.
BOX 1: Liquidation in Italy and in Spain
In Italy, liquidazione coatta amministrativa (LCA) is the ordinary liquidation proceeding for banks and financial institutions, governed by Legislative Decree no. 385/1993 (the Italian Banking Act) and by specific provisions of the Italian Transposing Law and of the Italian statute governing insolvencies, Royal Decree no. 267/1942. LCA is initiated by issuance of a decree by the Italian Ministry of Economy and Finance, and the first step is the appointment by the Bank of Italy of one or more receivers and a supervisory committee to monitor the liquidation process. The receivers replace the former management, ascertain the institution’s liabilities, carry out the liquidation of assets, take any legal action in respect of the possible liabilities of the former management and auditors and periodically report to the Bank of Italy. Following the issuance of the decree and the appointment of the receivers, no acts of enforcement may be initiated or continued by creditors, and all payments due from the financial institution are suspended. Within 30 days of the receivers’ appointment, all creditors are formally notified of their claims; the statement of liabilities, consisting of a list of the creditors admitted to the LCA proceedings, is then filed by the receivers with Bank of Italy. The statement also identifies the creditors’ ranking and the size of their claims. Transfers can be performed at any stage of LCA, including prior to the filing of the definitive statement of liabilities. The receivers may carry out the liquidation either by selling individual assets or through sale of aggregates of assets and liabilities.
In Spain, insolvency law establishes one single insolvency procedure (concurso), applied to any insolvent debtor, which includes a common phase during which the insolvency administrator is appointed, an inventory of the assets and creditors is performed, and claims are ranked. The insolvency process is supervised by the Spanish Mercantile Courts, which are competent to hear and decide on insolvency proceedings of a credit institution. Differently from the Bank of Italy – which appoints the liquidators – the Fund for Orderly Bank Restructuring (FROB)’s role in normal insolvency procedure is limited to presenting the Court with a proposed list of insolvency administrators from which the Court must select the appointee. The treatment and safeguards provided to the various classes of creditors and the ranking of their claims in insolvency proceedings of Spanish credit institutions are the same established by the law for creditors or claims relating to any non-banking business subject to insolvency proceedings. The Spanish transposition of the BRRD, however, provides exceptions in the event of an insolvency proceeding of a Spanish credit institution.
A second issue related to the national character of insolvency frameworks is the potential for them to be altered under national law. In its assessments published on 23 June 2017, the SRB stated that in order to assess the need to take resolution action based on the resolution objectives of protecting depositors and investors and protecting client assets and client funds, a comparison was made between the hypothetical resolution action and LCA proceedings. The SRB specifically states that:
The SRB also observes that:
So, in the context of the SRB’s assessment, “winding-up of the institution under normal insolvency proceedings” refers for the SRB to the LCA proceedings, and when discussing the Italian LCA and its degree of creditor protections, the SRB makes no mention of additional public funds.
This wording suggests that the regime actually implemented was a modified version of the ordinary liquidation proceedings, by the addition of liquidation aid. The recital of the actual Decree text offers a similar view when pointing out that:
The effect of this has been that senior creditors were actually better off in insolvency than they would have been in a resolution. The peculiarity of this outcome was noticed – among others – by the chairman of the European Banking Authority Andrea Enria who stressed that creditors in liquidation should not be better off than in resolution. The fact that insolvency law remains a national prerogative, coupled with the abovementioned lack of clarity in EU legislation about liquidation aid, creates uncertainty about the extent of possible amendments by national governments with different propensities to use public funds, and the ensuing consequences for the banks, their private creditors and taxpayers. To ensure that banks failing in different countries are liquidated under the same conditions and thus know what to expect, national insolvency laws should be harmonised, preferably by introducing an EU insolvency framework.
