Whenever a bank seeks State aid, it must be considered as “failing or likely to fail”. A failing bank must be liquidated or resolved. Resolution means that the critical functions of the bank are preserved while the rest are wound down. Critical functions are those that impact significantly the real economy such as deposits, loans to SMEs or payments. State aid may be granted to facilitate either the liquidation of a bank, its resolution or both.
A case in point is Commission decision SA.100687 on State aid for the resolution of the Polish Getin Noble Bank. The Bank was split into two: a Residual Entity that was to be liquidated and a Bridge Bank that was to be sold.
Getin Noble Bank was one of the top ten banks in Poland, with market share of 2.2% and about EUR 10 billion in assets. Because it had suffered significant losses and its liquidity decreased precipitously as a result of continuous withdrawal of deposits, in 2022 the Polish financial supervisor [KNF] informed the Polish resolution authority [BFG] that the Bank was “failing or likely to fail”, in accordance with Directive 2014/59 on the recovery and resolution of credit institutions [BRRD]. The Polish Ministry of Finance endorsed the resolution decision of the BFG. The BFG also administered Poland’s Deposit Guarantee Scheme [DGS] which guarantees deposits up to EUR 100,000.
In Poland, banks are allowed to set up “protection schemes” in which participation is voluntary. The purpose of these schemes, which are solely funded by their members, is to offer assistance to the members when they encounter liquidity or solvency problems. In the case of Getin Noble Bank, a protection scheme also provided funding as part of the resolution plan. Protection schemes have to be approved by the KNF to ensure compliance with the relevant law.
The resolution plan
The Bank was resolved as follows. Most liabilities and problematic assets were kept in the Bank which became the so-called “Residual Entity”. Liabilities in the form of deposits and non-problematic assets were moved to a so-called “Bridge Bank” in order to preserve Getin Noble Bank’s critical functions whose discontinuation could harm financial stability. The Bridge Bank was capitalised and then was to be put on sale through a competitive process. But because more liabilities [of about EUR 8.7 billion] than assets [of about EUR 6.7 billion] were transferred to the Bridge Bank, it was also necessary to grant it State aid in the form of contributions by the Resolution Fund and the Deposit Guarantee Scheme.
The accumulated losses of about EUR 1.57 billion were offset as follows:
EUR 0.66 billion: Contribution from the Protection Scheme.
EUR 141 million: Writing down existing shares.
EUR 150 million: Writing down subordinated debt.
EUR 125 million: Contribution from the Deposit Guarantee Scheme.
EUR 522 million: Other liabilities left in the Residual Entity.
The State aid measures
The Polish authorities notified the following funding and State aid measures:
Measure 1: Capital injection of EUR 147 million from the Resolution Fund into the Bridge Bank.
Measure 2: Contribution of EUR 656 million from the Protection Scheme into the Residual Entity in order to cover losses. This contribution was tax exempt.
Measure 3: Contribution of EUR 1.24 billion from the Resolution Fund to the Bridge Bank.
Measure 4: Contribution of EUR 125 million from the DGS to the Bridge Bank.
Measure 5: Acquisition of 49% of the shares of the Bridge Bank by the Protection Scheme for EUR 72 million.
Measure 6: Liquidity support in the form of loans or guarantees of EUR 1.05 billion from the Resolution Fund to the Bridge Bank.
Measure 7: Loss coverage guarantee of EUR 1.36 billion with the probability weighted value of EUR 45 million from the Resolution Fund to the Bridge Bank.
Measure 8: Capital injection of EUR 315 million from the Resolution Fund to the Bridge Bank.
Therefore, only measure 2 provided State aid to the Residual Entity.
Existence of State aid
There was hardly any doubt that the eight measures above conferred an advantage [no market investor would have been willing to invest in Getin Noble Bank], they were selective, affected trade and distorted competition in the meaning of Article 107(1) TFEU. However, for some measures the Commission was not sure whether they were funded by state resources.
According to the Commission decision, “(95) notified Measures 1, 3, 6, 7 and 8 will be provided by the Resolution Fund. Measure 4 will be provided by the DGS and Measures 2 and 5 will be granted by the Protection Scheme.”
“(96) Both the Resolution Fund and the DGS are managed by the BFG. The BFG is a legal entity established under public law, set up by virtue of national legislation, and entrusted with the tasks laid down in the BFG Act.”
“(97) While the BFG’s management lies with a management board appointed by the BFG’s council, the latter is in turn composed of representatives of public authorities: three representatives of the Minister of Finance, two representatives of the National Bank of Poland and one representative of the KNF. In addition, 25 the BFG is supervised by the Polish Ministry of Finance and all measures taken were subject to and have been approved by the Minister”.
“(98) Measures 1, 3, 6, 7 and 8 will be financed from the Resolution Fund and Measure 4 from the DGS, which were set up in compliance with the BFG Act, transposing the BRRD and the DGSD respectively. Contributions to the Resolution Fund and the DGS are mandatory and all banks active in Poland have to participate. The contributions are managed by the BFG that decides about their use in the context of the relevant legal framework”.
“(99) Moreover, the resources of the Resolution Fund and the DGS are under public control, as they are kept and managed by a public law body, for the purposes set out by the State, thus, they constitute State resources.”
With respect to the imputability of these measures to the state, the Commission considered that “(101) the BFG, can decide to take a resolution action in the public interest when it is necessary for the achievement of and is proportionate to one or more of the resolution objectives and winding up of the institution under normal insolvency proceedings would not meet those resolution objectives to the same extent. This assessment is made at BFG discretion, and thus its actions are imputable to the State.”
However, the imputability of measures aiming to protect covered depositors was more difficult to determine because their protection up to EUR 100,000 is mandated by the EU.
“(102) As the administrator of the DGS, the BFG reimburses depositors under the applicable obligations in the Deposit Guarantee Schemes Directive. In a scenario of direct depositor reimbursement, e.g. in the context of insolvency proceedings, it could be argued that such reimbursement would be undertaken in direct implementation of binding rules set out in Union law, thus not at the discretion of the national authorities and hence it would not amount to State aid. In the present case, the DGS intervention takes place in the context of resolution. The language of Article 109(1)(b) of the BRRD and Article 11(2) DGSD seems to suggest that in resolution the liability of the DGS needs to be activated to finance resolution, which would mean that here as well, the DGS intervention stems from the EU law. One might however argue that in this specific case, as the DGS is administered by the BFG that has decided to put the Bank into resolution in the first place, rather than place it in normal insolvency proceedings, there has been some discretion involved. It can thus not be excluded that the DGS intervention can be deemed imputable to the State. In view of the above considerations, the Commission leaves open the question whether the DGS’s contribution to the Bridge Bank in the present case is imputable to the State. This question can be left open, since even if this contribution constituted State aid, would be found compatible with the internal market”
Article 109 BRRD stipulates that:
“(1) Member States shall ensure that, where the resolution authorities take resolution action, and provided that that action ensures that depositors continue to have access to their deposits, the deposit guarantee scheme to which the institution is affiliated is liable for:
(b) when one or more resolution tools other than the bail-in tool is applied, the amount of losses that covered depositors would have suffered, had covered depositors suffered losses in proportion to the losses suffered by creditors with the same level of priority under the national law governing normal insolvency proceedings.”
It is clear from the text of Art 109 BRRD that there is no discretion left to the Member States as to whether to protect covered depositors. Admittedly, however, this obligation is clearly laid down in the case of insolvency proceedings, not in the case of resolution. Does this mean that covered depositors can suffer losses in case of resolution? I don’t think so. Covered depositors are always protected. Since the BFG is responsible for both resolution and depositor protection, in practice it would make no difference if the money came from the resolution fund rather than the depositor protection fund. The decisive issue here is that Member States must protect covered depositors either in liquidation or resolution. Had the BFG decided to liquidate Getin Noble Bank without resolution, it would still have to offset the losses of covered depositors. So, it is not clear why the Commission had doubts.
“(103) In contrast, as regards the Protection Scheme, which is established on the basis of the voluntary agreement of the largest Polish banks, it is not financed by State resources. In general terms, the participation in a protection scheme is voluntary, and a member of a protection scheme can even withdraw from it. Furthermore, the support that the Protection Scheme provided to the Bank in the form of a contribution and to the Bridge Bank in the form of a capital injection, is voluntary and fully independent from any legal obligation or link with a public authority. The Protection Scheme […] was concluded based on the voluntary decisions of the management and supervisory boards [of member banks]. Finally, the State involvement consisted only in the KNF approval of the Protection Scheme Agreement to make sure that the agreement did not violate the law and to ensure the security of the assets collected in the Protection Scheme. Therefore, Measures 2 and 5 from the Protection Scheme do not involve State resources and are not imputable to the State. They therefore do not constitute State aid.”
However, it should be noted that the tax exemption of the contribution of the Protection Scheme [measure 2] must be considered as forgone revenue by the state and therefore a transfer of state resources.
The Commission went on to conclude that “(105) Measures 1, 3, 6, 7 and 8, […], will be granted through State resources and are imputable to the State. As regards Measure 4, the Commission considers that it was granted from State resources and it cannot be excluded that this granting is imputable to the State.”
With respect to the presence of advantage for the Bridge Bank, the Commission found that all measures provided a benefit not available under normal market conditions as no private investor would have been willing to inject similar amounts into the Bridge Bank or the Residual Entity. It also observed that “(124) the intention of Poland is to sell the Bridge Bank. In this regard, it should be noted that, to ensure that the advantage granted to the Bridge Bank is not passed on to a potential future buyer, the sale process has to be open, transparent, non-discriminatory and competitive, conducted on market terms with the aim to maximise the sale price.”
With one exception, the decision is silent on the presence of advantage for the Residual Entity. The exception is recital 112 which states that the tax exemption in measure 2 is “a clear advantage to the Bank”. However, in recitals 123 and 125, the Commission refers to “an advantage to an undertaking, which will continue to carry out the economic activities previously carried out by the Bank” and to “an advantage to the benefit of an undertaking conducting an economic activity”. These statements suggest that the Residual Entity should not have been classified as an undertaking because its licence was withdrawn and did not engage further in any economic activity. Unfortunately, the decision does not take a position on whether the Residual Entity is an undertaking or not.
Compatibility with the internal market
The Commission assessed the compatibility of the aid on the basis of Article 107(3)(b) TFEU and in accordance with the conditions of the 2013 Banking Communication.
Several points are worth highlighting. First, the Commission accepted, without further examination by itself, the finding of the BFG that the resolution of Getin Noble Bank was in the public interest. [recital 141] Normally, resolution is in the public interest when the beneficiary has systemic significance. It is not clear how a bank with market share of about 2% could be considered to be significant.
Second, the Commission also accepted that it was necessary for the Polish authorities to provide extra liquidity to the Bridge Bank in case of a sudden withdrawal of deposits. [recitals 158-162]
In other words, the amount of aid was more than was strictly necessary at that moment and contained a margin for unforeseen future needs.
Third, in order to limit the distortion of competition caused by the aid, a number of restrictions were placed on the Bridge Bank. “(177) The Bridge Bank will refrain from advertising referring to the BFG’s support and will not pursue any aggressive commercial strategies that would not take place without that support (commitment No 6)). It will refrain from an aggressive deposit or loan pricing (commitment No 5)). It will also be bound by an acquisition ban (commitment No 3)). The above will ensure that its presence in the market is not aimed at growing the transferred business, but strictly at maintaining its critical functions in the limited time necessary for the Bridge Bank to be sold or wound down.”
Fourth, in compliance with the burden-sharing requirement of the 2013 Banking Communication, the Commission explained that “(180-182) the burden-sharing […] [is] also required for liquidation aid. This implies that shareholders and subordinated debtholders have to contribute to the maximum extent to the cost of the intervention. Point 44 of the 2013 Banking Communication provides that aid must not be granted before equity, hybrid capital and subordinated debt have fully contributed to offset any losses. Point 77 of the 2013 Banking Communication requires that the claims of shareholders and subordinated debtholders must not be transferred to any continuing economic activity. […] the Bank’s shareholders and subordinated debtholders […] will remain in the Residual Entity and will be fully written down. The Residual Entity […] was found to have negative equity […] It will also incur a senior liability towards the BFG corresponding to the amount of the contributions of the Resolution Fund and the DGS, in line with Article 37(7)(b) of the BRRD as transposed by Poland. […] the losses incurred by the Bank would amount to a full wipe-out of its equity and subordinated debt, thus also in the counterfactual scenario where no aid were granted, both the shareholders and subordinated debtholders of the Bank would not receive anything, as laid down in points 78 and 46 of the 2013 Banking Communication”.
In other words, creditors were not worse-off than under liquidation without resolution.
Fifth, as is standard practice, the Commission also examined the compliance of the Polish measures with the BRRD. This is because the Commission is required by the case law to ensure that provisions of state aid measures which are “indissolubly linked” to the objective of the aid do not contravene other EU law, such as the BRRD.
The Commission confirmed, among other things, that shareholders and subordinate bondholders were fully bailed-in before any contribution by the Resolution Fund or the Deposit Guarantee Fund. More specifically, in relation to the DGF, the Commission noted that “(209-210) The DGS will be used in resolution to absorb losses pursuant to Article 109(1)(b) of the BRRD for an amount of some […] EUR 125 million [Measure 4]. […] this amount corresponds to the amount of losses that the DGS would have borne, net of any recoveries, if the Bank had been wound up under normal insolvency proceedings. The use of the DGS appears therefore to be in conformity with Article 109(1)(b) BRRD, which requires that the DGS contribution is not greater than the losses that it would have had to bear, in case the institution had been wound up under normal insolvency proceedings. […] As the DGS is only used to absorb losses while filling the gap between assets and liabilities transferred to the Bridge Bank, its use is in conformity with Article 109(1)(c) BRRD, which forbids using the DGS from making any contribution to the recapitalisation of the Bridge Bank.”
The Commission also noted that “(215) Article 32 of the BRRD sets out the conditions for resolution. Among other things, a condition, set out in Article 32(1)(b) of the BRRD, is that there is no reasonable prospect that any alternative private measure would prevent the failure of the institution within a reasonable timeframe. It follows that if the contribution from the Protection Scheme would have prevented the failure of the Bank in this specific case, the BFG could not lawfully take resolution action with respect to the Bank. However, the circumstances in this case show that the private contribution for an amount of PLN 3.127 billion (EUR 656 million) would not prevent the failure and hence the resolution of the Bank”.
The Commission concluded that no provision of the BRRD was infringed and therefore, the aid was considered to be compatible with the internal market. The decision also contains in an annex a long list of commitments undertaken by Poland.
 The full text of the Commission decision can be accessed at: