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Greek and Italian ‘Lessons’ on Bank Restructuring: Is Precautionary Recapitalisation the Way Forward?

Published online by Cambridge University Press:  12 September 2017

Marco BODELLINI
Marco BODELLINI*
Affiliation:
Queen Mary, University of London
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Abstract

Even though the bail-in tool is potentially helpful in resolving banks in crisis, it may still create the same issues that resolution is meant to prevent and/or avoid, namely contagion, financial instability and also systemic risk. Recent cases of bank restructuring have demonstrated that there are situations in which the use of the bail-in tool could end up being dangerous for the stability of the financial system. Obviously in such cases, the write down and/or conversion into equity of the bank’s liabilities must be avoided. At the same time, however, the disapplication of bail-in makes the provision of external resources necessary to rescue effectively the bank in crisis.

The EU legislator was aware of these potential issues and for this reason introduced a number of rules allowing, in certain situations, both the disapplication of the bail-in tool and the provision of external financing. Nevertheless, when the provision of external financing comes from the Member States, it has to comply with the rules of the State aid framework set by the Treaty on the Functioning of the European Union (TFEU) and applied by the European Commission. In this article, it is argued that despite the strict rules on State aid, there is still room to manage even difficult banking crisis situations in which the application of the bail-in tool could be counterproductive and therefore public intervention should take place through the so-called precautionary recapitalisation instead. However, in this regard, it is crucially important that the authorities intervene before the bank in trouble ‘crosses the line’ of insolvency, as some recent cases of Greek and Italian banks have demonstrated.

Keywords

BRRDresolutionbail-outbail-inprecautionary recapitalisationState aid framework.
Type
Articles
Information
Cambridge Yearbook of European Legal Studies , Volume 19 , December 2017 , pp. 144 - 164
Copyright
© Centre for European Legal Studies, Faculty of Law, University of Cambridge 

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Footnotes

*

m.bodellini@qmul.ac.uk. The author wishes to thank Professor Rodrigo Olivares-Caminal (Queen Mary University of London – CCLS) for his insightful thoughts and assistance in writing this article. Any errors or omissions are only attributable to the author. This paper was presented at the conference ‘Non-Performing Loans And Bank Restructuring: An Italian Perspective’ organised in London on 22 May 2017 by Queen Mary University of London (CCLS) and Institute of Global Law, Economics and Finance (IGLEF).

References

1 Such as the UK, see Penn, B, ‘Banking Regulation’ in S Paterson and R Zakrzewski (eds), The Law of International Finance, 2nd ed (Oxford University Press, 2017), pp 52–53 Google Scholar.

2 See W-G Ringe, ‘Bail-in Between Liquidity and Solvency’ (2016) 33 University of Oxford Legal Research Paper, p 5, who argues that there is consensus about the fact that traditional bankruptcy procedures are not appropriate to deal with failing global banks as they are usually long and complicated and therefore can undermine market confidence and destabilise the financial system.

3 See Wojcik, K P, ‘Bail-in in the Banking Union’ (2016) 53 Common Market Law Review 92 Google Scholar, arguing that the fact that Lehman was not bailed out has ‘made visible the risks such failures entail for the financial system’; see P Calello and W Erwin, ‘From bail-out to bail-in’, (The Economist, 28 January 2010), arguing that a 15% haircut of Lehman senior debt would have avoided its collapse by recapitalising the bank.

4 See Lupo-Pasini, F and Buckley, R P, ‘International Coordination in Cross-Border Bank Bail-ins: Problems and Prospects’ (2015) 16 European Business Organisation Law Review 208 Google Scholar, arguing that a bail-out occurs when ‘it is the government – usually the Treasury – that rescues the failing bank through the use of taxpayers’ money’; see also C Hadjiemmanuil, ‘Limits on State-Funded Bailouts in the EU Bank Resolution Regime’ (2016) 2 European Economy 91.

5 See Financial Stability Board, ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’, October 2011, p 1; this document was updated in 2014, http://www.financialstabilityboard.org/2014/10/r_141015/.

6 Ibid, p 3.

7 See Lupo-Pasini and Buckley, note 4 above.

8 See Bates, C and Gleeson, S, ‘Legal Aspects of Bank Bail-ins’ (2011) 5 Law and Financial Markets Review 264 CrossRefGoogle Scholar.

9 See Armour, J, ‘Making Bank Resolution Credible’ in N Moloney et al (eds) Oxford Handbook of Financial Regulation (Oxford University Press, 2015), p 471 Google Scholar.

10 See Schillig, M, ‘Bank Resolution Regimes in Europe – Part II: Resolution Tools and Powers’ (2014) 25 European Business Law Review 77 CrossRefGoogle Scholar.

11 On contagion, see Bodellini, M, ‘From systemic risk to financial scandals: the shortcomings of U.S. hedge fund regulation’ (2017) 11 Brooklyn Journal of Corporate, Financial & Commercial Law 432 Google Scholar. On finanacial instability, see Andenas, M and Chiu, I, ‘Financial Stability and Legal Integration in Financial Regulation’ (2013) 38 European Law Review 342 Google Scholar. On systemic risk, see Rivière, A, ‘The future of hedge fund regulation, a comparative approach United States, United Kingdom, France, Italy and Germany’ (2011) 10 Richmond Journal of Global law & Business 263 Google Scholar; and Lee, C, ‘Reframing complexity: hedge fund policy paradigm for the way forward’ (2015) 9 Brooklyn Journal of Corporate Financial & Commercial Law 499 Google Scholar, arguing that systemic risk is ‘the risk that poses a threat to the entire financial system, either (i) directly through failure of, or significant losses in assets or liquidity to, one or more institutions, or (ii) indirectly through the effects of such events via the operation of financial markets. This concept is consistent with the G20’s approach to post-crisis reforms pertaining to systemically important financial institutions and markets whose failure or severe distress may contribute to, or transmit, systemic risk’.

12 See Financial Stability Board, note 5 above. Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms [2014] OJ L173/190.

13 Rec 67 BRRD states that ‘An effective resolution regime should minimise the costs of the resolution of a failing institution borne by the taxpayers’, whilst Rec 1 underlines that during the crisis Member States were forced to save banks by using taxpayers’ money. In this regard, see European Central Bank, ‘The Fiscal Impact of Financial Sector Support During the Crisis’ (2015) 6 ECB Economic Bulletin, p 80, which states that ‘General government debt in the euro area increased by 4.8% of GDP over the period from 2008 to 2014 owing to financial sector assistance … The debt impact of financial sector support varied considerably across countries. Financial sector support led to a substantial increase in government debt of around 20% of GDP in Ireland, Greece, Cyprus and Slovenia. It also had a high impact in Germany, especially owing to measures taken at the onset of the crisis, and in Austria and Portugal, mainly as a result of more recent interventions. By contrast, government debt in Italy and France was hardly affected by financial sector support’.

14 See Armour, note 9 above, who describes resolution as an ‘administrative process in which the goal is to protect the liquidity needs of short-term creditors, especially depositors, and to manage financial assets in a way that preserves their value and the franchise value of the failing institutions’; see also W-G Ringe, note 2 above, who defines resolution as ‘an umbrella term that describes the process of handling a distress bank, based on the objective of minimizing the societal costs of a bank failure’. See Art 2(1)(1) BRRD.

15 See Art 31 BRRD.

16 According to Art 32(4) BRRD.

17 See Art 32 BRRD.

18 Normal insolvency proceedings are defined, according to Art 2(1)(47) of the BRRD, as ‘collective insolvency proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator or an administrator normally applicable to institutions under national law and either specific to those institutions or generally applicable to any natural or legal person’.

19 In addition to the circumstance in which there is no reasonable prospect that any alternative private sector measures would prevent the failure of the institution within a reasonable timeframe.

20 See Art 32(5) BRRD.

21 See Rec 49 BRRD, under which ‘The resolution tools should therefore be applied only to those institutions that are failing or likely to fail, and only when it is necessary to pursue the objective of financial stability in the general interest. In particular, resolution tools should be applied where the institution cannot be wound up under normal insolvency proceedings without destabilising the financial system and the measures are necessary in order to ensure the rapid transfer and continuation of systemically important functions and where there is no reasonable prospect for any alternative private solution, including any increase of capital by the existing shareholders or by any third party sufficient to restore the full viability of the institution…’. See Art 15(1) BRRD.

22 See Bank of England, The Bank of England’s approach to setting a minimum requirement for own funds and eligible liabilities (MREL): Responses to consultation and statement of policy, November 2016, http://www.bankofengland.co.uk/financialstability/Documents/resolution/mrelpolicy2016.pdf.

23 See Banca d’Italia, Information on the resolution of Banca Marche, Banca Popolare dell’Etruria e del Lazio, CariChieti and Cassa di Risparmio di Ferrara crisis, 22 November 2015, https://www.bancaditalia.it/media/approfondimenti/2015/info-soluzione-crisi/info-banche-en.pdf?language_id=1.

24 See European Commission, State aid: Commission approves aid for market exit of Banca Popolare di Vicenza and Veneto Banca under Italian insolvency law, involving sale of some parts to Intesa Sanpaolo, Press Release IP/17/1791, 25 June 2017, http://www.ec.europa.eu, which states that the two banks are small Italian commercial banks mainly operating in regional areas. As of 31 December 2016, Banca Popolare di Vicenza had around 500 branches and a market share in Italy of around 1% in terms of deposits and around 1.5% in terms of loans, with total assets of slightly below EUR 35 billion. At the same time, Veneto Banca had around 400 branches and a market share in Italy of around 1% in terms of both deposits and in loans, with EUR 28 billion of total assets. See Single Resolution Board, The SRB will not take resolution action in relation to Banca Popolare di Vicenza and Veneto Banca, 23 June 2017, http://srb.europa.eu, regarding both banks ‘This conclusion is based on the following grounds: the functions performed by the Bank, e.g. deposit-taking, lending activities and payment services, are not critical since they are provided to a limited number of third parties and can be replaced in an acceptable manner and within a reasonable timeframe; the failure of the Bank is not likely to result in significant adverse effects on financial stability taking into account, in particular, the low financial and operational interconnections with other financial institutions; and, normal Italian insolvency proceedings would achieve the resolution objectives to the same extent as resolution, since such proceedings would also ensure a comparable degree of protection for depositors, investors, other customers, clients’ funds and assets’.

25 See M Bodellini, note 11 above.

26 Art 44(3) BRRD.

27 Commission Delegated Regulation (EU) 2016/860 of 4 February 2016 [2016] OJ L144/11: Art 3 defines direct contagion as ‘a situation where the direct losses of counterparties of the institution under resolution, resulting from the write-down of the liabilities of the institution, lead to the default or likely default for those counterparties in the imminent’. Art 8 states that such an assessment ‘shall include all of the following: (a) consideration of exposures to relevant counterparties with regard to the risk that bail-in of such exposures might cause knock-on failures; (b) the systemic importance of counterparties which are at risk of failing, in particular with regard to other financial market participants and financial market infrastructure providers.’

28 Ibid, Art 3 defines indirect contagion as ‘a situation where the write-down or conversion of institution’s liabilities causes a negative reaction by market participants that leads to a severe disruption of the financial system with potential to harm the real economy.’ Art 8 lists relevant indicators.

29 See Rec 73 BRRD; also Hadjiemmanuil, see note 4 above, arguing that ‘new financing may be needed either to provide the liquidity which is indispensable for operational continuity rests and/or to bring the bank back to acceptable levels of capitalisation’.

30 The bail-in tool rules entered into force just the 1 January 2016.

31 See Banca d’Italia, note 23 above. See Banca d’Italia, Annual Report of the National Resolution Fund, 28 April 2016, https://www.bancaditalia.it/media/notizia/national-resolution-fund-annual-report-2016.

32 They just had EUR 46.6 billion of aggregate total assets, EUR 30.1 billion of aggregate net customer loans and EUR 19.5 billion of aggregate deposits; see European Commission, State aid: Commission approves resolution plans for four small Italian banks Banca Marche, Banca Etruria, Carife and Carichieti, Press Release IP/15/6139, 22 November 2015, http://europa.eu/rapid/press-release_IP-15-6139_en.htm; these four banks jointly represented only 1% of the Italian system wide deposits; see Banca d’Italia, note 23 above. See Banca d’Italia, Annual Report, ibid. See Banca d’Italia, ‘Questions and answers on the solution of the crises at the four banks under resolution’ available at https://www.bancaditalia.it/media/approfondimenti/2016/d-e-r-quattro-banche/index.html?com.dotmarketing.htmlpage.language=1.

33 ie Unicredit, Intesa San Paolo and UBI Banca; see Banca d’Italia, Annual Report, note 31 above, ‘for 2015, the ordinary contribution amounted to approximately EUR 588 million’.

34 See Hadjiemmanuil, C, ‘Bank resolution financing in the Banking Union’ in J-H Binder and D Singh (Eds), Bank Resolution. The European Regime (Oxford University Press, 2016), p 177 Google Scholar.

35 Between 2008 and 2011, the Commission adopted six communications to provide details about the criteria to use in assessing the compatibility of State aid with the provisions of the TFEU, the so-called ‘Crisis Communications’: The application of State aid rules to measures taken in relation to financial institutions in the context of the current global financial crisis [2008] OJ C270/8 (‘2008 Banking Communication’); The recapitalisation of financial institutions in the current financial crisis: limitation of aid to the minimum necessary and safeguards against undue distortions of competition [2009] OJ C10/2 (‘Recapitalization Communication’); Communication from the Commission on the treatment of impaired assets in the Community financial sector [2009] OJ C72/1 (‘Impaired Assets Communication’); Commission communication on the return to viability and the assessment of restructuring measures in the financial sector in the current crisis under the State aid rules [2009] OJ C195/9 (‘Restructuring Communication’); Communication from the Commission on the application, from 1 January 2011, of State aid rules to support measures in favour of banks in the context of the financial crisis [2010] OJ C329/7 (‘2010 Prolongation Communication’); Communication from the Commission on the application, from 1 January 2012, of State aid rules to support measures in favour of banks in the context of the financial crisis [2011] OJ C356/7 (‘2011 Prolongation Communication’). Then, in 2013, in light of the adoption of the new regulatory architecture, the Commission published the so-called 2013 Banking Communication, Communication from the Commission on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis (‘Banking Communication’) [2013] OJ C216/1. This latter Communication also allows the application of the ‘burden sharing’ tool to subordinated creditors and for the request of a restructuring plan to be adopted and approved before obtaining the aid. Accordingly, State aid measures can be given only if equity and subordinated debt holders are involved in absorbing the losses through the conversion and/or the write down of their instruments.

36 For this reason Hadjiemmanuil argues that the Government Financial Stabilistation Tools cannot be seen as ‘a substitute for bail-in, but only as a complement to it’, see note 4 above.

37 See S Micossi et al, ‘Fine-Tuning the Use of Bail-in to Promote a Stronger EU Financial System’, (2016) 136 CESP Special Report, p 7, https://www.ceps.eu, in which this legal tool is clearly defined as the only way under the new legal framework to provide public assistance to banks without the need to write down liabilities or convert them into equity.

38 It is worth noting however that the Commission Communication The recapitalisation of financial institutions in the current financial crisis: limitation of aid to the minimum necessary and safeguards against undue distortions of competition C(2008) 8259 final, states that ‘the ECOFIN Council of 2 December 2008 recognised the need for further guidance for precautionary recapitalisations to sustain credit, and called for its urgent adoption by the Commission. The present Communication provides guidance for new recapitalisation schemes and opens the possibility for adjustment of existing recapitalisation schemes.’

39 As regards the meaning of the expression ‘in order to remedy a serious disturbance in the economy of a Member State’ see R Olivares-Caminal and C Russo, Precautionary recapitalisations: time for a review? In-depth analysis, (European Parliament, July 2017) PE 602.092, p 10, http://www.europarl.europa.eu. See B Mesnard et al, Precautionary recapitalization under the Bank Recovery and Resolution Directive: Conditionality and case practice, (European Parliament, 5 July 2017) Briefing PE 602.084, paras 1–3 https://www.europarl.europa.eu.

40 Art 32 (4) BRRD; see also Mesnard et al, ibid, paras 4–8.

41 Art 32 (4) BRRD.

42 ‘What is a precautionary recapitalization and how does it work?’ (European Central Bank, 27 December 2016) http://www.bankingsupervision.europa.eu.

43 See Banca d’Italia, The “precautionary recapitalization” of Monte dei Paschi di Siena, 29 December 2016, https://www.bancaditalia.it/media/approfondimenti/2016/ricapitalizzazione-mps/index.html?com.dotmarketing.htmlpage.language=1.

44 With regard to precautionary recapitalisation, the European Central Bank has defined a bank as solvent ‘if it fulfils the minimum capital requirements (ie Pillar 1 requirements). In addition, the bank should not have a shortfall under the baseline scenario or the relevant stress test’; see note 42 above.

45 The Italian version reads ‘al fine di evitare o rimediare a una grave perturbazione dell’economia di uno Stato membro’; the French version reads ‘a fin d’empêcher ou de remeédier à une perturbation grave de l’économie d’un État membre’; the Spanish version reads ‘a fin de evitar o solventar perturbaciones graves de la economia de un Estado miembro’.

46 See Hadjiemmanuil, note 4 above, who argues that due to the application of all these limitations it will be very difficult in practice to make use of such a tool.

47 See Dewatripont, M, ‘European Banking: Bailout, Bail-in and State Aid Control’ (2014) 34 International Journal of Industrial Organization 40 CrossRefGoogle Scholar, who points out that the EU is ‘the only jurisdiction in the world with State Aid Control policies’.

48 See Lo Schiavo, G, ‘State Aids and Credit Institutions in Europe: What Way Forward?’ (2014) 25 European Business Law Review 45 CrossRefGoogle Scholar.

49 See note 35 above.

50 As regards the so-called Banking Union, see Capriglione, F, ‘European Banking Union. A Challenge for a More United Europe’ (2013) 1 Law & Economics Yearly Review 5 Google Scholar; Moloney, N, ‘European Banking Union: Assessing its Risks and Resilience’ (2014) 51 Common Market Law Review 1609 CrossRefGoogle Scholar; Binder, J-H, ‘The Banking Union and the Governance of Credit Institutions: A Legal Perspective’ (2015) 16 European Business Organisation Law Review 467 CrossRefGoogle Scholar. On the new bank resolution regime, see Binder, J-H, ‘Resolution: Concepts, Requirements, and Tools’, in J-H Binder and D Singh (eds), Bank Resolution: The European Regime (Oxford University Press, 2016), p 25 Google Scholar; Enoch, C ‘The Bank Recovery and Resolution Directive: An International Standards Perspective’, in J-H Binder and D Singh (eds), p 61 Google Scholar; Kokkoris, I and Olivares-Caminal, R, ‘The Operation of the Single Resolution Mechanism in the Context of the EU State Aid Regime’, in J-H Binder and D Singh (eds), p 299 Google Scholar. On the Banking Communication, see note 35 above. On ‘burden sharing’, see G Lo Schiavo, note 48 above, who argues that ‘burden sharing entails that the aid shall be limited to the minimum necessary and that the beneficiary undertakes the required level of “own contribution” in order to receive the State aid’; see also Mesnard et al, note 39 above, p 3, stressing that burden sharing ‘means that the costs of a bank rescue should be minimized by the contributions from shareholders, creditors (through voluntary liability management exercises and a coupon and dividend ban), managers as well as the bank itself (for instance through the sale of assets and various cost reductions).’ On the final point see Dewatripont, note 47 above.

51 See Micossi et al, note 37 above.

52 See 2013 Banking Communication, note 35 above, point 45, under which, burden sharing can be excluded when implementing the Communication would endanger financial stability or lead to disproportionate results; see Micossi et al, note 37 above, arguing that ‘on the basis of these criteria, it is reasonable to expect that the prudential recapitalisation of a solvent bank, following a stress test, would not entail the risk of losses for junior creditors even where, due to general market conditions, there is a need for some temporary public support’; see also Hadjiemmanuil, note 4 above, arguing that the 2013 Banking Communication ‘is framed in terms sufficiently flexible for enabling the approval of almost every conceivable solution by way of “exception”. What must be doubted, however, is the actual willingness of the Commission to soften its stance. At present, all indications suggest that, even in the face of a simmering crisis with potentially highly detrimental consequences, such as that affecting the Italian banking sector, the Commission remains unperturbed and unwilling to budge. With the final entry into full effect of the BRRD’s provisions on burden-sharing on 1 January 2016, the Commission has found additional reasons for doing so’.

53 See Mesnard et al., note 39 above, p 3.

54 The 2015 comprehensive assessment comprised two main pillars: (1) an Asset Quality Review (a point-in-time assessment of the accuracy of the carrying value of banks’ assets as at 31 December 2014 and provided a starting point for the stress test); and, (2) a stress test. The exercise was led by the European Central Bank, which conducted it in close cooperation with the national competent authorities (NCAs) and was supported by external advisers (including auditors, consultants and appraisers). See ‘Note on the 2015 Comprehensive Assessment’ (European Central Bank) https://www.bankingsupervision.europa.eu/pdf/ca/2015-11-14_note_comprehensive_assessment.en.pdf?e09834c6564ab84419970599701b5c9c. See European Commission, State aid: Commission approves aid for Piraeus Bank on the basis of an amended restructuring plan Press Release IP/15/6193, 29 November 2015, http://europa.eu/rapid/press-release_IP-15-6193_en.htm; and European Commission, State Aid SA.43365 (2015/N) – Greece, Amendment of the restructuring plan approved in 2014 and granting of new aid to National Bank of Greece C(2015) 8930 final, 4 December 2015, http://www.ec.europa.eu.

55 See European Commission, IP/15/6193 and C(2015) 8930 final, ibid.

56 Ibid.

57 As of October 2015, the Piraeus Bank had an outstanding amount of EUR 592 million of bonds, ie EUR 365 million of senior notes, EUR 211 million of Tier 2 subordinated notes and EUR 16 million of Tier 1 subordinated notes. As part of the LME launched by the Bank in 2015, the noteholders were offered a conversion of their notes into newly issued ordinary shares from the capital increase (50% par value for Tier 2 subordinated notes, 100% for Tier 1 and senior notes) or a small amount of cash (ie 43% par value for senior notes and 9% for subordinated notes). The majority of holders of notes who participated in the meetings convened on 4 November 2015 voted in favour of the mandatory exchange of all those bonds into non transferable receipts. The noteholders who had not participated voluntarily were therefore obliged to exchange their notes. Consequently, the transaction generated a 100% participation rate through activation of contractual collective action clauses, creating EUR 602 million equity capital for the Bank (including accruals as well as the net of tax capital gain resulting from the 50% conversion of hybrid into shares). Given the 100% participation rate, the Single Supervisory Mechanism approved on 13 November 2015 the LME as a capital raising measure for the full nominal amount, ie EUR 602 million in the capital raising plan. The 2015 LME settled on 27 November 2015. As a consequence, following the 2015 LME conducted by the Bank, the liabilities of the Bank no longer include hybrid and subordinated capital instruments, or senior unsecured debt instruments; see European Commission, IP/15/6193, note 54 above.

58 EUR 457 million was raised through the international offering and EUR 300 million through the domestic offering; see European Commission, C(2015) 8930 final, note 54 above. The Bank launched the 2015 LME, completed on 11 November 2015, offering the holders of any outstanding subordinated and senior, unsecured bonds and hybrid securities conversion of their instruments into newly issued ordinary shares, based on different proportions of their nominal amounts depending on the instruments’ seniority, at the Offer Price. The participation generated EUR 717 million of capital; see European Commission, C(2015) 8930 final, note 54 above.

59 See European Commission, C(2015) 8930 final, note 54 above

60 CoCos issued by the banks and held by the HFSF are eligible as CET1. The payment of coupon is annual, fully discretionary, and can be made in cash or in shares. The coupon amounts to 8% of the nominal of the CoCos. No dividend can be paid on the Banks’ common stock if the Banks have decided not to pay the previous coupon in full. CoCos will automatically convert if a second annual coupon is missed (not necessarily consecutive). Conversion is also automatic if at any time the CET1 ratio of the Banks, calculated on a solo or a consolidated basis falls below 7%. Finally, the holder of the CoCos has the right to ask its conversion on the 7th anniversary of the issuance. In the event of conversion following a trigger event, the holder receives an amount of shares equal to 116% of the initial principal amount divided by the issuance price of ordinary shares in the framework of the 2015 capital increase. The Banks have the right – but no obligation – to repay the CoCos. CoCos can be transferred by the HFSF to another holder with the consent of the Banks and the regulator, as is laid down in the HFSF law; see European Commission, IP/15/6193 and C(2015) 8930 final, note 54 above.

61 See European Commission, IP/15/6193, note 54 above.

62 Ibid.

63 See European Commission, State aid: Commission authorises precautionary recapitalisation of Italian bank Monte dei Paschi di Siena, Press Release IP/17/1905, 4 July 2017, http://europa.eu/rapid/press-release_IP-17-1905_en.htm, which states that ‘[t]he two conditions for this agreement are now both fulfilled, namely the European Central Bank, in its supervisory capacity, has confirmed that MPS is solvent and meets capital requirements, and Italy has obtained a formal commitment from private investors to purchase the bank’s non-performing loan portfolio’; see also European Commission, Statement on Agreement in principle between Commissioner Vestager and Italian Authorities on Monte dei Paschi di Siena (MPS), STATEMENT/17/1502, 1 June 2017, http://europa.eu/rapid/press-release_STATEMENT-17-1502_en.htm; see also Mesnard et al, see note 39 above, which states that Monte dei Paschi di Siena (MPS) ‘stood out as the worst performer among all 51 banks which were scrutinised during the EBA’s 2016 EU-wide stress test, according to the results published on 29 July 2016: under the adverse scenario, MPS’ fully loaded CET1 capital ratio was reduced from 12.07% at the end of 2015 to -2.44% at the end of 2018, that is to say a reduction by EUR 10.1 billion (1451 basis points).’

64 See Mesnard et al, note 39 above, underlining that ‘the two banks confirmed in April 2017 that the capital shortfall estimated by the ECB in the adverse scenario of the 2016 stress test amounted to EUR 3.3. billion and EUR 3.1. billion respectively. The two banks are planning to merge and have applied for a precautionary recapitalization, claiming that the January 2017 capital increases adequately address the shortfall in the baseline scenario.’

65 Banca Popolare di Vicenza was asked to increase its capital of EUR 3.3 billion, Veneto Banca its capital of EUR 3.1 billion and Monte dei Paschi di Siena its capital of EUR 8.8 billion; see ‘Veneto banks’ bonds rise on hopes state bailout deal is close’, (Reuters, 4 April 2017) http://uk.reuters.com/article/italy-veneto-banks-bonds-idUKL5N1HC204; see also ‘Monte dei Paschi says ECB loan audit ended, may affect its solvency’ (Reuters, 21 March 2017) http://uk.reuters.com/article/us-italy-banks-monte-dei-paschi-idUKKBN16S0W9.

66 They were among the 15 largest Italian banks.

67 See Banca Popolare di Vicenza Successful completion of the offering of Euro 1.25 billion bond guaranteed by the Italian Government, Press Release, 20 February 2017, https://www.popolarevicenza.it; Monte dei Paschi di Siena, BPMS: Board approves preliminary results as at 31 December 2016, Press Release, 9 February 2017, http://english.mps.it/media-and-news/.

68 See European Central Bank, ECB deemed Veneto Banca and Banca Popolare di Vicenza failing or likely to fail, Press Release, 23 June 2017, https://www.bankingsupervision.europa.eu.

69 See Single Resolution Board, The SRB will not take resolution action in relation to Banca Popolare di Vicenza and Veneto Banca, Brussels, 23 June 2017, https://srb.europa.eu/en/node/341; see also European Commission, ‘State aid: Commission approves aid for market exit of Banca Popolare di Vicenza and Veneto Banca under Italian insolvency law, involving sale of some parts to Intesa Sanpaolo’, Brussels, 25 June 2017, available at www.ec.europa.eu.

70 See European Commission, IP/17/1791, see note 24 above.

71 See European Commission, STATEMENT/17/1502, see note 63 above; European Commission, IP/17/1905, see note 63 above.

72 See European Commission, IP/17/1905, see note 63 above, where it is remarked that ‘in order to approve the state injection, MPS’s shareholders and junior creditors have contributed €4.3 billion to limit the use of taxpayer money as required by EU state aid rules.’

73 See Micossi et al, note 37 above, quoting a letter sent by Mario Draghi to Commissioner Joaquìn Almunia mentioning some examples of banks recapitalised with public money and then sold to private investors with the States making good returns (eg Banco Popolare, Natixis, Société Générale and Goldman Sachs); in the US the so-called Paulson scheme in 2008 allowed recapitalization of banks with public money and then the sale of their shares with the Treasury making a net gain see P Veronesi and L Zingales, Paulson’s Gift (National Bureau of Economic Research, 2009) Working Paper 15458, passim; accordingly see Avgouleas, E and Goodhart, C, ‘Critically Reflections on Bank Bail-ins’ (2015) 1 Journal of Financial Regulation 8 CrossRefGoogle Scholar, arguing that in the US the Troubled Asset Relief Program (so-called TARP) and other forms of bank recapitalisation performed by the Treasury in 2008 ‘did not prove to be loss-making’.

74 Even if Art 32(4) BRRD clearly states that previous losses and losses that the bank is likely to suffer in the near future cannot be offset with public money.

75 See note 52 above.

76 See European Commission, IP/15/6193 and C(2015) 8930, note 54 above.

77 See European Commission, ibid; the latter states that ‘the measures are granted to remedy a serious disturbance in the Greek economy and to preserve financial stability in the Greek banking sector.’

78 The health of the Italian banking system is in a serious condition as, according to a survey published by Mediobanca on the basis of the 2015 balance sheets, there are 114 banks with non-performing loans (NPLs) representing 2 to 8 times the value of their regulatory capital; see Mediobanca, Focus on the Italian Banking System 2015, https://www.mbres.it/en/publications/leading-italian-companies; see also International Monetary Fund, ‘A strategy for resolving Europe’s problem loans’, Staff Discussion Note, SDN/15/19 September 2015, p 9, pointing out that NPLs are a serious problem for many financial institutions and are particularly common in countries that rely mainly on bank financing, as is the case in the Euro area. Huge numbers of NPLs on the banks’ balance sheets reduce their profitability, by increasing funding costs and tying up the capital. This in turn negatively impacts credit supply and ultimately the growth of the entire economic system; in Italy, the NPL problem is particularly serious as their total value in 2014 was around EUR 300 billion, ie 17% of all loans; see N Jassaud and K Kang, A Strategy for Developing a Market for Nonperforming Loans in Italy (IMF, 2015) Working Paper 15/24.

79 And from this point of view it has been argued that the use of CoCos is more effective, see Mesnard et al, note 39 above, p 2, which states that ‘an injection of capital in the form of contingent convertible bonds typically complies with this requirement, since the bank can, if its capital position improves later on, repay the State in full. An injection of equity in the form of ordinary shares does not offer the same flexibility in practice.’