Brussels, 10/07/2013 (Agence Europe) - Struggling banks must draw up a sound plan for restructuring or orderly winding-down before they can receive public recapitalisations or asset protection measures. Moreover, in the case of capital shortfalls, bank owners and junior creditors will be required to contribute and bank bonuses must be capped before banks can ask for public funding. The new rules on state aid for failing banks, unveiled by the European Commission on Wednesday 10 July, will come into force on 1 August 2013 and echo the rules laid down in the bank restructuring directive (see related article).
Restructuring or liquidation. In principle, a bank needs to work out a restructuring plan, including a capital raising plan, convincingly demonstrating how it will become profitable in the long term before it can receive recapitalisation measures. If the viability of the bank cannot be restored, an orderly winding down plan needs to be submitted instead. So far the Commission has temporarily authorised recapitalisations as rescue measures and taken a final decision on their compatibility with the crisis rules on the basis of a subsequent restructuring plan. This model was successful in ensuring a quick stabilisation of financial markets and preventing contagion at the beginning of the crisis. However, it did at times lead to long delays in the restructuring of aid beneficiaries, who - once their bail-out was achieved - did not always have sufficiently strong incentives to implement the necessary restructuring measures aimed at limiting the use of public money and avoiding similar problems in the future. Temporary public bailouts will still be allowed while the restructuring plan is being completed if the country's bank authority says it is necessary.
Burden-sharing. Banks with a capital shortfall will have to obtain shareholders and subordinated debt-holders' contributions before resorting to public recapitalisations or asset protection measures. This will level the playing field between similar banks located in different member states and reduce financial market fragmentation. Exceptions would be possible where financial stability is at risk or where a bank has already managed to significantly close the capital gap, and the residual amount needed from the state is small compared to the size of the bank's balance sheet. The rules provide that failed banks should apply strict executive remuneration policies while the bank is being restructured or is in receipt of public cash.
The rules will apply for as long as necessary and will be revised if required. (FG/transl.fl)