1. Introduction

On 1 June 2017 the European Commission and Italy reached an agreement ‘in principle’ on the recapitalization of Banca Monte dei Paschi di Siena (MPS). A mere week later, the Single Resolution Board (SRB) put Banco Popular Español (BPE) into resolution, and had its shares transferred to Banco Santander. Both cases must be understood in the context of the Bank Recovery and Resolution Directive (BRRD) and both can be considered as examples of how the new European bank resolution regime performs as an engine of European integration.

With only little exaggeration, it might be contended that there has been no other area of the law in which the developments over the last five years have been so numerous and fundamental as in European banking and insurance insolvency law. Although the years 2000-2008 have been far from quiet on the legislative front – those years have witnessed the enactment of the Insolvency Regulation, the Credit Institutions Winding-up Directive (CIWUD), and the Insurance Companies Winding-up Directive (IWUD) – truly revolutionary reforms have been made since then.

Since the crisis of 2008, the EU has witnessed a dramatic integration in banking law, as illustrated by the introduction of the Banking Union. This Banking Union has introduced harmonized bank insolvency rules for the entire EU and a unified application of those rules for the Eurozone. More specifically, and in addition to the CIWUD and IWUD, the EU legislature has enacted the BRRD for all EU Member States and the Single Resolution Mechanism Regulation (SRMR) for the Eurozone. At least five recent developments (including the MPS and BPE cases) show how this new bank resolution regime performs as an engine of European integration.

  1. Bank resolution as part of the Banking Union

First, the Banking Union as originally intended included, besides a new bank insolvency regime, also a common European deposit guarantee scheme (DSG) and a Single Supervisory Mechanism (SSM). The philosophy of the Banking Union has been that pan-European banks need pan-European oversight. This was created through the Single Supervisory Mechanism, pursuant to which the European Central Bank (ECB) took the ultimate responsibility for prudential banking supervision of all banks in the Eurozone. Perhaps even more revolutionary, the ECB is to apply not only European law, but also European law as implemented in the national laws of the participating Member States. This will lead to a harmonized approach in practice to bank supervision, but probably also to a more harmonized application of the national laws of the Eurozone Member States.

The founders of the Banking Union believed that banking supervision would only be credible if it could allow banks to become insolvent. This would entail that the burden of bank insolvencies should be shared amongst Member States, because individual Member States might not wish or be able to carry the burden of a major bank insolvency in their jurisdictions. However, for political reasons, a common European deposit guarantee scheme has until now apparently been a step too far. Yet, in November 2015, a new initiative has been introduced that should bring about a ‘European Deposit Insurance Scheme’ (EDIS). Emmanuel Macron, who was elected president of France only a couple of weeks ago, seems to endorse it. Such an EDIS would mean an important step in the direction of further European (or at least: Eurozone) integration, not only economically, but also politically and morally.

  1. Cross-border bank resolutions in court

Second, the new pan-European bank resolution regime has been ‘consolidated’ by two relatively recent court decisions, although these cases paint a nuanced picture. In both court decisions, the central question was whether certain decisions by (national) government authorities would qualify as ‘resolution measures’. If they would, they would have to be recognized in all other Member States of the EU as per the BRRD. In both decisions, such recognition was challenged by creditors in another Member State, who would suffer damages as a consequence of an insolvency measure taken by a government body in the Member State where the failing bank was located. In the judgment of the Regional Court Munich I of 8 May 2015, the court held that a certain form of cancellation of debt by the Austrian resolution authority of Austrian bank Hypo Alpe Adria was not to qualify as a resolution measure. Consequently, there needed not be any recognition in Germany, and hence the creditor, Bayern LB, was not to suffer damages as a consequence.

In the Banco Espírito Santo (BES) case, on the other hand, it was contested before an English court whether the Portuguese Central Bank had transferred a facility agreement that had been concluded between Goldman Sachs International and BES to Novo Banco  (NB). The Central Bank had incorporated NB to function as a bridge institution in the context of BES’s resolution, and BES was to be liquidated. Goldman Sachs contended that the facility agreement was effectively transferred, and the Central Bank said it was not. The English court in first instance considered the case to concern a ‘civil and commercial matter’ (in the meaning of the Brussels 1bis Regulation), rather than a decision of a resolution authority (so that it should be decided by a Portuguese administrative court). On appeal, this reasoning was overturned in a judgment of 4 November 2016. The Appeal Court held, in short, that whether the facility agreement was effectively transferred was first and foremost a matter of Portuguese law, and that resolution measures such as these should be recognized under the CIWUD. It also found support in the Kotnik case, in which the CJEU decided on 19 July 2016 that resolution measures that were taken by the Slovenia government pre-BRRD should nonetheless be recognized.

These two cases indicated at the least that measures taken by a resolution authority in the context of bank insolvency are not always recognized throughout the EU. But if they are recognized (and this seems increasingly to be the case), that has an integrational effect: it means measures taken in a Member State under that Member State’s law have effect in other Member States.

  1. Harmonization of national insolvency laws

Third, the new bank resolution regime has also led to harmonization of national insolvency laws. On the one hand, for many EU jurisdictions, the new bank resolution regime has meant a major shift in that crisis management for banks has been taken away from the bankruptcy courts (and ‘normal’, ie general, corporate insolvency law), and been put in the hands of government authorities, viz. resolution authorities.

On the other hand, national insolvency laws continue to play an important role in the new regime. Not only does the new regime rely, in several instances, on normal insolvency law (for instance because parts of a bank in resolution must be liquidated under normal insolvency law), but also as regards creditors and shareholders, the leading principle is that they must not be worse off than they would have been if the bank had been subjected to national insolvency laws. In order to retain a level playing field in the EU, this No-Creditor-Worse-Off (NCWO) rule has required the European legislator to harmonize, besides bank resolution law, also national insolvency laws.

Under Article 108 BRRD, the national priority order of creditors is harmonized. Thus, Article 108 represents an EU harmonization of substantive national insolvency law, which is otherwise virtually absent in European law. It requires, in short, Member States to amend (if necessary) their national law governing normal insolvency proceedings so that a priority ranking is established between certain classes of creditors. More specifically, the following three categories are created: (a) ordinary unsecured, non-preferred creditors; (b) eligible deposits from natural persons and micro, small, and medium-sized enterprises which exceed the DGS coverage level of EUR 100,000; and (c) covered deposits. Under Article 108, category (c) is to rank higher than category (b), which is to rank higher than category (a). This creation of various classes within the category of unsecured creditors is, in many EU jurisdictions, novel.

Moreover, under a recent Commission draft Directive of 23 November 2016, Article 108 BRRD is to be amended. Pursuant to this draft Directive, Member States must amend their insolvency laws so that a new category of ordinary unsecured claims is inserted into the national priority order. These claims follow from a specific type of debt instruments, and are to have a lower priority ranking than that of ordinary unsecured, non-preferred claims (category (a) above), but higher than statutory or contractually subordinated claims. The proposal is currently being debated in the European Parliament. But it signifies a trend, viz. the trend that the common bank resolution regime will require more harmonization and even unification as regards the national priority order under general insolvency law.

  1. Resolution regimes for non-banks

A fourth development concerns the initiatives of national as well as of European legislators to introduce resolution regimes, à la BRRD/SRMR, for financial institutions other than banks. Several weeks ago, for instance, the Dutch Council of State has advised on a draft bill that would create a resolution regime for insurers that is similar to the current bank resolution regime as established by the BRRD and SRMR.

Similarly, on 28 November 2016, the Commission published a draft resolution regime for Central Counter Parties (CCPs). As a consequence of the 2012 European Market Infrastructure Regulation (EMIR), which introduced the mandatory clearing of voluminous categories of derivatives, a ‘large proportion of the EUR 500 trillion of derivatives contracts that are outstanding globally are cleared by 17 CCPs across Europe’ (dixit the Commission). Thus, enormous risks have been centralised at CCPs, so that an appropriate resolution regime for these institutions seemed warranted.

  1. Resolution in practice

The above has shown that there are various reasons to believe that the new bank resolution regime will give further impetus to European integration. But, as many commentators have rightly noted, only a real-life case will show whether the new resolution regime actually works. More specifically, only then will it become clear whether the new regime will prevent governments from choosing the way of the least resistance by bailing-out failing banks. Thus, the costs of those bank failures would continue to be borne by all tax payers together, rather than by a specific group of investors. The recent cases of MPS and BPE are cases in point.

Last year, four Italian banks have been subjected to a government-led restructuring. One of them, MPS, is a systemically important financial institution (SIFI). As such, it is supervised directly by the ECB in the SSM. The Italian government authorities were reluctant to put the bank into resolution or take ‘government stabilization tools’ pursuant to the BRRD, as that would require a bail-in or write-down of 8% of the bank’s liabilities. In the case of MPS, those liabilities include own funds, but also senior unsecured debt and sub-ordinated bonds that have been sold to retail investors. An escape was found in the so-called ‘precautionary measures’, which allow governments to address capital shortfalls that are noted in Union-wide stress tests.

In December, the ECB required MPS to recapitalize EUR 8.8b (which was an increase from the EUR 5b initially proposed by MPS) and denied an extension of the period to raise extra capital. The Commission has also been involved, for any ‘precautionary measure’ must be approved under the State-aid rules by the Commission. On 1 June 2017, the Commission and Italy announced that an agreement was reached under which subordinated bonds will be wiped-out, although retail investors may be compensated on the grounds of miss-selling. A final deal has been made conditional on the confirmation by the ECB that MPS meets the applicable capital requirements and on confirmation by Italy that private investors will purchase MPS’s non-performing loans portfolio.

MPS represents an instance where the workings of the SSM and the new resolution regime have been put to the test. It proves the reluctance of governments to trigger resolution, but it also has required the relevant EU authorities to investigate, together with the Member State concerned, the limits of the new regime. This was all the more true for BPE, where the SRB did take a resolutlion measure which had to be implemented by the national resolution authority. Quite different from the solution chosen for MPS, as of 7 June 2017, all shareholders of BPE have been wiped out. Moreover, subordinated debt qualifying as Tier 2 instruments were converted into shares and subsequently transferred to Banco Santander for the price of 1 EUR, which effectively meant a wipe-out and expropriation of both shareholders and subordinated debtholders. Banco Santander has announced to inject EUR 7bn into BPE.

Whilst it remains to be seen how the current plight of Banca Popolare di Vicenza and Veneto Banca will be handled, I think it is fair to conclude that the new EU bank resolution regime proves to be an engine of integration with respect to the institutions tasked with resolving bank insolvencies, but also regarding national insolvency laws, and also for financial institutions other than banks.

This piece builds on a recently published book: Gabriel Moss QC, Bob Wessels and Matthias Haentjens, EU Banking and Insurance Insolvency (2nd edn, OUP 2017).

Matthias Haentjens is Professor of Financial Law at Leiden Law School.