15

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Precautionary recapitalisations: time for a review

06-07-2017

The first part of the paper considers the effects of pre-empting a resolution procedure for a troubled financial institution by a precautionary recapitalization as specified in Article 32 (4) (d) of the Bank Recovery and Resolution Directive (BRRD). Benefits are seen for the maintenance of systemically important operations of an institution with legally independent subsidiaries in multiple jurisdictions and possibly for the maintenance of lending in situations where an entire banking system is involved ...

The first part of the paper considers the effects of pre-empting a resolution procedure for a troubled financial institution by a precautionary recapitalization as specified in Article 32 (4) (d) of the Bank Recovery and Resolution Directive (BRRD). Benefits are seen for the maintenance of systemically important operations of an institution with legally independent subsidiaries in multiple jurisdictions and possibly for the maintenance of lending in situations where an entire banking system is involved. Other systemic concerns, such as the maintenance of lending when only part of a banking system is affected, the avoidance of damage to money markets, and potential systemic effects from bailing in creditors, can be addressed in a resolution procedure under the rules of the BRRD and do not require the instrument of a precautionary recapitalization. The second part of the paper provides a critical assessment of Article 32 (4) (d) of the BRRD and finds some weaknesses that contribute to raising taxpayers’ costs or to reducing the effectiveness of the operation. The availability of precautionary recapitalization outside of resolution contributes to undue and costly delays in acknowledging and addressing problems. The conditions specified in the Directive are problematic, sometimes too tough, sometimes too lenient, most importantly because the objectives of State aid control differ from the objectives of the BRRD. The paper concludes with suggestions for reform.

External author

Martin Friedrich Hellwig

Precautionary recapitalisations: time for a review

05-07-2017

Precautionary recapitalisation, a tool for public intervention in the banking sector defined in the Bank Recovery and Resolution Directive (BRRD), is consistent with the rest of BRRD and 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. Minor corrections to the legislative text are desirable to fix a few cases of poor drafting. Beyond these, there is no immediate ...

Precautionary recapitalisation, a tool for public intervention in the banking sector defined in the Bank Recovery and Resolution Directive (BRRD), is consistent with the rest of BRRD and 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. Minor corrections to the legislative text are desirable to fix a few cases of poor drafting. Beyond these, there is no immediate need for legislative change before the broader review of BRRD scheduled in late 2018. 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.

External author

Nicolas VERON, Bruegel

Precautionary recapitalisations: time for a review

05-07-2017

With the introduction of the Bank Recovery and Resolution Directive (BRRD), public capital contributions to insolvent banks should have become a thing of the past or at least an extremely unlikely eventuality. The supposedly exceptional precautionary recapitalisation of Banca Monte dei Paschi (MPS) seems to offer evidence of the contrary. Based on a review of the empirical literature and the resent resolution of Banco Popular and MPS, this paper argues that a precautionary recapitalisation facility ...

With the introduction of the Bank Recovery and Resolution Directive (BRRD), public capital contributions to insolvent banks should have become a thing of the past or at least an extremely unlikely eventuality. The supposedly exceptional precautionary recapitalisation of Banca Monte dei Paschi (MPS) seems to offer evidence of the contrary. Based on a review of the empirical literature and the resent resolution of Banco Popular and MPS, this paper argues that a precautionary recapitalisation facility can be in the taxpayers’ interest, but only under very specific circumstances and conditions. The current rules on precautionary recapitalisation and guidelines for the supervisory exercises used to determine the shortfall should therefore be revised. On the one hand, the current requirements are too flexible, leaving room for public capital injections into de facto insolvent banks, while on the other hand, the requirements imposed on the recapitalisation amounts are too rigid to allow the realisation of maximum economic returns.

External author

Willem-Pieter de Groen, CEPS

Precautionary recapitalisations: time for a review

05-07-2017

The paper conducts an analysis of the precautionary recapitalisation tool of article 32.4(d)(iii) of the BRRD, which gives Member States the ability to provide support to solvent banks with a capital shortfall highlighted by stress tests and asset quality reviews, in case of a serious disturbance in the economy. In doing so, the paper examines the relationship between precautionary recapitalisation, financial stability and a serious disturbance in the economy underlying how the absence of a clear ...

The paper conducts an analysis of the precautionary recapitalisation tool of article 32.4(d)(iii) of the BRRD, which gives Member States the ability to provide support to solvent banks with a capital shortfall highlighted by stress tests and asset quality reviews, in case of a serious disturbance in the economy. In doing so, the paper examines the relationship between precautionary recapitalisation, financial stability and a serious disturbance in the economy underlying how the absence of a clear definition of ‘serious disturbance’ and ‘financial stability’ gives sufficient room for manoeuvre to determine when to provide aid. It also reviews the applicable rules on State aid and burden sharing, which allow for sufficient flexibility in case of financial stability concerns, balancing the needs of preserving financial stability but at the same time taking competition policy interests into account. Overall, precautionary recapitalisation is a necessary measure, especially given the current economic climate and its potential to facilitate the restoration of necessary capital levels.

External author

Costanza Russo and Rodrigo Olivares Caminal, Queen Mary University of London

The Commission Insolvency Proposal and its Impact on the Protection of Creditors

10-06-2017

This study, commissioned by the European Parliament’s Policy Department for Citizens’ Rights and Constitutional Affairs at the request of the JURI Committee compares the preventive insolvency restructuring regimes of various Member States and sets forth the scope of the Commission proposal for a draft Directive of 22 November 2016, the transposition of such proposal and policy recommendations in connection therewith.

This study, commissioned by the European Parliament’s Policy Department for Citizens’ Rights and Constitutional Affairs at the request of the JURI Committee compares the preventive insolvency restructuring regimes of various Member States and sets forth the scope of the Commission proposal for a draft Directive of 22 November 2016, the transposition of such proposal and policy recommendations in connection therewith.

Helping European SMEs to grow: Start-up and scale-up initiatives for business ventures in the EU

06-06-2017

Small and medium-sized enterprises (SMEs) constitute 99 of every 100 businesses, and employ two out of three employees in Europe. Some of them are high-growth firms that generate a disproportionately high number of new jobs. However, SMEs often face obstacles specific to their smaller size that can hamper their growth potential. The main recent initiatives undertaken to help European SMEs grow fall within the flagship initiatives of the Commission: the European Fund for Strategic Investments, the ...

Small and medium-sized enterprises (SMEs) constitute 99 of every 100 businesses, and employ two out of three employees in Europe. Some of them are high-growth firms that generate a disproportionately high number of new jobs. However, SMEs often face obstacles specific to their smaller size that can hamper their growth potential. The main recent initiatives undertaken to help European SMEs grow fall within the flagship initiatives of the Commission: the European Fund for Strategic Investments, the single market strategy, the digital single market, and the capital markets union. The EU also supports SMEs through a range of long-term programmes running in the 2014-2020 period, such as COSME, Horizon 2020 and the structural and investment funds.

Economic Governance Structures in the United States

15-10-2015

Summary of the Study "Economic Governance Structures in the United States" (author: J.Kirkegaard, Peterson Institute of International Economics).

Summary of the Study "Economic Governance Structures in the United States" (author: J.Kirkegaard, Peterson Institute of International Economics).

Economic Governance Structures in the United States

14-10-2015

This report summarizes the history and organization of the principal economic governance institutions in the United States.

This report summarizes the history and organization of the principal economic governance institutions in the United States.

External author

Jakob F.Kirkegaard

Fiscal and Macro-Structural Challenges and Policy Recommendations for the Euro Area and its Member States under the 2014 Semester Cycle

14-08-2014

This in-depth review presents the fiscal and macro-structural challenges and policy recommendations for the Euro Area and its Member States under the 2014 Semester Cycle.

This in-depth review presents the fiscal and macro-structural challenges and policy recommendations for the Euro Area and its Member States under the 2014 Semester Cycle.

External author

Jacob Funk Kirkegaard

Fiscal and Macro-Structural Challenges and Policy Recommendations for the Euro Area and its Member States under the 2014 Semester Cycle

14-08-2014

This in-depth review presents the fiscal and macro-structural challenges and policy recommendations for the Euro Area and its Member States under the 2014 Semester Cycle.

This in-depth review presents the fiscal and macro-structural challenges and policy recommendations for the Euro Area and its Member States under the 2014 Semester Cycle.

External author

Daniel Gros ans Cinzia Alcidi (CEPS)

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