Bank resolution may involve State aid. However, the depositors do not normally benefit from State aid, nor do the buyers of the viable assets, if they pay a market price. Any aid normally goes to the remaining, non-performing, assets that are eventually liquidated.
The new bank resolution regime that came into force on 1 January 2016 aims to sever the link between banks and sovereigns. Gone are the days when taxpayers footed the bill from the rescue of banks by governments eager to please their constituencies. The Bank Recovery and Resolution Directive [BRRD] and the Regulation on the Single Resolution Mechanism [SRM] prioritise who pays for restructuring or resolution. In other words, they rank who gets bailed in. First come the shareholders, then bondholders and other creditors and lastly the state or the Single Resolution Fund.
Both the Directive and the Regulation provide for the establishment of resolution funds at national level and EU level, respectively. Resolution funds, at national and EU level, are to be gradually capitalised with contributions from the banks themselves. This immediately raises the question as to whether the resources that will be used for bank resolution can be counted as state resources or as private resources. If the answer is that the resources are private, then assistance to banks from these funds cannot be considered to be State aid.
The Commission has already found in a number of decisions [see, for example, SA.39543, Banca delle Marche, Italy; SA.41134, Banca Popolare dell’Etruria e del Lazio, Italy; SA.41925, Cassa di Risparmio di Ferrara, Italy; SA.43547, Cassa di Risparmio della Provincia di Chieti, Italy] that the mobilisation of the newly established national resolution funds results in transfer of state resources. This is because these resources are released only after a decision of a public authority – the resolution board.
However, a recent case was concluded with a finding of no aid. It is therefore, necessary and instructive to understand under which conditions resolution funds fall within the scope of Article 107(1) and under which conditions they do not. The case in question was the subject of Commission decision SA.43886 and concerned the resolution of the Cooperative Bank of Peloponnese in Greece.
In November 2015, the central bank of Greece requested the Cooperative Bank of Peloponnese [CBP] to meet the regulatory requirement of 8% capital adequacy ratio by December 2015. The CBP was unable to raise the required capital and as a result, Greece notified to the Commission a plan to resolve the CBP using a “purchase and assumption tool”.
According to the explanation in the Commission decision, “a purchase and assumption is a resolution tool which consists of identifying in a bank under resolution the assets and liabilities of high quality and auctioning them in order to transfer them to a large viable bank which will integrate them, while the remaining part of the bank is liquidated under normal liquidation procedures.”
Given the travails of the Greek economy during the past eight years, Greek banks suffered significant losses and had to undergo extensive consolidation and restructuring. In addition, the political turmoil and uncertainty in Greek led to capital flight and large deposit outflows. At periods, banks also lost access to the wholesale funding market. Since July 2015, capital controls have been imposed in Greece to stem the outflow of funds to other countries. These controls impacted severely on economic activity whose decline worsened further the situation of banks as many of their corporate clients could not repay loans. Furthermore, all cooperative banks [about 10] were hit by the resolution in 2015 of the Panellinia Bank which was their central counterparty, providing daily banking services and IT support. [The Commission approved the resolution of the Panellinia Bank under decision SA.41503].
The CBP offered retail and commercial banking services. It mainly focused on the financing of SMEs which accounted for 94% of its loan portfolio. As a result, it faced a huge increase in non-performing loans.
The Greek central bank decided that the CBP was failing or was likely to fail, and therefore it had to be resolved in accordance with Article 32(1)(a) of the BRRD Directive 2014/59. The central bank also considered that no other alternative funding could be found from private sources. The central bank concluded that a resolution action was necessary in the public interest, to protect depositors as well as client funds and assets.
The Commission explained that “(19) despite the fact that Bank of Peloponnese is not a systemic credit institution, the Bank of Greece concluded that, in view of the current fragile political and financial environment in Greece, the winding up of that bank under normal insolvency proceedings, with the subsequent loss of the uncovered deposits, would pose a significant threat to financial stability. It would exacerbate even further the disarray among market participants and depositors. … On the other hand, implementation of resolution measures would ensure the protection of the public interest, primarily, the protection of depositors’ confidence and financial stability in Greece. Therefore, the condition for resolution provided in Article 32(1)(c) of Directive 2014/59 is met.”
Normally, the liability of the state is limited to providing compensation to insured depositors [i.e. for amounts up to EUR 100,000]. The EU regime for orderly resolution goes beyond the threshold of EUR 100,000 and may cover all depositors in order to prevent negative spill-overs to other banks.
The resolution consisted of an auction of selected high-quality assets and liabilities of the CBP. These assets and liabilities are shown in the table below.
Note 1: Only receivables from the Hellenic Deposit & Investment Guarantee Fund [HDIGF].
Note 2: Only payables to the HDIGF.
The Greek Resolution Fund covered the “funding gap”, which was the difference between the value of the assets and the value of the liabilities transferred from the resolved bank to an acquiring bank. The Greek Resolution Fund was set up under the resolution branch of the Hellenic Deposit & Investment Guarantee Fund [HDIGF]. The funding gap was estimated at EUR 99.6 million. The acquiring bank would have to finance from its own resources the purchase price. After a competition selection procedure, the central bank chose the National Bank of Greece, a private bank. It offered EUR 5 million for the acquisition of the assets and liabilities of the CBP. The amount of EUR 5 million was used to reduce the cost of the resolution borne by the Greek Resolution Fund.
Probably the amount of EUR 5 million was about the same as the amount of cash and other liquid assets in the CBP. A funding gap of close to EUR 100 million probably signified that the liabilities, i.e. deposits, of the bank were about EUR 105 million and its assets were no more than the EUR 5 million of cash and other liquid assets.
(Non)existence of State aid
The Commission first examined whether the CBP would receive State aid by being resolved. “(35) The Commission notes that the Bank of Peloponnese will be put in liquidation and its banking license will be withdrawn. Therefore, it will no longer carry out economic activities on the banking market.”
Although the decision does not say so explicitly, it means that once an aid beneficiary withdraws from the market, there is no distortion of competition. Of course, in reality the competitive environment is affected but it is affected to the benefit of those who remain in the market. This effect is not considered to be distortion of competition because the state measure does not favour any particular undertaking on the market.
Then the Commission went on to examine whether the public financing of the funding gap, would constitute aid to the assets and liabilities which would be transferred. This would be the case if they were undertakings. The reasoning of the Commission on this point was as follows. “(36) The State support, that is to say the financing of the funding gap, would constitute aid to the transferred assets and liabilities within the meaning of Article 107(1) of the Treaty only if they together constituted an undertaking. The concept of an undertaking encompasses every entity engaged in an economic activity, regardless of legal status and the way in which it is financed. Any activity consisting in offering goods or services on a given market is regarded as an economic activity. Therefore, in order to conclude whether there
is aid to an undertaking, it should be assessed whether the transfer of the assets and liabilities entails the transfer of an economic activity.”
The resolution of the CBP involved the transfer only of deposits from customers and other banks. The CBP employed 66 employees in 14 branches. There was no automatic transfer of branches or employment contracts or loans between the CBP and the buyer. The Commission concluded that “(37) […] the fact that loans are not transferred to the Buyer but remain with [the CBP] into liquidation, the fact that no branch is transferred and the lack of automatic transfer of labour contracts contribute to the conclusion that there is no transfer of economic activity. The transferred liabilities (that is to say deposits) cannot be considered to be the beneficiary of State support, as they do not constitute an undertaking.” [Almost identical wording was used and similar conclusions were reached in the resolution of three other cooperative banks in Greece. Please see Commission decision 2015/454.]
At first sight, this appears to be a reasonable conclusion. But a moment of reflection leads to doubt. Economic activity, like all activities, is an act carried out by someone for the purpose of selling a good or rendering a service. A good which is sold and bought on a market does not by itself constitute the activity. The Commission itself refers to economic activity as the act of “offering goods or services”. So, why should deposits ever be considered to be economic activities? In order for an economic activity to occur, the owner of an asset must act to transfer or rent it to another person. Hence the Commission should have asked whether the owners of the deposits were undertakings. My conclusion is that the Commission did not want to deal with the issue of the aid that was indirectly transferred to owners of the uninsured deposits which had the status of undertakings.
Then the Commission turned its attention to the buyer of the CBP, which was the National Bank of Greece. The sale was assessed on the basis of points 79, 80 and 81 of the 2013 Banking Communication and point 20 of the 2009 Restructuring Communication. In particular, the Commission examined whether
i) the sale process was open, unconditional and non-discriminatory;
ii) the sale took place on market terms; and
iii) the credit institution or the government maximised the sale price for the assets and liabilities involved.
With respect to the first condition, the Commission observed that the central bank had contacted only four potential buyers. However, the Commission noted that “(42) […] the limited set of buyers contacted cannot exclude that the tender was open. The four banks contacted represent in fact the totality of the Greek banking sector excluding the cooperative banks. Moreover, foreign credit and financial institutions currently show limited interest in engaging in banking activities in Greece. That current lack of interest is clearly highlighted by the sale by foreign credit and financial institutions of their local subsidiaries in the past years. Moreover, as only limited assets and liabilities (mainly customer and bank deposits) will be transferred, only banks that are already present in the Peloponnese peninsula have the capacity to integrate those assets and liabilities. […] The Commission considers that the sale process was open, non-discriminatory and unconditional.” The evidence appears credible and therefore the conclusion is reasonable.
With respect to the second and third conditions, the Commission pointed out that the price paid by the buyer (EUR 5 million) for the assets and liabilities of the CBP was low in comparison with the funding gap covered by the Resolution Fund (EUR 99,6 million). However, it still concluded that “(43) […] it does not preclude that the sale price reflects the market value of the business. The Commission has no reason to consider that the offer made and the price paid did not reflect the market price of the business.”
On the basis of the above analysis the Commission concluded that the resolution of the CBP involved no aid for the bank, nor for the transferred assets and liabilities, nor for the new owner.[The rest of the decision deals with the compliance by the buyer with the conditions of its own restructuring plan that had been approved by the Commission several months earlier. The main issue of concern was that the buyer would abide by the behavioural constraints that had been imposed by the Commission in its decision approving the restructuring.]
It is surprising that the Commission conflated the concept of assets and liabilities with the concept of economic activity. I suppose this was intentional. Otherwise it would have been very difficult to determine the amount of aid that was granted to each uninsured depositor with the status of undertaking. It would then be even more difficult to ensure that the aid was compatible with the internal market.
 The full text of the decision can be accessed at: