Bank Crisis Management and State Aid in the EU: A comparative Law and Economics analysis of bank resolution, precautionary recapitalisation and bank liquidation

Abstract

This dissertation analyses the EU regulatory framework for the management of bank crises, with a focus on the interconnections between bank resolution and State aid rules and their implications for banking competition and market structures.

To this end, the primary step involves an assessment of the EU State aid rules as applied to the banking sector, to establish which are the conditions for granting public funds to institutions in distress and how these conditions have evolved from the latest financial crisis until the recent years. The establishment of the Banking Union provides an important backdrop against which to evaluate how a greater degree of sectoral integration at EU level has influenced the implementation of State aid rules and how bank crisis resolution strategies have been updated. In particular, focus is devoted to the balance struck between financial stability and competition policy objectives whenever governmental measures are deployed with a stabilisation purpose in instances of bank distress. In this respect, this study is grounded on the interaction between the 2013 Banking Communication of the European Commission and the newer prescriptions introduced by the Bank Recovery and Resolution Directive (BRRD), so as to assess the efficiency of the existing regulatory framework and evaluate how the apparent trade-off between financial stability and competition is addressed.

As a number of bank crisis resolution strategies and tools have been made available by the composite framework of resolution and State aid rules, this dissertation aims to assess how the use of different combinations of such strategies and tools can affect bankers’ incentives and banking market structures in different ways. To this end, this study provides a detailed comparative analysis of the most recent cases of application of bank resolution, precautionary recapitalisations and bank liquidation, respectively, in order to offer an updated and comprehensive view of the different tools available and suitable to deal with different sorts of bank failures.

This exercise is relevant both from a positive and from a normative perspective. From the former point of view, this study endeavours to shed light on the complexity of the interactions between alternative crisis management tools and forms of State aid, highlighting the enduring role of public fund granting in affecting institutions’ market conduct depending on the choice of bank restructuring tool, as well as public authorities’ incentives in choosing which rescue strategies and tools to apply to different instances of bank distress. From the latter point of view instead, it highlights how the regulatory framework, as designed and/or applied, can actively shape institutions’ and markets’ conduct and structure, with the aim of assessing whether the intended regulatory goals of the BRRD are met in practice and advancing policy proposals for possible improvements in this respect.