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So what is this new decision on bank resolutions all about? It is about state aid when the monies come from the deposit guarantee fund. Those funds are mandatory under EU law and are here to protect depositors in case of bank failure.
Banks have to be members and have to contribute to those funds in the EU.
When a bank fails, it is tempting for the banks and for the government to bailout the failing bank with the money which is in the fund and which, most of the time, is sitting there useless.
This avoids resolution and the use of government money – you can argue ad nauseam whether this is good policy or not, but surely you can see why politically it sounds like an easy way out.
The problem of course is that state aid is a regulated field in EU and, in the case of banks, it has very significant consequences: in 2013, the EC ruled that state aid to a bank imply a full wipeout of shareholders and sub debt holders.
when Banca Tercas failed, the Italians, smart as ever, thought to use the trick above: bailout the bank with cash from the deposit guarantee fund. (DGF)
State aid rules work (in summary) as follow: it can be state aid if (i) the aid is at the government’s initiative and (ii) it’s public money (‘state resources’ in the jargon.)
On Banca Tercas, the EC didn't enjoy the trick very much and ruled that the bailout was state aid. Italy, the banks and Banca d’Italia (BdI) disagreed and sued. And they just won. How?
The first criteria is always a tricky one to demonstrate and rather easy to dodge: a few phone calls from the PM will have the same effect as a vote at a board meeting. In this case, the board meeting of DGF had only bankers.
BdI was there but only checked the legality and the fact that from a supervisory point of view everything was ok. That was enough for the EC which said that all this was driven by the “public policy mandate” of the DGF ie a public initiative.
The Court disagreed, and this is very significant because it basically means that anything a DGF does which is not repaying depositors in case of bankruptcy could escape the state aid rules.
The other criteria is about public resources: the EC argued that voluntary or not, the contributions to the DGF were organized by law and all money is fungible.
This is in continuity of the famous Doux Elevage and Stardust Marine cases, where the ECJ looked at trade bodies & state aid.
But the court here said that the “voluntary” levies from the DGF were separate from mandatory levies, so they were not public resources.
I guess they did not care about the (extreme) situation where a voluntary levy is lebied… and a bankruptcy happens before the levy is used!
This is very significant for Carige which is currently trying to use the same trick. It is also very significant for the entire banking sector because it provides an easy way out of the claws of DG Comp for bank failures:
You can now expect “system-wide bailouts” to be used as an easy way to handle bank problems domestically without BRRD/SRB/EC etc involved. Not exactly Banking Union friendly! But remember: this is a General Court ruling, ECJ could overturn it!
And in case you're wondering: the situation of Nord LB is even trickier, because the members of the fund that will provide the cash are themselves public law entities !
