Commission staff working document accompanying the communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, the European Court of Justice and the European Central Bank - An EU Framework for Cross-border Crisis Management in the Banking Sector {COM(2009) 561} {SEC(2009) 1389} {SEC(2009) 1390}
Date: 2009-10-20
Institutions: European Commission
Subjects: credit institution, economic recession, economic reform, financial institution, financial market

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 20.10.2009 
SEC(2009) 1407 final 

COMMISSION STAFF WORKING DOCUMENT 

Accompanying the 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE, THE EUROPEAN COURT OF JUSTICE AND THE EUROPEAN 
CENTRAL BANK 

An EU Framework for Cross-border Crisis Management in the Banking Sector 

{COM(2009) 561} 
{SEC(2009) 1389} 
{SEC(2009) 1390} 

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TABLE OF CONTENTS 

1. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

Chapter 1 - Scope of an EU bank resolution regime.................................................... 4 

Chapter 2 - Early intervention – supervisory tools ...................................................... 9 

Chapter 3 - Asset transfers ......................................................................................... 18 

Chapter 4 - Resolution tools....................................................................................... 24 

Chapter 5 – Threshold conditions for resolution ....................................................... 33 

Chapter 6 - Ancillary measures to support resolution................................................ 37 

Chapter 7 - Company law and shareholders' rights.................................................... 40 

Chapter 8 - Coordination v/integration of resolution and insolvency........................ 46 

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Purpose of the Commission Staff Working Paper 

This Commission Staff Working Paper accompanies the Commission Communication entitled 
"An EU Framework for Cross-Border Crisis Management in the Banking Sector". Its purpose 
is  to  provide  further  clarification  of  specific  issues  raised  in  the  Communication,  and  to 
articulate a number of question to which the Commission services are seeking answers.  

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1. 

CHAPTER 1 - SCOPE OF AN EU BANK RESOLUTION REGIME 

Section 1 - The Issue  

The  Communication  focuses  on  the  need  for,  and  nature  of,  a  regime  for  reorganising  and 
resolving  cross-border  banking  groups  under  a  coordinated  or  integrated  resolution 
framework.  However,  this  Chapter  discusses  whether  the  EU  resolution  framework  should 
also  include  credit  institutions  with  cross-border  branches,  because  experience  has  shown 
that those banks can also present a real risk to financial stability in Member States where the 
branches  carry  on  significant  amounts  of  deposit-taking  business.  Furthermore,  as  banking 
groups often include entities that carry on investment activities and other financial services, it 
would  make  sense  for  a  harmonised  EU  resolution  regime  extend  to  investment  firms  and 
possibly to insurers. 

Section 2 – Which financial institutions? 

Focus on deposit-taking banks 

1. 

2. 

3. 

A specific regime for deposit-taking banks is only justified if it is accepted that 
banks  are  'special'  -  that  is,  different  from  other  regulated  financial  sector 
entities – and that there are particular risks associated with the failure of a bank 
that  cannot  be  adequately  managed  in  all  cases  by  ordinary  insolvency 
procedures  that  would  apply  to  other  financial  institutions  (or  commercial 
enterprises generally). 

There are strong reasons to assert that banks are indeed different. They play a 
unique  market  and  economic  role,  performing  financial  services  that  are 
fundamental  to  the  functioning  of  the  economy:  the  taking  of  deposits, 
extension  of  credit,  processing  of  payments  and  provision  of  financial 
infrastructure  services  more  broadly.  They  are  a  direct  source  of  credit  and 
liquidity,  through  loans  and  guarantees,  for  financial  and  non-financial 
enterprises, and are the channel through which monetary policy is given effect 
in  the  real  economy.  While  it  is  true  that  other  financial  institutions  perform 
some of these functions, no entities other than credit institutions perform all of 
them.  In  particular,  non-bank  institutions  do  not  offer  immediately  available 
liabilities to the public at large in the form of bank deposits, and do not provide 
payment services.  

Furthermore,  deposit-taking  banks  are  peculiarly  vulnerable  to  loss  of  public 
confidence.  Retail  depositors  are  generally  not  in  a  position  to  monitor  and 
assess the financial position of a bank. However, this inequality of information 
and  reliance  on  trust  means  that  the  slightest  rumour  that  a  bank's  financial 
position is precarious is likely to trigger a bank run, as depositors seek to protect 
their  individual  interests  by  withdrawing  their  money  as  quickly  as  possible. 
Any  reaction  of  this  kind,  whether  or  not  it  is  in  fact  reasonable,  will  almost 
certainly precipitate rapid worsening of the bank's situation by making it more 
difficult and costly for the bank to obtain market funding.  

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4. 

Moreover,  in  highly  inter-connected  financial  markets,  the  failure  of  one  bank 
can  be  contagious.  Such  "negative  externalities",  arising  from  inter-bank 
exposures,  fire  sales  of  assets  and  a  possible  drying  up  of  liquidity  mean  that 
bank  failures  carry  the  risk  of  wider  systemic  consequences  that  threaten 
financial stability and the integrity of the payment system.  

Risks posed by failure of other financial institutions 

5. 

6. 

7. 

8. 

Nevertheless,  there  are  arguments  that  the  failure  of  other  kinds  of  financial 
institution may also pose systemic risks to the financial system that may justify 
conferring  specific  powers  for  authorities  to  manage  the  impact  of  such  a 
failure. For example, investment firms (and  in  particular  broker-dealers) differ 
from  many  other  financial  institutions  in  that  they  hold  securities  and  cash  on 
behalf  of  their  clients.  They  may  also  be  highly  connected  to  other  market 
participants  through  the  volume  of  their  trading  and  positions  in  derivatives. 
Market  stability  concerns  also  arise  from  the  exercise  of  close  out  rights 
immediately insolvency is triggered. Simultaneous market activity of thousands 
of  counterparties  can  cause  the  price  of  affected  assets  to  collapse.  Moreover, 
counterparties may be required to use the asset values determined in closing out 
such  contracts  to  establish  market  prices for  similar assets subject to  contracts 
with  third  parties,  so  transmitting  the  instability  of  the  debtor  beyond  its 
counterparties.  

The market impact of the collapse of the Lehman group supports the view that 
an investment bank can be systemically important. Uncertainty about the status 
and location of client assets and collateral, and the status of its open trades and 
its  clients  and 
derivative  positions  caused  substantial  difficulties  for 
counterparties. Moreover, the impact was much broader: several money market 
funds had significant exposures to Lehman and concerns about the stability of 
money  market  funds  caused  investors  to  withdraw  funds,  further  exacerbating 
instability in the financial system. Similarly, the provision of financial support 
by the US government to AIG was motivated by the need to avert the risks to 
the global financial system of disorderly failure of a complex entity in a fragile 
market environment. The "inter-connectedness" of AIG as a result of its credit 
default swaps business meant that the market impact of its  failure  would  have 
been too great.  

In  the  US,  the  need  for  additional  tools  to  address  systemically  significant 
financial  institutions  that  fall  outside  the  existing  resolution  regime  under  the 
FDIC has been extensively discussed in the wake of the Government funding of 
AIG  and  the  bankruptcy  of  Lehman  Brothers.  The  UK  has  also  recently 
consulted  on  the  development  of  effective  resolution  arrangements  for 
investment banks.1 

However, the resolution measures that are appropriate for deposit-taking banks 
may  not  necessarily  be  appropriate  for  other  kinds  of  financial  institution.  For 
example,  the  power  to  transfer  assets  and  liabilities  to  a  'bridge  bank'  may  be 
suitable for deposit-taking banks because of the nature of their activities and the 

1 

http://www.hm-treasury.gov.uk/consult_investment_banks.htm 

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objectives  of  the  resolution,  but  less  relevant  for  investment  banks,  where  the 
focus  of  a  resolution  regime  may  be  to  address  problems  and  uncertainties  in 
respect  of  trading,  clearing  and  settlement,  collateral  and  custody  of  client 
assets.    

Section 3 – What type of credit institutions? 

Application 
(subsidiaries)  

to  cross-border  credit 

institutions  (branches)  and  cross-border  groups 

9. 

10. 

11. 

Under  the  Credit  Institutions  Winding-Up  and  Reorganisation  Directive 
("CIWUD"),2 cross-border branches of credit institutions are treated as part of 
the  credit  institution,  and  are  therefore  included  in  the  insolvency  proceedings 
for that institution under the applicable regime of the home Member State. This 
is  an  important  principle  underpinning  the  internal  market.  However  the 
Directive does not harmonise substantive insolvency law provisions (including 
reorganisation or resolution measures). In the event of the failure of a bank, the 
treatment  of  depositors  with  branches  in  other  Member  States  will  depend  on 
the  resolution  measures  taken  by  the  home  Member  State.  If  poorly-managed, 
the  failure  of  a  credit  institution  may  have  a  negative  impact  on  foreign 
depositors. Events during this crisis have shown that in extreme circumstances 
the financial stability of the host Member State can be affected.  

However,  CIWUD  does  not  cover  groups  (with  subsidiaries  in  other  Member 
States).  As a result, each subsidiary is subject to the insolvency regime of the 
State  where  it  is  established.  If  the  scope  of  a  bank  resolution  framework  is 
limited  to  cross-border  banking  groups,  the  question  remains  whether  the 
resolution  of  group  entities  should  take  place  as  coordinated  national 
proceedings, or whether a framework for 'integrated' resolution is needed.  

Under  a  framework  based  on  coordination,  resolution  would  take  place  at  the 
level of each legal entity within a group, and be subject to the insolvency law of 
the  country  of  origin  under  CIWUD.  As  banking  groups  often  consist  of  both 
deposit taking and non-deposit taking entities, a resolution regime might need to 
be  extended  to  investment  firms,3  financial  institutions,  and  possibly  even 
insurance  companies.  Integration  of  market  and  of  activities  means  it  is 
increasingly difficult to resolve deposit-takers in isolation. By contrast, under an 
integrated EU resolution framework all group entities under resolution would be 
dealt with under a single procedure, and would necessarily include non-deposit 
takers that are part of a group. This is discussed further in Chapter 8. 

'Systemically important' banks/groups 

12. 

The  application  of  an  EU  resolution  framework  might  be  further  restricted  to 
'systemically  important'  cross-border  banks  or  banking  groups.  The  potential 
problems  associated  with  systemically  important  banks  and  the  appropriate 

2 
3 

Directive 2001/24/EC 
Currently investment firms are covered neither by the Winding-Up and Reorganisation Directive nor by 
the Insolvency Regulation.  

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policy and legislative responses are currently being discussed in the context of 
the G20 and the Basel Committee for Banking Supervision.  

13. 

14. 

Any  restriction  of  the  regime  to  systemically  important  institutions  or  groups 
would  require  a  clear  definition  of  this  concept  or  the  identification  of  the 
institutions that fall into this category.   

This might be done by identifying in advance the characteristics of systemically 
important institutions. Possible factors include: 

•  size – an institution that is "too big to fail" – measured by one or more of market 
capitalisation, total gross assets, total exposure (as measured by a leverage ratio), 
total risk weighted assets, share of EU or national insured deposits, and proportion 
of its EU or national market share;  

•  inter-connectedness  –  the  likely  impact  that  the  failure  would  have  on 
counterparties  and  other  market  participants  –  measured  by  one  or  more  of 
proportion  of  capital  flows,  size  or  distribution  of  counterparty  risk  capital 
requirement,  share  of  trades  on  clearing  houses  or  exchanges,  provision  of 
services  to  other  financial  institutions  (for  example  fund  management,  custody 
and reinsurance), or level of involvement in OTC markets for derivatives or credit 
default swaps;  

•  complexity  –  which  may  be  correlated  with  the  likely  level  of  difficulty  of 
managing  the  wind-down  in  the  event  of  failure  –  measured  by  one  or  more  of 
legal structure, business model, nature and level of intra-group exposures, use of 
unregulated entities and level of activity in complex products;  

•  the role of the institution in payment systems or other essential services.  

The  definition  is  clearly  critical  and  potentially  very  complex.    A  more  simple 
definition  carries  the  risk  that  it  would  not  cover  all  necessary  cases.  Specifically, 
experience has shown that banks which would not meet most standard definitions of 
systemic importance can pose real risks to financial stability in Member States where 
they  carry  on  cross-border  business  through  branches.    A  more  complex  definition 
would,  on  the  other  hand,  offer  a  more  comprehensive coverage of risk, but would 
also be harder to implement.   

15. 

Alternatively,  the  identification  of  systemic  importance  could  be  linked  to  the 
process  of  preparing  "wind-down  plans"  or  "living  wills"  that  is  discussed  in 
Chapter  2.  The  application  of  a  bank  resolution  regime  would  be  determined 
only  after  a  thorough  examination  about  how  best  to  resolve  the  specific 
institution.  However,  if  any  regulatory  requirement  for  "living  wills"  only 
applied  to  systemically  important  institutions,  some  kind  of  ex  ante  definition 
would have to be formulated and applied.   

16. 

In any event, transparency and legal certainty would be crucial. There should be 
no scope for any ambiguity as to whether a resolution regime for 'systemically 
important' institutions applies in any particular case.  

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17. 

18. 

The  existence  of  a  resolution  regime  for  systemically  important  banks  could 
help  address  the  widely  discussed  risks  of  'moral  hazard'  associated  with  the 
perception that a bank is 'too big – or too inter-connected – to fail'. The creation 
of framework under which it is possible to manage the failure of a systemically 
important  institution  and  to  minimise  its  impact  would  clearly  increase  the 
likelihood  that  such  a  bank  would  be  allowed  to  fail.  This  is  turn  should 
improve  market  discipline  since  debt  holders  would  no  longer  consider 
themselves to be insulated from losses.  

The  question,  therefore,  is  whether  an  EU  resolution  regime  should  be 
developed specifically, and exclusively, for systemically important cross-border 
banks,  or  whether  this  would  be  too  restrictive.  If  the  concept  of  systemic 
importance is useful in this context, the Commission would welcome views on 
how this concept should be defined and how the relevant institutions should be 
identified. 

Implications for the design of a Resolution framework 

19. 

If  a  bank  is  not  systemically  significant,  executing  an  orderly  restructuring 
under  the  normal  processes  of  insolvency  law,  or  a  winding  up  process  that 
promptly  reimburses  insured  depositors,  maximises  the  proceeds  for  creditors 
and  quickly  transfers  viable  operations  to  other  banks  may  well  be  the  best 
solution.  But  if  a  failing  cross-border  bank  is  systemically  significant,  the 
principal  priority  of  a  resolution  is  likely  to  be  the  maintenance  of  critical 
functions performed by that bank, which in turn will mean that different tools – 
such as the use of a bridge bank or transfer of business to another private sector 
entity - will almost certainly be more appropriate. The larger and more complex 
the failing bank, the more likely that a bridge bank structure may be required in 
cases  of  urgency  where  private  sector  purchasers  are  unable  to  carry  out  the 
necessary due diligence within the short timeframe available.  

Section 4 –Questions 

(1) 

(2) 

(3) 

Should  an  EU  regime  focus  exclusively  on  deposit-taking  banks  (as  opposed  to  any 
other regulated financial institution)?  

Should an EU regime apply exclusively to cross-border banking groups, or should it 
also  encompass  single  entities  which  only  operate  cross-border  (if  at  all)  through 
branches? 

Should an EU regime apply exclusively to, 'systemically important' institutions? If so, 
how  should  this  concept  be  defined  and  how  should  the  relevant  institutions  be 
identified? 

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2. 

CHAPTER 2 - EARLY INTERVENTION – SUPERVISORY TOOLS 

Section 1 - The Issue  

Some  elements  of  a  framework  for  early  intervention  by  supervisors  already  exist  under 
Article 136 of the Capital Requirements Directive. However, significant gaps remain. There is 
clear  evidence  from  recent  events  that  the  supervisory  framework  has  not  been  sufficiently 
robust to support efficient coordination of supervisory measures aimed at restoring a cross-
border group.  

Section 2 – Current legal framework 

EU legal framework 

20. 

21. 

Remedial intervention by supervisors is only effective if taken at an early stage 
of  financial  difficulty when the  firm, although at risk, is still a going concern. 
This includes the measures that can be imposed under Article 136 of the Capital 
Requirements  Directive  ('CRD'),4  for  example,  a  requirement  to  increase  the 
institution's  own  funds  above  the  minimum  level  specified  in  the  Directive;  a 
strengthening  of 
internal  organisation  and  governance  arrangements;  a 
requirement  that  the  institution  should  apply  a  specific  provisioning  policy;  a 
restriction  on  the  business  or  operations  of  the  credit  institution;  or  a 
requirement that the institution reduce the risk inherent in its activities, products 
or  systems.  Such  measures  leave  control  of  the  institution  in  the  hands  of  the 
management5 and do not  represent  a significant interference  with the  rights of 
shareholders or creditors.  

Recently  agreed  changes  to  the  Capital  Requirements  Directive  will  require 
consolidating supervisors to plan and coordinate joint assessments in emergency 
situations, exceptional measures, the implementation of  contingency plans and 
communication to the public.6 In addition, the Committee of European Banking 
Supervisors  ('CEBS')  (or  in  due  course  the  European  Banking  Authority)  is 
required  to  develop  guidelines  on  the  joint  conduct  of  the  Pillar  2  review 
(including the supervisory risk assessment7).  However, these changes may not 
go  far  enough  in  ensuring  that  supervisors  have  adequate  powers  and  tools  to 
support an effective early intervention regime. 

4  
5 

6 

7 

Directive 2006/48/EC relating to the taking up and pursuit of the business of credit institutions (recast). 
Nevertheless,  some  countries,  e.g.  France  have  the  power  to  replace  the  management  of  a  bank  by 
nominating a special administrator. 
Article  129(1)(c)  of Directive  2006/48/EC  as  re-casted  in 2009  (Publication  in  the  Official  Journal  is 
still pending) 
Article 129(3) of  "CRD 2", see text of Commission proposal:  
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52008PC0602:EN:NOT 

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National frameworks 

22. 

23. 

Powers  and  tools  available  to  supervisory  authorities  in  emergency  situations 
differ significantly across Member States. A survey conducted by CEBS8 shows 
that even where limited EU harmonisation exists (Article 136 CRD), powers are 
not uniform. The differences are even greater with respect to powers related to 
the management body, to the shareholders and capital-related measures.  

While  many  supervisors  have  powers  over  the  composition  of  the  bank 
management  (to  oppose  nomination  or  require  replacement),  only  some  are 
empowered to appoint a special representative or administrator in an institution 
that is solvent and a going concern. In Italy, for example, the Minister  for the 
Economy  and  Finance  can  appoint  a  provisional  administrator  on  a  proposal 
from  the  Banca  d'Italia.  In  France  the  Commission  bancaire  has  independent 
powers  to  appoint  a  provisional  administrator  to  a  bank.  The  powers  of  the 
administrator  also  differ.  In  some  Member  States  (for  example,  France  and 
Italy)  the  administrator  can  replace  completely  the  management  of  the  bank, 
while in others (for example, Austria and Luxembourg) the administrator only 
supervises  the  management  and  controls  decisions  which  go  beyond  the 
ordinary  course  of  business.  Powers  do  not  generally  extend  beyond  that  of  a 
CEO. Reorganisation measures (such as mergers or the sale of business) cannot 
generally be imposed without the consent of the shareholders. In France, when a 
provisional  administrator  or  a  liquidator  has  been  appointed,  the  Commission 
bancaire, having obtained the opinion of the deposit insurance fund, may apply 
to court for permission to order the transfer of the shares held by one or more 
executives  of  that  institution.  In  Italy,  special  administrators  operate  under  an 
oversight  committee  which  exercises  control  over  the  measures  and  gives 
opinions.  

Chart 1: Competent authorities' power over the management body of a bank (source: CEBS) 

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Oppos e the nom ination of a board m ember or
managing director

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Replac e or require a bank to replac e a direc tor or
manager

A ppoint a pers on / body  with general or spec ific
powers 

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Limit c om pens ation to directors  and senior
ex ec utive offic ers

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Y es

Not Fully

No 

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CEBS,  Mapping  of  supervisory  objectives  and  powers,  including  early  intervention  measures  and 
sanctioning powers, March 2009 

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24. 

Measures directed at the shareholders are outlined in Chart 2 below. They can 
only  be  exercised  at  severely  distressed  institutions,  and  with  a  view  to 
achieving wider public policy objectives, such as maintaining financial stability 
or protecting depositors' interests.  

Chart 2: measures directed at shareholders (Source: CEBS) 

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Suspend the voting rights / shares held by a
specific/all shareholder(s)

22

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3

Require the transfer of the shares held by a
specific shareholder

11

Require a change in ownership

10

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Prohibit/limit the distribution of profits to
shareholders

22

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2

Require actions from shareholders to support the
institution 

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Yes Not Fully No 

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25. 

In  terms  of  capital  related  measures,  only  a  minority  of  competent  authorities 
have  the  power  to  require  a  bank  to  convert  its  subordinated  debt  into  equity, 
whereas  the  majority  of  authorities  have  the  power  to  limit  or  prohibit  certain 
capital payments.  

Chart 3 – Capital related measures (Source: CEBS) 

1
8

2
8

3
8

Prohibit/ limit
principal or interest
payments on
subordinated debt

Require conversion
of subord. debt into
preferential or new
equity

Limit/ prohibit any
major capital
expenditure

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Yes Not Fully No 

26. 

Powers also differ in relation to 'restoration plans'. Only 16 authorities have the 
powers to coordinate a rescue plan before insolvency is declared. The powers to 
fully  implement  emergency  measures  (for  example,  coordination  of  a  private 
sector  take-over,  setting  up  of  a  bridge  bank)  also  vary  from  one  country  to 
another.  

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Section 3 – Adequacy of the current framework 

Supervisory tools 

27. 

28. 

Discrepancies  between  supervisors'  tools  and  powers  have  the  potential  to 
compromise  the  effectiveness  of  a  coordinated  response  to  emergency 
situations. In particular, as indicated above, not all national supervisors have the 
power  to  require  the  individual  entities  that  they  supervise  to  submit  a 
'restoration plan'. Nor is there any clear framework to do this at the level of a 
cross-border group. 

The  effectiveness  of  some  measures  has  also  been  called  into  question.  In 
particular,  CEBS  emphasised  that  the  exercise  of  powers  directed  at  the 
shareholders  may  raise  legal  issues  -  as  borne  out  by  the  Fortis  case.  As  the 
conditions under which supervisors may exercise these powers can differ, CEBS 
has  recommended  that  further  clarity  be  sought  on  the  ways  in  which  these 
powers can be activated and how they relate to the relevant EU Company Law 
Directives and provisions of national company law.  

Joint assessment 

29. 

While the CRD requires joint assessment in both going concern and emergency 
situations,  the  Directive  does  not  specify  the  conditions  that  trigger  the 
application of specific supervisory powers, nor how joint assessment should be 
conducted.  If  national  law  or  national  supervisors  interpret  and  apply  those 
conditions  differently,  coordinated  action  by  supervisors  of  different  group 
entities might be difficult. CEBS has also noted the absence of a common set of 
indicators and agreed terminology between EU supervisors which would clearly 
define  how  indicators  should  be  interpreted  and  applied.9  CEBS  has  already 
identified  indicators  for  liquidity  risk  and  is  working  on  other  indicators  to 
capture other risks in the context of a joint risk assessment system.  

Contingency 

30. 

The crisis has shown that some group structures may be simply too complex to 
manage  in  a  crisis.  In  the  context  of  contingency  plans  that  will  be  required 
under  recent  changes  to  the  CRD,10  it  may  be  useful  to  explore  whether  large 
banks should be obliged to prepare and submit to authorities plans which detail 
the  arrangements  for  winding  down  the  institution  should  it  fail.  Such  plans 
could  in  particular  look  at  cross-border  dependencies  of  the  institution,  the 
implications of legal separateness in case of resolution and the possible exercise 
of  resolution  powers.    This  is  discussed  in  more  detail  in  paragraphs  42  to  47 
below. 

9 

10 

CEBS,  Mapping  of  supervisory  objectives  and  powers  including  early  intervention  measures  and 
sanctioning powers, January 2009 
Article 129(1)(c) of "CRD 2" 

EN 

12 

   EN 

 
 
                                                 
Supervision of branches  

31. 

32. 

33. 

34. 

The supervision of the cross-border branches of a credit institution is, for most 
purposes, the responsibility of the regulator of the bank's home Member State. 
This is subject to very limited exceptions: most importantly, the regulator of the 
'host'  State  where  the  branch  is  established  shares  responsibility  for  the 
supervision of liquidity in relation to the branch with the home supervisor. This 
principle  of  home  State  control  is  intended  to  facilitate  passporting  and  is 
fundamental to the freedom of establishment under the EC Treaty.  

It follows from this principle that the powers of the host supervisor to intervene 
directly  in  the  business  of  a  branch  should  be  limited  to  those  that  are  strictly 
necessary to protect depositors and investors in the host State. Currently, those 
powers  are  restricted  to  a  power  to  take 
'precautionary  measures'  in 
'emergencies'.11  The  nature  and  scope  of  such  precautionary  measures  is  not 
specified,  and  there  is  divergent  interpretation  and  implementation  of  the 
circumstances and way in which the power can be exercised by Member States. 

One of the manifestations of the current financial crisis in some Member States 
arose from the activities of branches. For example, branches of Icelandic banks 
offering aggressively attractive rates of interest accepted huge numbers of retail 
deposits in several Member States, the total of which far exceeded the ability of 
the  Icelandic  deposit  insurance  scheme  and  the  Icelandic  state  to  meet  the 
liability to host State depositors.  

In the wake of these events, it is suggested by some that home State supervision 
of branches is fundamentally unsound as a regulatory system, that the powers of 
host country supervisors should be extended, or even that the right for banks to 
passport  through  a  branch  should  be  curtailed.  The  Commission  Services  take 
the  clear  view  that  restrictions  of  this  kind  would  be  inconsistent  with  the  EC 
Treaty,  which  confers  on  undertakings  a  right  to  exercise  the  freedom  of 
establishment.  Nevertheless,  the  problems  caused  by  the  Icelandic  banking 
crisis  were  extremely  serious,  and  it  is  appropriate  to  examine  whether  the 
current framework is adequate to pre-empt and address problems developing in 
a bank that might have a seriously damaging effect on the banking sector of a 
host member State.  

11 

The  power  for  the  host  supervisor  of  a  branch  to  take  direct  measures  in  'emergency  situations'  is 
conferred by Article 33 CRD. However, as it is currently drafted it is unclear whether the powers are 
excercisable  only  in  those  areas  where  competence  is  specifically  conferred  by  the  CRD:  that  is, 
liquidity  requirements  (in  cooperation  with  the  home  supervisor);  conduct  of  business  rules  under 
MiFID; measures relating to the implementation of national monetary policy; disclosure requirements 
for the purposes of statistical reporting; and non-prudential requirements under, for example, national 
fiscal, social security and consumer protection legislation. 

EN 

13 

   EN 

 
 
 
 
                                                 
Section 4 – Possible ways forward 

Supervisory tools and coordination 

35. 

36. 

37. 

38. 

CEBS  has  recommended  further  convergence  of  early  intervention  tools 
available  to  supervisors,  in  particular,  with  respect  to  measures  directed  at  the 
shareholders.  Conditions  for  the  exercise  of  those  powers  need  to  be  further 
explored  and  addressed  in  connection  with  existing  Company  law  Directives 
(see Chapter 7).  

A more intrusive measure available to some supervisors is the power to change 
the  management  of  the  bank  by  nominating  a  special  representative  (an 
'administrator'  or  'manager')  with  the  objective  of  restoring  the  financial 
situation  of  the  institution.  In  some  Member  States  the  range  of  powers  of  a 
special representative - and in particular its impact on the powers of the general 
meeting – is not entirely clear. If the appointment of a special representative is 
considered  to  be  an  effective  supervisory  tool,  which  might  be  used  in 
conjunction with a common group restoration plan, such details would need to 
be  specified.    For  actions  of  special  representatives  to  be  coordinated  in  a 
banking group, issues such as their powers, their responsibility to shareholders 
and  supervisors  and  the  confidentiality  of  the  measure  would  need  to  be 
addressed in a consistent way across Member States. Particular care would also 
be needed when assessing whether the  appointment of a  special representative 
might exacerbate the financial deterioration of the institution by causing market 
counterparties to withdraw credit lines. 

The framework for joint and coordinated action by the various supervisors of a 
banking  group  could  also  be  enhanced.  For  example,  supervisors  could  be 
required  to  reach  a  joint  decision  on  the  basis  of  a  common  assessment  and  a 
restoration plan12 submitted by the parent company for the group as a whole.  

Under the new supervisory architecture that has recently been proposed by the 
Commission,13 the European Banking Authority would, inter alia, have powers 
in  the  context  of  the  CRD  to  ensure  the  consistent  application  of  Community 
rules,  to  take  specific  actions  in  emergency  situations  and  to  settle  certain 
disagreements between authorities including within colleges of supervisors. To 
ensure that decisions by the European Banking Authority, without prejudice to 
the application of Community law, do not impinge on the fiscal responsibilities 
of  the  Member  States,  a  safeguard  clause  is  also  proposed,  in  line  with  the 
Ecofin and European Council conclusions of June 2009.14 

12  
13 

14  

That is, the basis for coordinating supervisory measures under the new Article 129(1) of 2006/48/EC. 
Proposal  for  a  Regulation  of  the  European  Parliament  and  of  the  Council  on  a  European  Banking 
Authority, 23 September 2009. 
It  may  also  be  stressed  that  under  the  Commission  Proposal,  the  powers  of  the  European  Banking 
Authority would not extend to bank resolution measures of the kind discussed in Chapter 4.  Moreover, 
matters covered by Directive 2001/24/EC on the Reorganisation and Winding Up of Credit Institutions 
are  outside  of  its  statutory  competence  (as  proposed  by  the  Commission).    However,  the  draft 
Regulation  on  a  European  Banking  Authority  may  be  amended  during  the  process  of  adoption  by 
Member States and the European Parliament.   

EN 

14 

   EN 

 
                                                 
Joint assessment and triggers 

39. 

40. 

In  support  of  a  joint  assessment  framework,  the  Commission  is  currently 
considering  further  amendments  to  the  CRD  to  introduce  complementary 
prudential  measures  designed  to  capture  at  least  the  effects  of  leverage  and 
liquidity  risks.15  These  harmonised  measures  would  usefully  supplement  the 
indicators  that  form  part  of  an  'early  warning  system'  to  facilitate  the  joint 
assessment of emergency situations.  

that  "no  automatic 

When  considering  the  issue  of  a  'trigger'  for  supervisory  actions,  CEBS 
concluded 
triggers  exist  and,  consequently,  early 
intervention  measures  are  activated  through  on-going  prudential  supervision. 
Prudential supervision is based on both quantitative and qualitative analysis of 
the situation of credit institutions in order to determine its individual risk profile 
and  to  identify  and  solve  any  (potential  problems)  at  an  early  stage".  The 
respective  merits  of  'automatic'  triggers  and  supervisory  discretion  are  further 
discussed  in  Chapter  5  on  threshold  conditions  in  the  context  of  resolution 
measures.  

Contingency planning for banks: 'Wind down plans' or 'living wills' 

41. 

42. 

The  concept  of  wind-down  plans  or  'living  wills'  is  currently  attracting 
considerable  political  and  regulatory  interest  as  a  means  of  facilitating  a  more 
rapid  resolution  or  winding  down  of  large  and  complex  financial  institutions 
The  idea  is  that  systemically  important  cross-border  institutions  should  be 
required  to  produce  contingency  plans  to  facilitate,  in  a  period  of  severe 
financial stress or instability, the preservation of the firm as a going concern, the 
continuity  of  its  financial  infrastructure  services,  and  the  rapid  resolution  or 
winding  down  of  the  institution  where  necessary.  Detailed  plans  may  include, 
for example: the information that might be required by authorities to manage a 
crisis  (such  as  lists  of  counterparties  and  the  location  of  inventory  assets); 
details  of  client  assets,  the  location  of  custodians  and  arrangements  for  client 
asset  protection,  and  relevant  legal  restrictions;  information  necessary  for  the 
settlement  and  netting  of  financial  market  contracts;  details  of  information 
storage  and  IT  systems,  and  back-up  plans  for  record  retention  and  data 
integrity; and group-wide contingency funding plans, including which business 
lines  could  be  sold  to  raise  emergency  funds,  and  plans  to  reduce  risks  or 
stabilise funding.  

In addition to the obvious advantages for supervisors, resolution authorities and 
insolvency  officials  of  having  this  information  in  a  comprehensive  and 
structured form in the event of a crisis, a requirement for 'wind down plans' is 
attractive  in  that  it  is  likely  to  bring  about  an  ongoing  dialogue  between 
institutions  and  their  supervisors  which  should  ensure  that  supervisors  better 
understand  the  complex  structures  they  have  to  supervise.  Such  plans  are  also 
likely  to  force  managers  to  think  much  more  carefully  about  the  complex 
financial  structures  that  have  been  created  within  their  organisation  and  the 
extent to which contractual obligations (such as default swaps) place substantial 

15 

See Commission's 4 March 2009 Communication 

EN 

15 

   EN 

 
                                                 
43. 

44. 

45. 

46. 

constraints  on  the  choices  facing  authorities  in  the  event  that  reorganisation 
measures need to be undertaken. 

However,  more  detailed  thought  needs  to  be  given  to  a  number  of  issues.  For 
example, the discussion of wind down plans in an international context, such as 
the FSB and the G20, tends to be coupled with the assumption that an intended 
and  beneficial  effect  of  such  plans  would  be  to  force  a  clarification  and 
simplification of legal structures. This might include a reduction of complexity, 
a  greater  organisation  of  business  in  stand-alone  subsidiaries  that  can  be  ring-
fenced  and  reorganised  separately  in  the  event  of  a  crisis,  and  stronger 
capitalisation and liquidity requirements on individual subsidiaries. There is no 
doubt  that  greater  simplification  would  facilitate  crisis  management  and 
resolution, and the desirability of a move towards less complex structures is an 
important element of the current debate on financial regulation. 

Nevertheless,  any  requirement  for  wind  down  plans  as  a  part  of  the  EU 
supervisory  regime  would  have  to  be  properly  adapted  to  the  specific  legal 
context of the EU and the single market. In this context, it is crucial that there is 
a  clear  understanding  of  the  potential  impacts  of  any  such  requirement  on  the 
large cross-border banking groups that are active in the EU retail market, and in 
particular on any possible detrimental effects on their efficiency, as well as on 
the  effectiveness  of  consolidated  supervision.  Any  measures  that  risked 
undermining  the  single  market  principles  of  the  EU  Treaty,  and  that  might 
fundamentally  affect  that  firm's  business  models  should  only  be  adopted  after 
careful assessment. If one effect of 'living wills' would be to force banks to re-
consider  the  centralisation  of  key  management  functions  and  their  functioning 
across business lines, this may lead to inefficiencies and reverse the integration 
trend in the Internal Market. 

On  the  other  hand,  should  an  EU  cross-border  resolution  framework  be 
developed  in  which  allows  resolution  at  group  level,  the  implementation  and 
design  of  'funeral  plans'  need  not  fundamentally  affect  the  organisation  of 
groups  and  supervision,  since  resolution  measures  might  be  able  to  deal  more 
easily with the group structure.  

A  further  issue  to  be  assessed  is  the  extent  to  which  such  plans  would  be 
feasible  in  practice.  For  example,  to  what  extent  would  cross-border  banking 
groups  be  able  to  provide  own  accurate  and  comprehensive  analysis  of  how 
different national insolvency laws would apply across the group? And given the 
potential  detailed  nature  of  the  information  contained  in  the  plans  and  the 
dynamic  nature  of  banking  business,  to  what  extent  would  it  be  realistic  to 
expect that they could be kept up-to-date and relevant in a crisis situation? 

Section 4 –Questions 

(4) 

(5) 

Do  supervisors  need  additional  tools  and  powers  for  early  intervention,  and  if  so, 
which?  

Should the application of early intervention measures only be the result of supervisory 
(joint)  assessment  of  emergency  situations,  or  would  there  be  any  advantage  in 
structured or automatic triggers for early intervention? 

EN 

16 

   EN 

 
(6) 

(7) 

Is any modification of the current framework for the supervision of branches necessary 
or desirable? 

The  Commission  Services  invite  views  on  a  requirement  for  'wind  down'  plans.  In 
particular: 

•  Would 'wind down' plans provide useful information to managers and supervisory 

authorities?  

•  What kinds of institution should be required to prepare them? 

•  What should be the content of wind down plans?  

•  Should the development of wind down plans be closely linked to the design of a 

cross-border resolution framework?  

EN 

17 

   EN 

 
3. 

CHAPTER 3 - ASSET TRANSFERS 

Section 1 - The Issue  

The  transfer  of  assets  as  a  means  of  intra-group  financial  support  could  assist  groups  in 
managing liquidity positions and in some cases could help stabilise entities in a developing 
crisis.  There  is  currently  no  EU  authorisation  regime  for  asset  transfers,  and  there  are 
significant obstacles arising from company and insolvency law. 

47. 

48. 

The  conclusions  of  the  October  2007  ECOFIN  Council  requested  the 
Commission  "to  perform  a  feasibility  study  on  reducing  barriers  for  cross-
border  asset  transferability  while  introducing  appropriate  safeguards  within 
banking, insolvency and company law, taking into account that the reallocation 
of assets in a crisis affects the ability of stakeholders in different legal entities to 
pursue claims".16 The overall objective was to reinforce the primacy of private 
solutions,  avoid  counter-productive  ring-fencing  of  assets,  and  facilitate  a 
smooth  management  of  a  crisis.  Intra-group  asset  transfers,  if  made  at  a 
sufficiently early stage, may help to prevent liquidity problems from developing 
in a group company. 

Addressing  legal  obstacles  to  asset  transfers,  which  arise  in  the  context  of 
company  and  insolvency  law,  should  not  be  viewed  as  a  policy  objective  in 
itself. Most barriers in fact represent legitimate protections for stakeholders, and 
there  are  sound  policy  reasons  for  restricting  intra-group  transfers  in  order  to 
limit contagion risks.  

Section 2 – Current legal framework 

49. 

50. 

Asset  transfers  among  entities  within  a  group  are  a  common  and  every  day 
transaction  in  the  normal  course  of  business,  provided  that  the  legal  entities 
involved  meet  their  respective  prudential  requirements17  and  that  transactions 
are carried out at arm's length.  

There  is  no  EU  authorisation  regime  for  asset  transfers  (although  in  some 
Member  States  authorisation  by  supervisory  authorities  is  required18),  and  EU 
legislation  does  not  provide  a  general  framework  of  terms  and  conditions  for 
transfers.19 However, in principle, in all Member States asset transfers must be 
made for fair consideration, irrespective of whether they are between affiliated 

16 

17 

18 

19 

14 November 2008 Commission services report on asset transferability, see 
http://ec.europa.eu/internal_market/bank/docs/windingup/rep141108_en.pdf 
Prior  authorisation  by or notification of  supervisors  is only  required  in  some  countries (e.g.  Portugal, 
Italy and Poland) 
For  example,  in  Portugal  the  authorisation  of  a  transfer  by  the  supervisory  authorities  is  required  in 
crisis situations; in Italy transfers above a certain threshold must be authorised by the Bank of Italy; and 
in Poland authorisation is required when the transferee’s own funds constitute part of the assets being 
transferred.  
Recital 52 of Directive 2006/48/EC only specifies that the management of exposures should be carried 
out  in  a  fully  autonomous  manner,  in  accordance  with  the  principles  of  sound  banking  management, 
without regard to any other considerations.  

EN 

18 

   EN 

 
                                                 
51. 

52. 

53. 

or  unconnected  entities.  The  way  that  this  principle  is  expressed  and  given 
effect  varies  according  to  the  national  law.  Some  Member  States  prohibit 
'disadvantageous'  transactions  or  transactions  at  an  undervalue,  while  others 
impose the principle that transactions must be made at 'arms length', on standard 
commercial  terms.20  Moreover,  while  some  requirements  are  set  out  in 
legislation, many have been developed through case law.  

In  many  cases,  there  are  procedural  requirements  such  as  authorisation  by  the 
General  Assembly  of  the  supervisory  board.  Such  requirements  may  be 
triggered  by  the  size  of  the  transfer,21  the  fact  that  the  transfer  was  not 
concluded in the ordinary course of business,22 or because the transfer is made 
between connected parties.23 Authorisation requirements are generally designed 
to ensure adequate protection for shareholders and creditors. For example, in the 
Czech  Republic,  the  strict  regulation  of  intra-group  transfers  of  assets  was 
adopted  in  reaction  to  a  widespread  practice  of  disadvantageous  intra-group 
transfers in the 1990s.  

While  all  supervisors  have  the  power  to  restrict  intra-group  transfers24  with  a 
view  to  limiting  contagion  risks  in  stress  situations,  there  is  no  framework 
permitting  or  facilitating  the  transfer  of  assets  between  affiliated  entities  and 
significant  constraints  under  national  company,  insolvency  and  criminal  law 
which  may  impose  procedural  obstacles  even  to  transfers  that  are  supposedly 
carried  on  commercial  terms,  and  prevent  transfers  that  are  not  made  at  arms' 
length.  

Executing  transfers  on  preferential  terms  runs  the  risk  of  challenges  from 
minority shareholders or creditors, and may expose directors of the transferring 
company  to  civil  or  criminal  liability.  The  difficulties  and  justified  objections 
may be particularly pronounced where a transfer on preferential terms is made 
from  a  subsidiary  to  a  parent,  or  between  subsidiaries.  While  some  Member 
States  recognise  and  regulate  the  concept  of  a  'domination  agreement'  in 
national law,25 this is an exception to the general rule.  

20 
21 

22 

23 

24 

25 

In some jurisdictions, the concept of "group interest" may limit the arm's length principle. 
For example, in Austria, authorisation is required for an 'extraordinary transaction; in the Netherlands 
there  is  a  quantitative  trigger,  and  in  the  Czech  Republic  any  transfer  of  assets  between  companies 
within a group of a value exceeding 10% of the share capital requires an expert valuation of the assets 
to be transferred and the approval of the General meeting in certain cases.  
For example, in the Czech Republic, a transfer must be approved by the supervisory board if the value 
of  the  assets  transferred  within  one  accounting  period  exceeds  a  third  of  the  company’s  net  assets. 
However,  such  authorisation  is  not  required  when  the  transfer  is  agreed  in  the  normal  course  of 
business.  There  are  also  conditions  on  transfers  that  go  beyond  the  ordinary  course  of  business  in 
Luxembourg, Poland and Estonia.  
In  the  Czech  Republic,  prior  approval  of  the  General  meeting  is  required  for  transactions  between 
companies that are inter-related at board level unless the transaction is made at arms length. In France, 
authorisation is required if a transfer is not entered into under normal terms and conditions. In Spain, 
the General assembly must authorise a transfer of shares from a parent to a subsidiary. 
CEBS,  Mapping  of  supervisory  objectives  and  powers  including  early  intervention  measures  and 
sanctioning powers, January 2009. 
E.g. 'Control contract' in Hungary, control agreement in Germany, 'domination agreement' in the Czech 
Republic.  

EN 

19 

   EN 

 
                                                 
54. 

55. 

The fact of substantive differences between national insolvency regimes may in 
itself be a disincentive to asset transfer. If assets are transferred between entities 
in  different  jurisdictions  –  either  in  an  attempt  to  fortify  or  rescue  particular 
group  entities  or in  the context of  a group restructuring  - and the transferee is 
subsequently  wound  up,  the  administration  of  the  transferred  assets  will  be 
carried out under the applicable national framework. This may not provide the 
managers and stakeholders of the transferor with sufficient confidence that the 
transferor's  claims  to  the  assets  will  be  protected,  and  the  lack  of  any  formal 
framework  for  the  coordination  of  the  winding  up  of  group  companies  tends 
towards  conflict  and  litigation  between  jurisdictions,  as  the  insolvency 
authorities  of  the  individual  entities  assert  the  interests  of  their  particular 
creditors.  

Insolvency  law  poses  a  further  obstacle  to  any  constructive  use  of  intra-group 
asset transfer, for example to address short term liquidity problems of particular 
group  entities,  since  a  transfer  that  was  carried  out  during  the  'suspect'  period 
preceding the commencement of winding up proceedings may be retroactively 
invalidated. If the transferor subsequently enters insolvency proceedings, there 
is  a  risk  that  the  transfer  may  be  set  aside  or  challenged  if  it  was  made  at  an 
undervalue  or  was  detrimental  to  the  transferor  or  its  creditors.  Provisions 
conferring  on  administrators,  liquidators  or  creditors  the  power  to  challenge  a 
transaction exist in the insolvency law of most Member States, and the 'suspect' 
period  may  be  as  long  as  five  years  (for  example,  Hungary).  Similarly,  a 
preference  granted  by  the  transferee  to  the  transferor  with  the  objective  of 
protecting  the  claim  of  the  transferor  might  be  subject  to  challenge  by  the 
insolvency officer or creditors in the event of the winding up of the transferee. 
Risks  of  this  kind  undermine  the  legal  certainty  of  a  transfer  and  may 
discourage the use of asset transfer as a means of reinforcing a group entity or 
stabilising a group.  

Section 3 – Adequacy of the current framework 

56. 

The fragmented framework outlined above represents a significant obstacle to a 
coherent  and  coordinated  approach  towards  different  entities  of  a  cross-border 
group in crisis situations.  

Company law 

57. 

While  requirements  under  company  law  have  the  legitimate  and  necessary 
objective of protecting shareholders and creditors, they also limit the ability to 
move assets rapidly around a group where that may be needed in order to avert 
the  deterioration  of  a  group  member.  However  a  company  is  a  distinct  legal 
person and, with few exceptions, Member States' laws do not contain any legal 
concept  of  a  group  for  the  purposes  of  establishing  company  law  rights  and 
obligations.  In  the  absence  of  a  concept  of  'group  interest,26  directors  of  a 

26 

A concept of 'group interest' exists in a number of Member States. A concept of 'group interest' exists in 
a  number  of  Member  States.  For  instance,  Italian  law  defines  the  concept  of  banking  group  and  lays 
down  the  parent  company's  responsibility  for  the  sound  and  prudent  management  of  the  group  as  a 
whole.  Germany and Portugal have introduced formal group law in their companies legislation, and the 

EN 

20 

   EN 

 
                                                 
company  are  neither  responsible  to  other  group  entities,  nor  to  the  group  as  a 
whole, and should they act to promote the interests of the group in a way that is 
detrimental to their own company, they could be in breach of their duties and at 
risk of liability under national company law. Where a transfer may be deemed 
detrimental to shareholders or creditors, directors are at risk of civil or criminal 
liability under national law. This severely restricts any potential for using intra-
group  asset  transfer  as  a  tool  for  averting  or  managing  a  developing  liquidity 
crisis in a group entity. 

Insolvency law 

58. 

The  core  of  the  problem  for  cross-border  resolution  arrangements  and  intra-
group  asset  transfers  to  support  entities  with  liquidity  problems  is  the  concern 
that creditors will be worse off as a result of the arrangements or transfer than 
they  would  have  been  if  the  arrangements  or  transfer  had  not  taken  place  and 
insolvent entities had simply been wound up under the applicable national law. 
The powers to set aside transfers made during the 'suspect' period is, of course, 
designed  to  protect  creditors  against  precisely  this  kind  of  concern,  but  can 
create uncertainty for group entities wishing to engage in asset transfer.  

Section 4 – Possible ways forward 

Company law 

59. 

60. 

Introducing a concept of 'group interest' for banking groups might be one way 
of underpinning transfers and addressing the risks of liability for directors. Such 
a concept is currently developed in the national law of only a small minority of 
Member States27 and varies between those States where it exists. However, this 
concept  raises  a  number  of  challenges.  For  very  good  reasons,  both  company 
law and insolvency law remain focussed on the individual legal entity and the 
protection  of  its  shareholders  and  creditors.  Moreover,  directors  of  individual 
companies  may  not  be  able  or  willing  to  assess  the  group  interest,  and  the 
benefits of modifying company law to change the duties of directors to permit 
this are questionable.  

A  more  limited  concept  of  the  interdependence  and  mutual  interest  of  group 
companies has been developed in the 'Rozenblum' case law,28 and may provide 
an alternative set of framing principles for financial support for a group entity 
prior to insolvency and outside resolution measures. Described as constituting " 
the  clearest  common  denominator  found  in  group  law",29  the  Rozenblum 

concept has been developed in case law in other jurisdictions. For example, the 'Rozenblum' doctrine 
developed by the French Cour de Cassation sets clear criteria about the circumstances in which assets 
may  be  transferred  between  group  companies  for  the  purposes  of  mutual  support.  That  case  law  has 
been followed in Belgium. However, the development of a law on groups of companies in the 'Ninth 
Directive' was abandoned owing to strong opposition from a number of Member States 
This  is  provided  in  case  law  in  e.g.  BE  and  FR,  or  as  part  of  national  frameworks  for  groups  of 
company (e.g. DE, CZ,HU) 
French Cass. Crim, 4 February 1985. Similar case law exists in Belgium.  
Eddy Wymeersch, "Conflicts of interest in financial services groups" (see CESR web site).  

27 

28 
29 

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21 

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judgment ruled that transfers may take place between legal entities of the same 
group at agreed conditions (without considerations on transfer pricing) provided 
that the following conditions are met: 

–  there must be a policy with regard to the group as a whole; 

–  financial  assistance  should  not  occur  without  any  return  for  the  company 
providing the assistance nor should it disrupt the balance of mutual obligations; 

–  the  financial  assistance  should  not  exceed  the  capacity  of  the  company  that 

supports the burden. 

61. 

62. 

The judgment permits mutual support provided that "it does not take place on a 
unilateral  basis,  but  that  there  is  a  sufficient  quid  pro  quo  to  avoid  one  of  the 
partners  to  be  always  on  the  losing  side",  and  "that  support  does  not  exceed 
what can reasonably be expected from the supporting partner".30 Significantly, 
"this rule would forbid support being given in the light of insolvency or without 
necessary guarantees if the support could exceed the capacity of the creditor".31 
Any framework based on the conditions developed in this case law could only 
facilitate transfers made while the company receiving support was still solvent.  

The  Rozenblum  judgment  also  specifies  that  financial  support  should  be 
provided  in  accordance  with  conditions  agreed  by  shareholders  on  a  case-by-
case  basis.  Alternatively,  it  may  be  sufficient  to  require  that  financial  support 
may  take  place  only  in  accordance  with  a  general  agreement  whose  terms, 
policies  and  procedures  would  be  agreed  ex  ante  by  shareholders  of  all  legal 
entities within a banking group.  

63. 

If  pursued,  the  concept  of  'banking  group'  would  have  to  be  developed  in 
conjunction  with  a  framework  for  coordinated  or  integrated  treatment  of 
banking groups under insolvency, as outlined in Chapter 8.  

Insolvency law 

64. 

65. 

If a facilitating regime for financial support were to be based on these or similar 
principles, further thought would need to be given to protections for creditors of 
the  company  providing  the  support.  This  might  entail,  for  example,  a  priority 
ranking  for  that  company  under  the  applicable  national  insolvency  law  in  the 
event of the insolvency of the transferee.  

This  Chapter  has  focussed  on  the  transfer  of  assets  between  solvent  group 
entities. Financial support to an entity under resolution or 'intra-group' financing 
to support the reorganisation of a group as a whole, would need to be addressed 
in  the  context  of  insolvency  law.  Intra-group  financing  is  recognised  by 
UNCITRAL  as  a  key  component  of  group  insolvency  law,  and  raises 
fundamental  questions  about  whether,  in  the  circumstances  of  a  resolution, 
authorities should be able to override stakeholders' rights on financial stability 

30 
31 

Eddy Wymeersch, ibid., p.5. 
Eddy Wymeersch, ibid., p.6.  

EN 

22 

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grounds,  or  whether  any  decision  on  intra-group  financing  should  always  be 
subject to the consent of the creditors of the transferor.  

Section 5 –Questions 

(8) 

The  Commission  Services  invite  views  on  the  advantages,  if  any,  of  designing  a 
framework for asset transfers along the lines outlined above. 

(9) 

 What are the appropriate safeguards for creditors? 

(10) 

Is the concept of 'banking group' worth exploring further?  

EN 

23 

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4. 

CHAPTER 4 - RESOLUTION TOOLS 

Section 1 - The Issue  

National approaches to bank resolution fall broadly into two categories: those that operate 
under  general  corporate  insolvency  law,  including  administration  and  those  that  have  a 
special regime for banks. In both cases, the rules are limited to national banking operations. 
They do not, and cannot, apply on a cross-border basis. An effective range of tools must give 
authorities options other than public financial support and liquidation to address problems in 
an ailing bank.  

Section 2 – The current legal framework 

Member States' legal frameworks to deal with bank crisis differ  

66. 

67. 

There  is  no  harmonisation  at  EU  level  of  the  national  laws  governing  bank 
resolution.  Beyond  introducing  a  minimum  set  of  powers  for  supervisory 
authorities  aimed  at  restoring  the  situation  of  a  bank,32  and  establishing 
arrangements  for  the  winding-up  and  reorganisation  of  credit  institutions  with 
branches in other Member States,33 no EU framework exists which sets out how 
and under which conditions authorities should act in the event of a crisis arising 
in a bank.  

The management of crises is almost entirely governed by national laws. A study 
carried out on behalf of the Commission services34 provides evidence about the 
extent to which Member States' arrangements differ: they are based on different 
approaches, pursue different goals and have been designed to fit with the wider 
legal  system  of  each  country  (for  example,  provisions  governing  commercial 
and contract law, ownership law, labour law, netting and set-off, tax law). The 
powers to manage bank crises are split between different domestic authorities, 
ranging from supervisory authorities, to central banks, to government ministries, 
judicial  authorities  and  in  some  cases  deposit  guarantee  schemes.  Finally  the 
extent of powers and the conditions governing their use also differ according to 
each national system.  

32 
33 

34 

These powers are described in Chapter 2. 
The EU Directive on reorganisation and winding up of credit institutions (CIWUD) sets out how credit 
institutions  with  cross-border  branches  may  be  reorganised  or  wound  up  (under  the  home  state 
insolvency proceedings). However the Directive does not extend to cross-border subsidiaries and was 
never intended to harmonise insolvency proceedings, as national laws were at the time believed to be 
sufficient.  
In  2008,  the  Commission  engaged  consultants  DBB  Law  to  carry  out  a  survey  in  the  context  of  the 
study on "Study on the feasibility of reducing obstacles to the transfer of assets within a cross border 
banking group during a financial crisis and of establishing a legal framework for the reorganisation and 
winding-up  of  cross  border  banking  groups".  The  survey  covered  the  following  EU  Member  States: 
Austria, Belgium, Czech Republic, Denmark, Estonia, France, Germany, Hungary, Italy, Luxembourg, 
Poland, Portugal, Romania, Spain, Sweden, the Netherlands and the United Kingdom. 

EN 

24 

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Bank-specific regimes vs. corporate insolvency law 

68. 

The first major difference is in the basic design adopted by Member States for 
their  bank  resolution  frameworks.  The  International  Monetary  Fund  has 
identified two possible broad approaches:35  

•  Bank specific regimes, which treat banks which are insolvent or likely to become 
insolvent  differently  from  other  commercial  entities  (including  other  kinds  of 
financial institution); 

•  General corporate insolvency regimes, where no specific framework applicable to 

banks exists. 

69. 

70. 

However in practice the situation in EU Member States is more nuanced: certain 
bank  specific  regimes  are  in  fact  largely  based  on  or  refer  to  corporate 
insolvency law for all aspects not regulated by the specific regime,36 while most 
corporate insolvency laws contain provisions which are adapted to the particular 
problems of a bank insolvency.37  

The  distinction  is  nonetheless  significant in  one  important  respect.  The  choice 
of  regime  under  which  to  carry  out  a  reorganisation  of  a  bank  may  affect  the 
outcome if the objectives pursued are not the same: 

•  Bank  specific  regimes  generally  seek  to  achieve  broader  social  objectives 
including  the  preservation  of  financial  stability,  continuity  of  key  banking 
services,  protection  of  insured  depositors  and  the  minimisation  of  costs  to  the 
public;  

•  In the case of corporate insolvency law, by contrast, objectives pursued are aimed 
at achieving fair and predictable treatment of creditors and maximisation of asset 
value in the interest of creditors. 

Judicial vs. administrative proceedings  

71. 

A further important distinction between systems is whether they are managed as 
part  of  court-based  procedures  (“judicial”),  or  whether  they  are  initiated  and 
conducted  by  administrative  authorities  without 
involvement 
(“administrative”). 

judicial 

35 

36 

37 

See  "Overview  of  the  Legal,  Institutional,  and  Regulatory  Frameworks  for  Bank  Insolvency",  2009, 
International Monetary Fund. 
For  instance,  Article  80  (6)  of  the  Italian  Banking  Law,  governing  the  proceedings  of  'compulsory 
administrative liquidation' for banks, refers to the Italian bankruptcy law as regards all the aspects not 
covered by these specific proceedings.  
for instance banking supervisors may play a role in insolvency proceedings e.g. the supervisor may be 
the initiator of proceedings, to the exclusion of debtors and creditors (e.g. in the case of German law), 
or  the  supervisor  may  make  a  proposal  to  the  Court  concerning  the  appointment  of  an  administrator 
(e.g.  HU),  or  the  supervisor's  approval  may  be  required  for  certain  decisions  in  order  to  ensure 
compliance with banking regulations (e.g. in Sweden the only exception to corporate insolvency law is 
that the financial supervisory authority appoints a general representative in the proceeding to participate 
in the management of the bankruptcy estate together with the receiver appointed under the bankruptcy 
code)..  

EN 

25 

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•  General corporate insolvency proceedings are invariably initiated and overseen by 

the courts and carried out by court-appointed officials;  

•  Bank-specific  regimes  can  on  the  other  hand  be  either  court  based  or 
administrative. In certain cases the administration is conducted by administrative 
authorities, although this may be subject to judicial oversight, and the liquidation 
proceedings remain under the control of the judicial authorities.38  

72. 

As bank resolution may require authorities to be in a position to act quickly and 
decisively  in  order  to  safeguard  financial  stability,  a  system  which  relies  on 
court  procedures  may,  unless  special  procedures  exist,  be  insufficiently 
responsive  in  urgent  situations  and  may  not  be  able  to  take  account  of  the 
particular characteristics of banks and of bank insolvency. On the other hand, a 
system which relies on the powers of administrative authorities may be less well 
adapted to ensuring legal certainty and adequate protection of stakeholders.  

73. 

Given  the  different  national  approaches,  any  new  EU  framework  will  need  to 
carefully  consider  the  correct  balance  between  the  potentially  conflicting 
outcomes delivered by different systems. 

A graduated approach to reorganisation, resolution and liquidation 

74. 

75. 

Regardless of whether the regime is bank specific or based on general corporate 
insolvency, most national systems offer the options of re-organisation or, where 
there is no reasonable prospect of restoring the business, an orderly liquidation. 
In  some  Member  States,  an  institution  may  be  placed  under  “special 
administration”39  where  an  official  authority  takes  control  of  the  bank  and 
decides on the extent to which it can be re-structured or liquidated. The extent 
of  this  control  varies:  in  some  Member  States  (for  example,  France  and  Italy) 
the  administrator  can  replace  the  management  of  the  bank  entirely,  while  in 
others (for example, Austria and Luxembourg) the administrator only supervises 
the management and controls decisions which go beyond the ordinary course of 
business.  

Official administration only lasts for a limited period (Italy, Romania, Austria: 
one year, Estonia: six months) after which, if not successful, the bank is wound 
up.  In  certain  countries  the  official  administration  must  necessarily  precede 
liquidation, while in others (for example, Italy) it is not a pre-requisite. In some 
Member  States,  the  official  administration  also  involves  a  "moratorium"  or 
suspension of payments. Depending on the system, the moratorium may simply 
entail a stay of the enforcement actions by creditors, a partial suspension of the 
payment  of  debts,  or  a  total  suspension  of  all  the  payment  and  collection 

38 

39 

For  example,  Estonia  has  2  types  of  proceedings:  one  administrative  (moratorium)  aimed  at  the 
recovery of the bank and one judicial (ordinary bankruptcy proceedings adapted to banks).  
This  general  form  of  proceedings  has  been  identified  by  the  IMF  in  its  ""Overview  of  the  Legal, 
Institutional, and Regulatory Frameworks for Bank Insolvency", 2009 (see p. 26 and following), on the 
basis  of  certain  common  characteristics.  However,  the  IMF  notes  that  the  terminology  varies  widely 
from  country  to  country.  In  the  EU  panorama,  examples  of  this  form  of  proceedings  are  the  special 
administration  (amministrazione  straordinaria)  in  Italy,  rehabilitation  proceedings  (postępowanie 
naprawcze) in Poland, receivership (Geschäftsaufsich) in Austria. 

EN 

26 

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76. 

77. 

activities  of  the  bank.  In  some  countries  (for  example,  Luxembourg,  Estonia), 
the  moratorium  is  automatic,  while  in  others  it  is  at  the  discretion  of  the 
authorities (for example, Italy).  

In certain systems (for example, Italy) liquidation proceedings may also be used 
to sell the business as a going concern, and leaving only a residual non viable 
part of the bank with the original legal entity for liquidation.  

The  common  trait  of  such  frameworks  is  that  they  provide  for  a  graduated 
approach  to  intervention,  first  seeking  a  resolution  with  the  agreement  of 
stakeholders,  and  involving  more  intrusive  powers  to  authorities  only  in  the 
context of a liquidation. The Italian approach to resolution is presented in more 
detail below. Importantly, a 'graduated approach' does not mean that resolution 
always  needs 
in  appropriate 
circumstances, the consent of shareholders may help the restructuration process.  

follow  pre-determined  stages,  but, 

to 

The Italian approach to resolution 

In Italy, banks can be reorganised under a "special administration" system which can be ordered by the 
Minister for the Economy and Finance, acting on a proposal from the Banca d'Italia. The procedure 
can last up to one year. Conditions for special administration include: 

i) there must be serious administrative irregularities or serious violations of laws governing the bank's 
activities; 

ii) serious capital losses or illiquidity which can affect the stability of the whole financial system are 
expected.  

The  Banca  d'Italia  appoints  one  or  more  special  administrators  and  an  oversight  committee.  The 
special administrator exercises the administrative powers of the bank and is entrusted with eliminating 
irregularities  and  promoting  solutions  that  protect  the  interests  of  the  depositors.  This  may  include 
proposing a restructuring plan for the bank which may entail a merger, acquisition, or partial sale of 
assets. Under the special administration the shareholders are deprived of certain rights, although they 
maintain the right to decide on any restructuring operation that is normally subject to their approval.  

Subject  to  the  authorisation  of  the  Banca  d'Italia,  the  administrator(s)  may  suspend  payment  of  the 
bank's liabilities of whatever kind and the restitution to customers of financial instruments connected 
with the provision of investment services for a  period of up to one  month. The suspension does not 
constitute insolvency. 

The Ministry of Economy and Finance, on a proposal from the Bank of Italy, can withdraw the licence 
of a bank and commence its liquidation (Compulsory Administrative Liquidation) if the administrative 
irregularities  or  violations  of  laws,  regulations  or  bylaws  or  the  losses  are  exceptionally  serious. 
Liquidators  can  take  any  decision  concerning  the  restructuring  of  the  bank  without  the  need  for  the 
shareholder  approval.  The  law  allows  the  liquidator  to  sell  all  or  part  of  the  assets.  The  Deposit 
Guarantee  Scheme  may  decide  on  the  basis  of  the  "least  cost  solution"  whether  to  pay  out  the 
depositors or finance the sale of the business. 

78. 

Spain  has  recently  reformed  its  legal  framework  for  dealing  with  stressed 
banks40 and has introduced a graduated approach. Restructuring of banks takes 

40 

Royal Decree of 27 June relating to the Fund for Orderly Bank Restructuring 

EN 

27 

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the  adoption  of  restructuring  measures  with 

place  in  three  stages.  Under  the  first  stage,  a  purely  private  sector  solution  is 
sought without the intervention of the Deposit Guarantee Scheme ('DGS'). The 
second  stage  entails 
the 
participation of the DGS. The third stage entails the restructuring process with 
the intervention of the Fund for Orderly Bank Restructuring. When a bank is in 
the third stage, the Bank of Spain will replace its managers by those appointed 
by the Fund. The Fund will report on the financial institution and will submit a 
restructuring plan to the Bank of Spain.  

Immediate pre-emptive resolution 

79. 

80. 

A  significantly  different  approach  is  adopted  in  the  context  of  the  recently 
adopted UK special resolution regime.41  

The UK special resolution regime prioritises the objectives of the protection and 
enhancement of the stability of the financial system and of public confidence in 
the  banking  system,  the  protection  of  depositors  and  of  public  funds,  and 
facilitates  rapid  and  intrusive  action  by  the  administrative  authorities.  The 
relevant UK authorities may sell all or part of the business or of the shares of 
the  bank  to  a  private  purchaser,  or  to  transfer  all  or  part  of  the  business  to  a 
publicly  owned  'bridge  bank',  or  to  take  the  bank  into  temporary  public 
ownership. Importantly, these actions can be taken by the authorities without the 
consent  of  the  shareholders  and  the  creditors.  These  arrangements  allow  for  a 
splitting  of  the  viable  part  of  the  business  which  is  transferred  to  a  private 
purchaser or to a new legal entity from the non-viable part of the business which 
is  left  with  the  original  legal  entity.  The  original  legal  entity  may  be  kept 
functioning for some time under administration if it needs to provide essential 
services  to  the  transferred  business.  Eventually,  the  original  legal  entity  is  put 
into liquidation.  

Tools for dealing with bank crisis  

81. 

82. 

National  crisis  management  frameworks  also  differ  as  regards  the  tools  that 
authorities may employ to take control of a bank and to remedy the situation, or 
at least to manage its failure. 

In most Member States, general insolvency frameworks include reorganisation 
tools which can also be applied to banks. These include: 

–  the arrangement of mergers or acquisitions (by transfer of shares to a third party); 

–  agreements with creditors concerning reduction of debt, debt restructuring, debt-

equity conversion; 

–  asset sales; 

–  closure of non-viable parts of the business. 

41 

See: http://www.bankofengland.co.uk/financialstability/role/risk_reduction/srr/index.htm 

EN 

28 

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83. 

In certain Member States, more specific techniques for bank restructuring may 
also be available:  

–  purchase-and-assumption transactions (transfer of some or all of the bank's assets 

and liabilities to a purchaser); 

–  the creation of “good” and  ”bad” banks and bridge banks (that is, the sale of non-
performing  loans  and  other  substandard  assets  for  collection  to  an  asset 
management vehicle, or the transfer of viable assets to a bank established for that 
purpose and generally owned, at least in part, by the State); 

–  nationalisation. 

84. 

In the EU, only the UK Banking Act 2009 confers dedicated bank restructuring 
tools  which  can  be  applied  by  the  authorities  without  the  consent  of  the 
stakeholders.  However, 
in  other  Member  States,  specific  restructuring 
techniques,  although  not  detailed  in  a  special  regime  for  bank  resolution,  may 
be  available  under  either  administrative  or  judicial  proceedings  applied  to 
banks.  

–  In  Italy,  for  example,  the  law  does  not  specify  which  techniques  the  appointed 
special administrator may use, but the powers are set more broadly with the law 
stipulating that the administrator must promote helpful solutions in the interest of 
depositors.  Wide  interpreted,  such  ‘solutions’  may  include  a  merger,  acquisition 
or  partial  sales  of  assets.  However  an  important  difference  compared  to  the  UK 
system  is  that  shareholders  retain  the  right  of  approval  for  any  reorganisation 
measure. 

–  In France, the provisional administrator nominated by the banking supervisor may 
conclude  transactions  in  the  ordinary  course  of  business.  However  a  more 
intrusive  intervention  entailing  a  transfer  of  shares  without  the  shareholders’ 
authorisation requires the administrator to obtain a court order. Settlements with 
creditors may be achieved through various types of proceedings at the initiative of 
the  debtor.42  Specific  bank  re-structuring  techniques  may  only  be  used  under  an 
insolvency proceeding.  

–  In Germany, the legal framework does not provide a bank specific administrative 
reorganisation,  however  under  the  corporate  insolvency  law  certain  techniques 
(e.g. asset sales) are possible subject to the approval of creditors.  

85. 

There  are  significant  differences  and  gaps  in  the  tools  provided  under  the 
current legal framework in Member States. Voluntary reorganisation, involving 
the  consent  of  shareholders  or  creditors,  may  not  always  produce  the  desired 
results:  indeed,  there  have  been  several  cases  during  the  recent  crisis  where 
shareholders have obstructed or challenged action proposed or taken by national 
authorities.43  Furthermore,  while  generally  framed  laws  may  offer  greater 

42 

43 

For instance, France has three types of proceedings provided by the commercial code and applicable to 
banks,  aimed  at  a  settlement  with  creditors:  the  "ad  hoc  mandate",  the  composition  procedure  and 
safeguard procedure.  
For example in the cases of restructuring Northern Rock, Fortis and HRE. 

EN 

29 

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flexibility to take the requisite measures, a legal framework that confers specific 
measures  and  sets  out  clearly  the  conditions  for  their  use  would  minimise 
problems  of  legal  uncertainty  and  the  risk  of  challenge.  Finally,  the  lack  of 
adequate re-structuring tools may mean that authorities resort more quickly and 
more frequently to financial support with public funds, and may result in more 
costly crisis resolution. 

Section 3 – Adequacy of the current framework 

How national regimes meet the objectives of a resolution framework 

86. 

87. 

Recent experience has highlighted a number of gaps and deficiencies in national 
systems for bank resolution. Certain types of procedure are not well-adapted to 
the  specific  nature  of  the  banking  sector  and  the  imperatives  of  preserving 
financial stability  and  confidence in the  banking system. The crisis has  shown 
that  fast,  effective,  and  legally  sound  stabilisation  or  resolution  is  essential. 
However,  under  some  systems  emergency  measures  can  be  frustrated  by 
shareholder protections, while other systems quite simply lack the possibility to 
re-organise a bank on a non-voluntary basis.  

Ordinary  insolvency  proceedings  may  be  too  slow  or  too  costly  to  fulfil 
financial  stability  objectives.  There  are  compelling  reasons  for  enhancing 
national regimes to adapt them better to the specific problems and objectives of 
bank resolution:  

•  Unless  authorities  are  equipped  with  adequate  stabilisation  tools,  they  may  be 

forced into bailing out banks;  

•  With appropriate tools, losses can be more easily directed onto shareholders and 

creditors rather than tax-payers; 

•  When  ordinary  bankruptcy  is  viewed  as  too  costly  or  to  pose  too  great  a  risk  to 
financial  stability,  bankruptcy  ceases  to  be  a  credible  threat.  This  undermines 
market discipline and creates moral hazard;  

•  Continuity of services is key to financial stability. 

The inconsistency of national tools for effective coordination  

88. 

The  scope  for  effective  cross-border  resolution  is  severely  limited  where 
national authorities do not share a common set of tools. As a basic example, if 
one national authority has the power to transfer assets to a third party purchaser 
by  executive  order,  while  another  cannot  do  so  other  than  by  judicial 
proceedings,  a  rapid  and  coordinated  intervention  by  those  two  authorities  to 
deal with affiliated banks in their respective jurisdictions might be difficult. The 
problem  is,  of  course,  exacerbated  if  one  of  the  national  authorities  involved 
does  not  have  the  necessary  power  at  all.  This  would  prevent  national 
authorities from acting rapidly in a coordinated way to stabilise a cross-border 
group and to ensure business continuity. 

EN 

30 

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89. 

The  reorganisation  of  a  banking  group  is  likely  to  be  more  difficult  if  a  one 
member  is  subject  to  a  moratorium  or  suspension  of  payments  and  stops 
functioning  as  a  going  concern  while  other  entities  continue  their  business. 
While  the  suspension  of  certain  creditors'  claims  may  be  appropriate  for  an 
ordered  resolution,  an  automatic  and  complete  moratorium  for  an  inflexible 
period specified by law would result in a loss of value of the bank, prevent the 
continuity of services and undermine depositor confidence. Only a discretionary 
moratorium,  limited  to  the  time  and  scope  strictly  necessary,  would  be 
compatible with the objectives of continuity of services, financial stability and 
cost minimization.  

Speed of intervention 

90. 

91. 

The point at which resolution measures can be imposed is also crucial. Not all 
Member State authorities have the power to intervene to stabilise and reorganise 
an ailing bank at an early stage before the formal point of insolvency (as defined 
in  national  law)  is  reached.  The  lack  of  harmonised  threshold  conditions  – 
which when crossed permit a national authority to intervene and take control of 
a  troubled  institution  in  specified  ways  –  may  prevent  coordinated  action  in 
relation to a cross-border group. This is further discussed in Chapter 5. 

Procedural  differences  can  also  have  an  impact  on  the  timing  of  coordinated 
measures. Where the necessary measures require judicial approval or have to be 
taken with in the framework of court-directed insolvency proceedings, they may 
not necessarily lend themselves to a timely and fast crisis intervention. While a 
graduated approach may be preferable where developing problems are identified 
at  a  sufficiently  early  stage,  a  legal  regime  that  is  based  on  a  graduated 
intervention may not deal effectively with cases where serious problems emerge 
quickly and decline is rapid. 

Reorganisation measures cannot be applied at group level 

92. 

Reorganisation  measures  under  insolvency  law  only  cater  for  national  entities. 
This means that the national conditions for reorganisation would have to be met 
for each relevant group entity and that the relevant authorities in Member States 
where  legal  entities  of  the  group  are  incorporated  will  have  to  cooperate  in 
applying such measures to each legal entity.  

Section 4 – Possible ways forward 

93. 

While it may be appropriate to preserve a wide range of possibilities in Member 
States'  national  toolkits,  the  following  resolution  tools  may  be  necessary  to 
deliver the objectives of an EU bank resolution framework:44  

–  The  power  to  arrange  acquisition  by  a  private  sector  purchaser:  this  will 
frequently  be  the  best  way  to  achieve  the  objectives  of  business  continuity, 

44 

EN 

See  IMF  working  paper  "The  Need  for  Special  Resolution  Regimes  for  Financial  Institutions—The 
Case 
Nier, 
http://www.imf.org/external/pubs/ft/wp/2009/wp09200.pdf 

European 

Union", 

Martin 

Erlend 

Čihák 

and 

the 

of 

31 

   EN 

 
                                                 
financial stability and minimising the cost to the public purse. It also effectively 
protects  the  interests  of  creditors  and  counterparties,  whose  exposures  to  the 
failing  institution  are  replaced  by  claims  on  a  stronger  institution.  National 
authorities  need  to  have  the  power  to  transfer  the  institution  to  a  private  sector 
purchaser without seeking or obtaining the consent of the existing shareholders. 

–  The power to transfer  assets and liabilities  to a bridge bank: a 'bridge  bank'  is a 
temporary  licensed  banking  institution  created,  and  generally  owned  by  or  on 
behalf  of,  the  national  authority  to  take  over  the  viable  business  of  the  failing 
institution and preserve it as a going concern while the authority seeks to arrange 
a permanent resolution, such as to a suitable private sector purchaser. The residual 
failing institution can then be wound up, once its services are no longer required, 
in an orderly manner.  

–  The power to partially transfer assets to a 'bad bank': authorities should also have 
the power to separate good from bad assets by selling non-performing loans and 
'toxic'  or  difficult-to-value  assets  to  a  separate  asset  management  vehicle  (often 
referred to as a 'bad bank'). The aim is to sanitise the balance sheet of the failing 
bank in order to restore it to viability or with a view to facilitating a private sector 
solution.  

94. 

The resolution tools prescribed under an EU regime could be exercised either by 
national  resolution  authorities  or  by  special  administrators  appointed  under 
national  law.  That  is,  a  bank  resolution  regime  could  be  combined  with  a 
national system of "special administration" provided the special administrators 
have the power to take the necessary measures quickly and without procedural 
hurdles  that  would  impede  their  effectiveness.  In  this  respect,  the  IMF 
recommends  that  "the  law  should  make  clear  that  the  official  administrator  is 
authorised not merely to take normal managerial decisions, but also to decide on 
and  implement  far-reaching  corporate  actions  of  the  type  that,  in  a  normal 
situation,  would  require  shareholders'  approval  (for  example,  the  sale  of  all  or 
parts of the bank's business), provided that for some decisions the approval of 
the court or the relevant banking authorities may be required."45  

Section 5 – Questions 

(11)  Which  objectives  should  bank  resolution  tools  seek  to  pursue?  Which  objectives 

should be prioritised? 

(12)  What  resolution  measures  are  necessary?  In  particular,  would  the  resolution  tools 

outlined in paragraph 92 be appropriate and sufficient for an EU regime?  

(13)  Would  administrative  reorganisation  (as  described)  be  a  viable  option  for  financial 
institutions – or might there be a risk that the appointment of an administrator could 
exacerbate liquidity problems due to loss of confidence?  

45 

IMF and World Bank, April 2009, An Overview of the Legal, Institutional, and Regulatory Framework 
for Bank Insolvency 

EN 

32 

   EN 

 
                                                 
5. 

CHAPTER 5 – THRESHOLD CONDITIONS FOR RESOLUTION 

Section 1 - The Issue  

Clear "threshold conditions" that must be met before the powers of intervention are triggered 
are  central  to  an  EU  resolution  regime.  They  facilitate  coordinated  action  by  national 
authorities,  reduce  the  risk  of  challenge,  and  provide  legal  certainty  for  shareholders  and 
creditors as to the circumstances in which action might be taken. The threshold conditions for 
an  EU  regime  should  allow  intervention  at  the  appropriate  stage,  while  being  sufficiently 
rigorous to ensure that intervention which interferes with the rights of stakeholders is justified 
by  clear  public  interest  in,  for  example,  financial  stability  and  the  continuity  of  banking 
services. 

Section 2 – Current legal framework 

95. 

Conditions  which  determine  how  and  when  authorities  may  intervene  are  a 
crucial  component  of  a  bank  resolution  regime.  Depending  on  how  conditions 
are  set,  they  can  either  enhance  or  restrain  the  ability  of  authorities  to  take 
preventative  or  remedial  action.  The  ability  to  take  measures  to  intervene  in  a 
timely manner, which may be before the bank is technically insolvent, may be 
crucial for the objectives of ensuring continuity of services, preserving financial 
stability and minimising public costs.  

•  Conditions for entering insolvency 

96. 

Although  the  terminology  may  be  different  the  relevant  thresholds  under 
insolvency law are generally based on one or both of two concepts:  

•  the "illiquidity threshold", i.e. the debtor is unable to meets its obligations as they 

fall due;46 and  

•  the "balance sheet threshold", i.e. the entity's balance shows a negative net worth 

(the liabilities exceed the assets).  

97. 

98. 

Austrian  law,  for  example,  provides  that  when over-indebtedness  or  illiquidity 
can be remedied, the credit institution or the supervisor may request an order for 
receivership from the court.47  The threshold for the commencement of winding 
up is only reached where the over-indebtedness or liquidity cannot be remedied.  

In  some  Member  States  the  threshold  for  intervention  is  the  "imminent 
insolvency" of the debtor, that is, where the debtor is likely to be unable to pay 
future  obligations  when  they  fall  due.  For  example,  as  a  modification  to 
ordinary French corporate insolvency law, credit institutions are deemed to be 
insolvent  if  they  are  actually  unable  to  meet  their  current  liabilities  or  will  be 
unable to do so in the near future. 

46 
47 

This threshold is defined as "general cessation of payments" in certain systems.  
Section 83, subsection 1 BWG. 

EN 

33 

   EN 

 
                                                 
•  Conditions for pre-insolvent intervention 

99. 

100. 

Member  States  which  permit  bank  intervention  at  an  early  stage  of  financial 
distress also set the conditions for the exercise of powers. These thresholds are 
generally  what  the  International  Monetary  Fund  has  termed  "regulatory 
thresholds",48  that  is,  they  are  based  on  the  breach  of  banking  regulatory 
requirements  rather  than  the  threshold  conditions  for  general  corporate 
insolvency. The conditions differ between systems: they may refer to the breach 
of either specific rules or of banking regulations generally, and they may be of a 
qualitative  or  a  quantitative  nature  (that  is,  focussed  on  capital  requirements). 
Their aim is to allow authorities to intervene before insolvency - while the bank 
still has a positive net worth.  

it 

to  permit 

In UK for example, under the new Banking Act, one of the threshold conditions 
for  intervention  is  that  the  bank  is  failing,  or  is  likely  to  fail,  to  satisfy  the 
to  carry  on  regulated  activities.  In  Poland, 
conditions 
“rehabilitation” proceedings should be applied if the bank incurs a balance sheet 
loss,  or  if  there  appears  to  be  a  threat  of  a  balance  sheet  loss  or  risk  of 
insolvency. In Hungary, a list of detailed regulatory conditions is set out by law, 
and  these  include  both  qualitative  conditions  and  the  failure  to  meet  capital 
requirements. 

•  Threat to financial stability as a condition 

101. 

In many Member States a necessary condition for more intrusive forms of crisis 
intervention is the risk to the financial stability.  

•  In the UK, the Treasury or the Bank of England may exercise the "private sector 
purchaser"  and  "bridge  bank"  options  only  on  condition  that  the  stability  of  the 
financial  systems  of  the  UK,  or  the  maintenance  of  public  confidence  in  the 
stability of the banking system is jeopardized or in order to protect depositors.  

•  The Italian law also refers to the risk to the stability of the financial system as one 

of the possible conditions for the special administration.  

•  In  the  Czech  Republic,  a  bank  may  be  put  into  administration  if  its  continued 

operation endangers the stability of the banking system. 

Section 3 – Adequacy of Threshold Conditions 

102. 

Any  measures  to  stabilise  a  bank  which limit the rights of stakeholders would 
need to be based on a clear demonstration that the action is proportionate to the 
seriousness of the problems in the institution in question and driven by the clear 
public interest in, for example, financial stability and the continuity of banking 
services.  

103. 

However, the public interest in ensuring the continuity of banking services and 
in  an  orderly  resolution  also  means  that  intervention  should  be  possible  at  a 

48 

See  "Overview  of  the  Legal,  Institutional,  and  Regulatory  Frameworks  for  Bank  Insolvency",  2009, 
International Monetary Fund. 

EN 

34 

   EN 

 
                                                 
stage before the bank is “balance sheet” insolvent: that is, before the bank has 
reached  the  relevant  threshold  for  the  purposes  of  ordinary  insolvency 
proceedings.  If  authorities  cannot  intervene  before  the  bank  is  technically 
insolvent, this is likely to limit the choice of effective  options for  stabilisation 
and  resolution,  or  increase  the  amount  of  public  funds  that  will  need  to  be 
committed in support of such an option. 

104. 

Broadly  speaking,  there  are  two  approaches  to  defining  the  appropriate 
conditions to trigger stabilisation and resolution measures. The first is based on 
hard solvency triggers which define when a bank is critically undercapitalised. 
If a bank falls below the solvency threshold, authorities can be entitled, or even 
required,  to  take  action.  The  US,  for  example,  applies  a  mandatory  threshold 
based on leverage ratio.  

105.  While  providing  an  effective  means  of  ensuring  common  and  predictable 
supervisory  responses,  triggers  based  on  the  solvency  of  an  institution  have 
proved  irrelevant  during  the  current  crisis,  in  so  far  as  the  most  relevant 
weakness facing institutions has been absence of liquidity. Because a bank is at 
risk of a run, an illiquidity problem can turn very rapidly into insolvency. The 
current crisis has clearly shown that capital ratios cannot capture all the possible 
material information which is necessary to detect problems in a bank at an early 
stage.  

106. 

107. 

The  second  approach  uses  a  soft  regulatory  threshold  which  involves  a  more 
nuanced  supervisory  judgment  and  may  allow  the  relevant  authority  greater 
discretion  as  to  whether  to  intervene.  The  UK  Special  Resolution  Regime,  for 
example,  is  triggered  by  such  a  soft  threshold  based  on  the  regulator's 
assessment  of  whether  the  bank  is  failing,  or  is  likely  to  fail,  to  meet  the 
conditions of authorisation (which include an assessment of its capital and more 
generally  the  'adequacy  of  the  firms'  resources')49  and  unlikely  (without 
intervention)  to  be  able  to  remedy  that  failure,  coupled  with  a  public  interest 
condition. Under an EU regime, a 'public interest' test might include a European 
dimension,  requiring  national  authorities  to  take  into  account  the  impact  of 
national measures on the financial stability in other Member States.  

A clear framework for intervention will reduce the risk of challenge to actions 
taken  by  national  authorities,  and  provide  legal  certainty  for  shareholders  and 
creditors  about  the  circumstances  in  which  action  might  be  taken  and  the 
protections  conferred  upon  them.  In  order  to  increase  the  legal  certainty  of 
resolution  measures,  it  may  be  appropriate  to  limit  the  grounds  for  judicial 
review.  For  example,  legal  challenges  to  measures  taken  under  a  statutory 
framework  might  be  restricted  to  the  review  of  the  legality  of  an  authority’s 
action. That is, a review would determine whether the authority acted within its 
powers and whether measures were proportionate to the public interest at stake, 
but  would  not  allow  judicial  authorities  to  reassess  any  exercise  of  discretion 
unless there was clear evidence of a manifest error of fact, an abuse of power or 
bad  faith.    This  would  not,  or  course,  preclude  challenge  under  the  European 
Convention on Human Rights (see Chapter 7). 

49 

Conditions for licensing a bank are harmonised under Directive 2006/48/EC. 

EN 

35 

   EN 

 
                                                 
Section 4 – Possible ways forward 

108. 

A  regime  which  gives  authorities  the  power  to  take  exceptional  action  or  to 
intervene in the management, structure or activities of an undertaking needs to 
set clear conditions defining when that action can be taken. The conditions will 
reflect  the  nature  of  the  intervention  in  question,  the  stage  at  which  it  is  most 
useful  or  appropriate,  and  the  degree  of  interference  with  stakeholders'  rights 
that the intervention entails. 

Section 5 – Questions 

(14)  What threshold conditions would be appropriate for the use of resolution tools? 

(15)  Should different conditions be defined for the use of different tools, and in particular 

in the case of a graduated approach to resolution?  

EN 

36 

   EN 

 
6. 

CHAPTER 6 - ANCILLARY MEASURES TO SUPPORT RESOLUTION 

Section 1 – The Issue 

Reorganisation  measures  that  split  a  financial  group,  or  transfer  parts  of  the  business  to 
another  institution  may  disrupt  operations  and  contractual  arrangements  or  affect  market 
counterparties. Safeguards may be necessary to ensure continuity of services and financing as 
well as appropriate protection of the rights of shareholders and creditors. 

Section 2 – Continuity of services 

109. 

Reorganisation  measures  need  to  be  effected  in  such  a  way  that  they  do  not 
cause critical disruption to business operations. A resolution framework would 
need  to  ensure  that  both  the  residual  company  (in  the  event  of  the  transfer  of 
business to a bridge bank or a partial sale to  a private sector entity) and other 
group  entities,  could  be  required  to  provide  the  support  needed  to  ensure  the 
continuity  of  banking  services  by  the  bridge  bank  or  purchaser.  Such  support 
might  be  necessary,  for  example,  where  certain  systems,  contracts  or  services 
necessary to the operation of a bridge bank have not been transferred from the 
residual  company,  or  where  essential  support  services  were  formerly  provided 
to  former  bank  by  another  group  entity.  That  requirement  should  apply 
irrespective  of  whether  the  entity  providing  the  support  is  located  in  the  same 
Member State as the bridge bank or purchaser.  

110. 

It  may  also  be  necessary  to  restrict  the  rights  of  third  parties  to  terminate 
contracts  in  certain  circumstances,  for  example  where  the  contracts  are 
transferred  to  a  bridge  bank,  so  that  the  continuity  of  banking  services  is  not 
jeopardised. 

Section 3 - Partial property transfers   

111. 

112. 

Bank  resolution  measures  may  involve  a  partial  property  transfer,  whereby 
national  authorities  transfer  some  of  the  assets  of  an  ailing  bank  to  another 
entity,  leaving  the  remainder  in  the  residual  company.  The  ability  to  make 
partial  transfers  is  likely  to  increase  the  chances  of  smooth  continuity  for  the 
viable parts of the business, and a successful resolution using a bridge bank or a 
private  sector  purchaser.  However,  a  partial  property  transfer  also  risks 
disadvantaging  creditors  of  the  residual  company,  and  may  also  seriously 
disrupt commercial contracts.  

First, if the splitting into two entities results in an insolvent residual company, 
the  creditors  that  remain  in  the  residual  company  may  be  worse  off  than 
creditors of the same ranking that are transferred to the bridge bank. This might 
be resolved if the residual company is given a certain and enforceable economic 
interest  in  the  net  proceeds  of  the  resolution,  for  example  the  proceeds  of  any 
subsequent  sale  of  the  bridge  bank  to  a  private  sector  entity.  However,  there 
remains a risk that compensation determined in this way might not be sufficient 
to ensure that creditors that remain with the insolvent residual bank are left no 
worse off than they would have been in the event of a whole bank insolvency. 

EN 

37 

   EN 

 
113. 

114. 

Second,  a  partial  property  transfer  can  interfere  with  widely  used  commercial 
structures  such  as  set-off  and  netting  arrangements,  security  interests  and 
structured  finance.  This  could  have  serious  consequences.  For  example,  any 
undermining of legal certainty that financial contracts will be subject to set-off 
and  netting  could  lead  to  increased  regulatory  capital  requirements  for  banks' 
counterparties, since they might be required to account for their credit exposure 
to an EU bank on a gross rather than a net basis. Similarly, if security interests 
could be disrupted by a partial transfer, counterparties that have lent to banks on 
a  secured  basis  will  not  have  legal  certainty  that  they  can  enforce  against  the 
collateral on which the loan is secured. This could have a negative effect on the 
cost of finance for EU banks that are potentially subject to resolution measures 
involving partial transfers, and could lead to counterparties withdrawing credit 
at  an  earlier  stage,  precipitating  the  deterioration  of  an  institution  that  is 
perceived  to  be  at  risk.  This  could  also  have  very  serious  effects  on  the 
operation of clearing and settlement systems (which are of systemic importance) 
and put strains on the conduct of monetary policy operations by Central Banks 
to the extent that partial property transfers might affect collateral arrangements 
entered  into  in  relation  to  the  operation  of  such  systems  and  to  the  policy  of 
Central Banks.  

Safeguards  would  need  to  address  these  issues.  The  legal  and  commercial 
problems connected with partial property transfers, and appropriate safeguards, 
have  been  explored  extensively  by  the  UK  government,  respondents  to  the 
various  public  consultations,  and  the  expert  advisors  it  appointed  for  this 
purposes, in the course of the preparation of the UK special resolution regime 
under  the  Banking  Act  2009.50  That  work  provides  a  valuable  resource  for 
understanding  the  problems.  However,  any  solutions  developed  at  EU  level 
would have to be compatible with the different legal systems of the EU. Further 
detailed  consideration  therefore  needs  to  be  given  both  to  appropriate 
compensation  for  creditors51  and  safeguards  for  financial  contracts  and 
commercial arrangements that may be affected by partial property transfers. 

Section 4 – Changes required under insolvency law  

115.  Modifications to insolvency law in support of re-organisation measures applied 
to  cross-border  groups  may  also  be  necessary.  As  a  minimum,  a  moratorium 
should be possible to prevent the opening of other proceedings once a resolution 
measure has been applied. This would be necessary to maintain the continuity of 
services and to ensure an orderly resolution process. 

116.  Work  on  an  EU  resolution  regime  might  also  consider  how  to  facilitate  the 
continuous operation of the business under reorganisation by securing access to 
funds.  For  example,  finance  after  the  commencement  of  an  insolvency 
procedure  ("post-commencement  finance")  may  be  obtained  from  other 
members of the group operating as a going concern. This raises the question of 

50 
51 

http://www.hm-treasury.gov.uk/consult_special_resolution_regimes.htm 
Including  mechanisms  for  ensuring  that  creditors  whose  claims  remain  with  the  residual  bank  are  no 
worse off in the winding up of that residual bank than they would have been in the hypothetical event of 
a whole bank insolvency. 

EN 

38 

   EN 

 
                                                 
117. 

whether the entity financing the insolvent group member should have a priority 
ranking.  In  the  absence  of  enabling  or  clarifying  treatment  in  insolvency  law, 
the provision of finance in the period before commencement of the insolvency 
proceedings may also be subject to avoidance and carry the risk of liability for 
both the lender and the debtor.52  

UNCITRAL53 supports the development of a system for “post commencement 
finance”  between  affiliated  entities.  In  order  to  enable  group  members  to 
finance the affiliate under reorganisation, techniques need to be found to secure 
repayment  of  their  claim.  These  might  include  a  priority  in  a  subsequent 
liquidation  of  the  affiliate,  a  security  interest  on  unencumbered  assets,  or  a 
junior  security  interest  on  already  encumbered  assets.  Authorisation  of  post 
commencement  finance  and  securing  assets  for  repayment  of  the  financing 
affiliate might also require the approval of creditors of the entity providing the 
funding or of the court to secure the protection of all affected parties. 

Section 5 – Questions 

(16)  What  kind  of  specific  protection  and  support  measures  are  needed  in  the  context  of 
partial  transfers  or  the  splitting  of  a  group,  including  measures  for  the  protection  of 
creditors? 

(17)  What  changes  to  insolvency  law  would  be  necessary  to  support  bank  resolution 

measures (e.g. moratorium, post commencement financing, etc.)? 

(18)  What safeguards are needed for financial contracts and commercial arrangements that 

may be affected by partial property transfers? 

52 

53 

Some insolvency laws provide that where a lender advances funds to an insolvent debtor in that period, 
it may be responsible for any increase in the liabilities of other creditors or the advance will be subject 
to avoidance in any ensuing insolvency proceedings. In other examples, the insolvency representative 
who borrows money may face personal liability for repayment. 
Working Group V of UNCITRAL is considering recommendations on easing intra-group financing for 
entities  under  insolvency  in  relation  to  the  treatment  of  corporate  groups  in  insolvency.  See: 
http://www.uncitral.org/uncitral/en/commission/working_groups/5Insolvency.html 

EN 

39 

   EN 

 
                                                 
7. 

CHAPTER 7 - COMPANY LAW AND SHAREHOLDERS' RIGHTS 

Section 1 – The Issue 

While a robust framework of shareholders' rights is essential for good corporate governance 
and for the free movement of capital, those rights must be balanced with the public interest in 
the ability of resolution authorities to intervene quickly and decisively to restructure a failing 
institution or group to minimise contagion and ensure the stability of the banking system in 
affected  Member  States.  The  question  is  how  to  recognise  shareholders'  rights  and  avoid 
challenges to cross-border resolution measures by shareholders whose rights under national 
company law or rights to property have been affected? 

Section 2 – Current legal framework 

Company law framework 

118. 

EU  law  contains  a  number  of  mandatory  requirements  that  confer  rights  on 
shareholders  of  public  limited  liability  companies.  The  capital  maintenance 
regime under the Second Company Law Directive54 requires the approval of the 
shareholders'  general  meeting  for  any  increase  in  capital  and  any  reduction 
(except under a court order) in the subscribed capital, and confers pre-emption 
rights  on  existing  shareholders.  The  Shareholders'  Rights  Directive55  -  which 
had to be transposed by Member States by August 2009 – sets out requirements 
relating  to  the  general  meeting  of  shareholders  of  listed  companies,  and  in 
particular specifies the convocation periods and the form of the convocation. As 
regards re-organisation measures applied to certain limited liability companies, 
rules in the Third Company Law Directive56 and the Directive on cross border 
mergers57  contain  provisions  on  the  role  of  the  general  meeting  in  the  case  of 
national mergers and cross-border mergers respectively, and the Sixth Company 
law Directive58 in the case of divisions.59 

119. 

The  Second  Company  Law  Directive  applies  to  those  types  of  public  limited 
liability  companies  that  are  listed  in  Article  1  of  the  Directive.  The  Directive 
does  not  make  special  provision  for  the  situation  where  a  company  enters 

54 

55 

56 

57 

58 

59 

Second Council Directive 77/91/EEC of 13 December 1976 on coordination of safeguards which, for 
the  protection  of  the  interests  of  members  and  others,  are  required  by  Member  States  of  companies 
within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of 
public  limited  liability  companies  and  the  maintenance  and  alteration  of  their  capital,  with  a  view  to 
making such safeguards equivalent, OJ L 26, 31.1.1977, p.1. 
Directive 2007/36/EC on the exercise of certain rights of shareholders in listed companies, OJ L 184, 
14.7.2007, p.17. 
Third  Council  Directive  78/855/EEC  of  9  October  1978  based  on  Article  54  (3)  (g)  of  the  Treaty 
concerning mergers of public limited liability companies, OJ L 378, 31.12.1982, p.47 
Directive  2005/56/EC  of  the  European  Parliament  and  of  the  Council  of  26  October  2005  on  cross-
border mergers of limited liability companies 
Sixth Council Directive 82/891/EEC of 17 December 1982 based on Article 54 (3) (g) of the Treaty, 
concerning the division of public limited liability companies  
Where  the  company  to  be  acquired has  entered  insolvency  or  comparable  proceedings,  the  Third  and 
the  Sixth  Directives  allow  Member  States  to  derogate  from  their  requirements,  see  Article  1(3) 
Directive 78/855/EEC and Article 1(4) Directive 82/891/EEC. 

EN 

40 

   EN 

 
                                                 
insolvency.  It  can  therefore  be  concluded  that  the  rules  of  the  Directive  - 
including  the  requirement  of  a  general  meeting  resolution  for  any  capital 
increase and decrease - apply as long as a bank operates in one of the forms of a 
public  limited  liability  company  specified  in  Article  1.  Furthermore,  the 
Directive  does  not  provide  for  any  exemptions  in  crisis  situations  where  a 
company  undergoes  serious  financial  difficulties  or  a  credit  institution  is 
reorganised.60  

The Third and the Sixth Company law Directives and the Cross-border mergers 
Directive  do  not  contain  specific  rules  in  cases  where  a  company  gets  into 
difficulties.  However,  according  to  the  rules  of  the  directives,  the  requirement 
for the approval of the general meeting can be waived by Member States under 
specific circumstances.61 In all cases, however, a one month publication period 
has to be respected for the publication of the draft terms of merger or division. 

Furthermore,  Member  States  are  not  required  to  apply  the  Third  or  the  Sixth 
Company  Law  Directives  "where  the  company  or  companies  which  are  being 
acquired  or  will  cease  to  exist  are  the  subject  of  bankruptcy  proceedings, 
proceedings  relating  to  the  winding-up  of  insolvent  companies,  judicial 
arrangements,  compositions  and  analogous  proceedings".62  The  Directive  on 
cross-border mergers does not contain any similar derogation. 

In addition to these mandatory requirements in EU law, national company law, 
listing rules and the articles of association of banks may contain further rules on 
the right of shareholders in the context of restructuring measures. In particular 
the requirement that all material transactions have to be approved by the general 
meeting applies in a number of Member States.63  

120. 

121. 

122. 

European Convention on Human Rights 

123. 

The  European  Convention  on  Human  Rights  ("ECHR")  and  its  First  Protocol 
have been signed by all EU Member States. Its rules have been recognised by 
the  European  Court  of  Justice  as  general  principles  of  EU  law  and  have  been 
reflected  in  the  Treaty  of  Amsterdam  which  calls  for  respect  for  the 
fundamental rights guaranteed by the Convention. 

124. 

Under Article 1, Protocol 1 ("A1P1") to the ECHR, any transfer of ownership or 
assets  of  an  ailing  bank  must  comply  with  the  shareholders'  right  to  property. 
This  guarantees  the  peaceful  enjoyment  of  possessions,  including  shares.64 

60 

61 
62 
63 

Joint Cases C-19/90 and C-20/90 Karella and Karellas v. Minister of Industry, Energy and Technology 
and organisations AE [1991] E.C.R I-2691, and C-441/93 Panagis Pafitis and Others v. Trapeza ellados 
A.E. and Others [1996] ECR I-1347 
Article 8 Directive 78/855/EEC, Article 6 Directive 82/891 EEC; Art. 9(3) Directive 2005/56/EC. 
Article 1(3) Directive 78/855/EEC; Article 1(4) Directive 82/891/EEC 
A  similar  rule  in  the  Corporate  Governance  Statement  of  the  bank  formed  the  basis  of  the  Court 
decision in the case "Fortis". 
Article 1 of Protocol 1 of the European Convention on Human rights states: 

64 
"Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived 
of his possessions except in the public interest and subject to the conditions provided for by law and by 
the general principles of international law.  

EN 

41 

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Shareholders  have  the  right  not  to  be  deprived  of  their  shares,  or  to  suffer  a 
diminution  in  their  value,  unless  the  interference  is  justified  in  the  public 
interest  and  in  accordance  with  conditions  provided  in  law,  and  in  accordance 
with international law.  

125. 

Any interference with the peaceful enjoyment of possessions must strike a “fair 
balance”  between  “the  demands  of  the  general  interest  of  the  community  and 
the  requirement  of  the  protection  of  the  individual's  fundamental  rights”.65  A 
deprivation of property without payment of an amount that is reasonably related 
to  its  value  will  normally  constitute  a  disproportionate  interference  that  is 
unjustified.  However,  there  is  no  right  to  full  compensation  since  “legitimate 
objectives  of  public  interest,  such  as  [are]  pursued  in  measures  of  economic 
reform  or  measures  designed  to  ensure  greater  social  justice,  may  call  for  less 
than reimbursement of the full market value”.66  

126. 

Furthermore, Articles 6 and 13 ECHR provide for the shareholders' right to due 
process  ("fair  and  public  hearing")  and  to  a  legal  remedy  against  unlawful 
interference with their rights. 

National frameworks for bank resolution  

127. 

128. 

As  far  as  creditors'  rights  are  concerned,  where  national  frameworks  for  bank 
resolution  are  based  on  insolvency  law  they  include  the  principle  of  the  equal 
treatment of creditors who enjoy the same ranking. As a consequence, creditors 
are  involved  in  various  ways  in  the  proceedings  and  their  consent  is  usually 
required for any decisions which may affect their rights and entitlements, such 
as sale of assets outside the ordinary course of business, the continuation of the 
business,  consideration  and  approval  of  a  reorganisation  plan.  However,  the 
current national frameworks for bank resolution differ in the way they deal with 
the rights of stakeholders, and there are in particular differences with regard to 
the rights of the shareholders. 

In most systems, placing a bank into provisional official administration implies 
only  a  partial  reduction  of  shareholders  rights.  For  instance,  shareholders  may 
be deprived of the right to call the general meeting and draft the agenda or the 
right to take certain decisions which would normally be reserved for the general 
meeting (such as the appointment of the management or liability actions against 
previous  managers).  However,  in  general  shareholders  retain  their  right  to 
approve  the  more  far  reaching  bank  restructuring  measures  which  affect  their 
ownership  rights  (for  instance  this  is  the  case  in  Italy,  Romania,  Poland  and 
Austria).  Only  in  certain  Member  States  can  these  decisions  be  taken  without 
the  shareholders’  consent.  For  instance,  in  France,  the  administrator  may  be 
authorised by the court to sell the shares of a bank without the agreement of the 
shareholders.  In  the  Czech  Republic,  the  administrator  must  seek  the  approval 
of  the  central  bank  instead  of  the  general  meeting  of  the  shareholders.  The 

The preceding provisions shall not, however, in any way impair the right of the State to enforce such laws as it 
deems  necessary  to  control  the  use  of  property  in  accordance  with  the  general  interest  or  to  secure 
payment of taxes or other contributions or penalties."  
Sporring and Lonnroth v Sweden (1982) 5 EHRR 35  
Lithgow v United Kingdom ((1986) 8 EHRR 329. paragraph 121. 

65 
66 

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42 

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129. 

extent  to  which  such  a  national  rule  is  consistent  with  the  current  legislative 
framework at EU level remains to be examined.  

Under  the  UK  Special  Resolution  Regime,  the  authorities  may  take  certain 
decisions  affecting  the  rights  of  shareholders  and  creditors  without  their  prior 
consent  (to  the  extent  that  such  consent  is  not  required  under  EU  law). 
However,  the  system  does  provide  for  certain  safeguards  for  the  protection  of 
their interests. In the case of a partial transfer of assets and liabilities, creditors 
that are left in the residual company are entitled to compensation based on the 
principle  that they should be  no worse off  than  they  would  have  been  had  the 
bank  been  fully  liquidated.  The  calculation  of  the  proceeds  of  a  hypothetical 
whole-bank liquidation and the dividends that would be paid to each creditors is 
determined by an independent valuer. Secured creditors may be transferred with 
the  relevant  collateral  to  the  new  company.  The  same  principle  applies  to 
shareholders  when  shares  are  transferred  to  a  private  purchaser  or  to  a  bridge 
bank:  they  are  entitled  to  compensation  which  cannot  be  inferior  to  what  they 
would  have  received  in  the  event  of  the  liquidation  of  the  whole  bank.  The 
stakeholders  are  entitled  to  judicial  review  of  the  decision  of  the  authorities 
affecting  their  rights.  However,  this  review  cannot  reverse  the  operations 
decided by the authorities but only affect the amount of the compensation. 

Section 3 – Adequacy of the current framework 

130. 

The  procedural  requirements  contained  in  EU  law  do  not  necessarily  interfere 
with bank resolution where measures may be taken or required by supervisors 
exercising  powers  under  Article  136  of  the  CRD  since  the  necessary  time  to 
comply  with  such  requirements  is  likely  to  be  available.  Furthermore,  the 
harmonisation  of  the  requirements  through  the  EU  directives  ensures  a  level 
playing  field  within  the  EU.  However,  it  cannot  be  excluded  that,  under 
exceptional  circumstances,  certain  of  these  requirements  (for  example,  the 
minimum convocation period under the Shareholder Rights Directive) may pose 
hurdles to effective crisis resolution. In extreme situations, the requirement for 
prior  consent  of  stakeholders  for  restructuring  decisions,  while  ensuring  a 
degree  of  legal  certainty  and  high  stakeholder  protection,  may  undermine 
attempts  by  authorities  to  handle  a  bank  crisis  quickly  -  for  example  by 
orchestrating  a  private  sector  purchase.  Lack  of  approval  by  affected 
shareholders may hamper the adoption of appropriate solutions that involve, for 
example, the transfer of assets or shares.  

131. 

The latter problem was demonstrated by the case of Fortis where, under Belgian 
law,  shareholder  control  delayed  the  implementation  of  the  sale  of  a  majority 
stake in the Belgian bank to BNP Paribas. The rescue plan had to be revised and 
renegotiated  because  shareholder  approval  was  required,  and  resolution  was 
delayed by a prolonged legal challenge with resulting uncertainty for creditors, 
employees and other stakeholders in Fortis.  

Section 4 – Possible ways forward 

132. 

Adjustments to the Company law Directives and to national company laws may 
be  needed  to  guarantee  the  ability  of  national  authorities  to  intervene  rapidly 

EN 

43 

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133. 

134. 

135. 

without  having  to  seek  shareholder  approval  and  thus  to  ensure  continuity  of 
essential  services  that  have  been  provided  by  the  bank  and  to  minimise  the 
systemic impact of its failure.  

Such  adjustments  have  three  potential  objectives:  (1)  they  could  be  aimed  at 
clarifying  the  scope  of  the  Company  Law  Directives,  and  in  particular  the 
question  to  what  extent  the  Second  Company  law  Directive  applies  to 
companies  that  have  reached  insolvency;  (2)  they  could  provide  for  specific 
exemptions  from  certain  of  the  rules  of  the  Company  law  Directives  in  the 
context  of  bank  resolution  schemes;  and/or  (3) they  could  provide  for 
exemptions  in  the  context  of  such  resolution  procedures  from  requirements 
imposed by national company laws (or allowed by these laws and laid down in 
listing rules or articles of association). 

However,  reflecting  the  protection  conferred  by  Article  1,  Protocol  1,  any 
restriction  of  shareholder  rights  would  need  to  be  justified  by  an  overriding 
public interest and made subject to the appropriate safeguards to ensure that the 
rights of shareholders are given proper weight. Those safeguards should entail 
conditions  for  intervention  that  reflect  the  considerations  of  public  interest 
recognised  in  the  jurisprudence  of  ECHR,  and  adequate  arrangements  for  the 
compensation  of  shareholders.  Furthermore,  a  stabilization  and  resolution 
framework  would  have  to  respect  constitutional  limitations  of  Member  States' 
laws – as guaranteed under the EU Treaty. 

Finally,  where rights granted by EU law are affected, appropriate mechanisms 
for redress and compensation would need to be agreed and set out at EU level. 
The question for further consideration is whether for all other cases, appropriate 
mechanisms  can  be  left  to  the  discretion  of  Member  States.  If  resolution 
measures are applied at a cross-border level involving entities in more than one 
Member  State,  it  seems  logical  that  redress  possibilities  and  compensation  for 
shareholders of the affected entities should be determined in the same way. 

Section 5 – Questions 

(19) 

Is  it  necessary  to  derogate  from  certain  of  the  requirements  imposed  by  the  EU 
Company  Law  Directives  and,  if  so,  what  conditions  should  apply  to  any  such 
derogation?  If  the  scope  of  an  EU  special  resolution  framework  extended  beyond 
deposit-taking banks to cover other financial institutions (see Chapter 1), should such 
derogations  from  the  EU  Company  law  rules  apply  to  all  financial  institutions 
covered? 

(20)  The Fortis case has shown that requirements imposed only at the level of the national 
law, or allowed by it, can also impair effective measures to save an ailing bank. Is it 
therefore  necessary  to  regulate  at  EU  level  to  ensure  that  such  national  rules  do  not 
apply  in  where  measures  are  taken  under  a  bank  resolution  framework?  If  so,  what 
conditions should apply to any such derogation from national rules? 

(21)  What kind of triggers or conditions are likely to best deliver the objectives set out in 
paragraphs 132-133, and to ensure that intervention in the field of shareholder rights is 
proportionate  and  justified?  In  particular,  should  these  triggers  or  conditions  be  the 

EN 

44 

   EN 

 
same  as  those  discussed  in  Chapter  5,  or  should  the  conditions  for  interference  be 
stricter where shareholders' rights are at stake. 

(22)  Should mechanisms for compensation be set out at EU level, and if so how should this 

be done? 

EN 

45 

   EN 

 
8. 

CHAPTER 8 - COORDINATION V/INTEGRATION OF RESOLUTION AND INSOLVENCY 

Section 1 – The Issue 

This Chapter focuses on the changes, if any, that may be needed to insolvency law to support 
an EU resolution regime for banking groups. 

The  resolution  of  a  cross-border  banking  group  would  entail  the  application  of  resolution 
measures  to  group  entities  in  different  jurisdictions.  This  requires,  as  a  minimum,  a 
framework for coordinated action by the relevant national resolution authorities. However, it 
may  be  necessary  to  go  further  and  provide  for  an  integrated  resolution  orchestrated  by  a 
lead authority. 

Any  resolution  will  almost  certainly  be  accompanied  by  the  application  of  insolvency 
measures to elements of the group. The effectiveness of that resolution, and the willingness of 
national authorities to apply resolution at group level, may depend to a large extent on the 
ability of the applicable insolvency regimes to support the resolution measures.  

Section 2 – The current legal framework 

136. 

137. 

In the resolution of a cross-border banking group, measures must be applied to 
legal  entities  in  different  jurisdictions.    This  requires  either  coordination 
between the national resolution authorities involved or an integrated resolution 
orchestrated  by  a  lead  authority.  Under a  simple  cooperation  and  coordination 
framework, the resolution of a banking group will necessarily be carried out at 
the level of each legal entity in accordance with the applicable national regime. 
For example, relevant resolution authorities could be subject to a duty to consult 
each other before taking measures in relation to a member of a banking group. 
Going  further,  they  might  be  required  to  consider  (but  not  necessarily  apply) 
joint resolution measures if that would be likely to represent the best outcome 
for the group as a whole.  

However,  while  the  simplest  option  legally,  this  may  not  reflect  commercial 
reality.  Banking  groups  are  increasingly  operationally  and  commercially 
interdependent, frequently centralise liquidity management in a way that entails 
the intermingling of assets, and are organised and operated in a way that reflects 
business  lines  rather  than  legal  structure.  Even  where  coordinated,  separate 
entity  resolution  will  not  necessarily  allow  the  most  efficient  reorganisation. 
These concerns can only be fully addressed by greater structural integration of a 
resolution  framework,  possibly  by  designating  a  single  authority  to  be 
responsible  for  the  resolution  of  a  particular  group.  The  Commission 
Communication  on  an  EU  Framework  for  Cross-border  Crisis  Management  in 
the Banking Sector outlines these alternative approaches.  

138. 

However, any resolution will almost certainly be carried out in conjunction with 
national  insolvency  procedures.67  The  separate  entity  approach  to  resolution 

67 

Directive  2001/24/EC  on  the  Reorganisation  and  Winding  Up  of  Credit  Institutions  prohibits  the 
application of separate insolvency measures to branches under the law of the host State. It ensures the 

EN 

46 

   EN 

 
                                                 
means that insolvency proceedings are only effective in the country where they 
are  initiated,  and  will  administer  only  those  assets  that  are  located  within  that 
jurisdiction.68 This territorial approach to cross border insolvencies has not kept 
pace  with  the  increasing  irrelevance  of  national  frontiers  in  a  global  financial 
market.  Cooperation  between  national  insolvency  authorities  is  often  uneasy 
and  imperfect,  and  cannot  deal  effectively  with  financial  conglomerates, 
international  holding  structures  and  the  organisation  of  financial  groups 
according to business lines. 

139. 

These  difficulties  are  aggravated  by  procedural  and  substantive  differences  in 
national  insolvency  laws  for  credit  institutions.  Some  Member  States  use  the 
same general corporate insolvency law for the reorganisation and winding up of 
banks,  while  others  have  special  proceedings  for  credit  institutions.  Special 
banking insolvency regimes may entail a system of depositor preference, so that 
depositors' claims are paid before those of general creditors, while this will not 
be the case where banks are subject to a general corporate insolvency regime.  

Section 3 – Adequacy of the current framework 

140. 

The territorial nature of insolvency law and the substantive differences between 
national regimes may represent a disincentive to coordinated or integrated group 
resolution.  If  insolvency  is  necessarily  national,  domestic  authorities  have  a 
legitimate  interest,  and  are  likely  to  be  motivated  by  a  political  imperative,  to 
ring-fence  the  national  assets  of  an  ailing  bank  in  order  to  protect  national 
deposits and maximise the assets available to the creditors of the national entity. 
It also limits the feasibility of asset transfer between group entities as a means 
of  addressing  liquidity  problems  within  other  parts  of  the  group,  even  if  such 
action would be in the interests of the group as a whole.  

Section 4 – Possible ways forward 

141. 

It  may  therefore  be  necessary  to  develop  EU  measures  for  the  insolvency  of 
banking  groups  to  complement  and  support  bank  resolution  measures.    Of 
course, the nature of any adaptation of insolvency law that may be needed will 
depend on the nature of any EU resolution regime and the way in which multi-
jurisdictional  application  is  managed:  whether  by  coordination  of  separate 
national actions or by a more integrated approach. The need for modification of 
insolvency law arises to the extent that measures adopted at EU level facilitate 
or are likely to result in the reorganisation of business or the transfer of assets 
between  group  entities  in  different  jurisdictions.  A  coordinated  approach  to 
resolution  may  require  fewer  changes  (if  any)  to  insolvency  law  than  an 
integrated regime. An enabling regime for asset transfer would almost certainly 

mutual recognition and coordination of procedures under home country control, imposes a single-entity 
approach  by  which  all  the  assets  and  liabilities  of  the  'parent'  bank  and  its  foreign  branches  are 
reorganised or wound up as one legal entity under, subject only to exceptions specified in the Directive, 
the law of the home State. However, this directive does not provide for the consolidation of insolvency 
proceedings  for  separate  legal  entities  within  a  banking  group,  and  makes  no  attempt  to  harmonise 
national insolvency law.  
This is subject to the exception under Directive 2001/24/EC of branch assets that are located in another 
Member State. 

47 

   EN 

68 

EN 

 
                                                                                                                                                         
require adjustments to national insolvency law to ensure adequate protection for 
creditors  of  the  transferor,  but  might  be  most  consistent  with  more  structural 
coordination or integration of insolvency proceedings for banking groups. 

142. 

There are two basic approaches for the design of an EU resolution framework. 
Under  a  coordinated  framework,  each  legal  entity  of  a  cross-border  group 
would be resolved under the insolvency law of its country of incorporation, but 
formal framework would permit or require those proceedings to be coordinated 
where appropriate. Under an integrated framework, the insolvency of the group 
as a whole would be conducted under a single process, possibly in accordance 
with a single applicable regime.  

Coordination 

143. 

144. 

145. 

Coordination  may  be  in  particular  efficient  where  banking  groups  are  not 
integrated,  or  where  ring-fencing  of  a  legal  entity  is  needed  to  e.g.  avoid 
contagion of risks. Two principal approaches might be explored.   

The first – a framework for cooperation and exchange of information – would 
entail  EU  rules  requiring  courts  and  insolvency  officials  to  exchange 
information in respect of the different group entities under resolution. However, 
the insolvency of the individual group entities would continue to be conducted 
in accordance with the applicable national insolvency regime. Going further, a 
new  EU  instrument  might  also  provide  a  framework  for  coordinated 
stabilisation  or  reorganisation  plans  and,  in  the  context  of  reorganisation  or 
liquidation, facilitate the coordination of the use and disposition of assets, use of 
avoidance  powers  and  distributions  to  creditors.  Such  measures  might  address 
some of the problems experienced in the liquidation of affiliated entities where 
there has been significant co-mingling of assets. 

The second approach would facilitate a more directed coordination of national 
proceedings in relation to group entities by a 'lead' administrator or liquidator. 
EU rules would determine the identity of that lead practitioner in a way that was 
consistent with the principal focus of its business activities. . Such rules might 
also  include  procedures  for  the  adoption  of  a  coordinated  stabilisation  or 
reorganisation  plan  and  for  decision-taking  in  accordance  with  agreed 
objectives.  More  radically,  this  approach  could  provide  for  the  nomination  of 
the same insolvency administrator to all  the group members concerned. Those 
proceedings  would  be  conducted  in  accordance  with  the  applicable  national 
insolvency regime. 

146. 

An initiative of this kind would not be unprecedented and might be able to draw 
upon other international work.. In an EU context, Council Regulation (EC) No 
1346/2000  on  insolvency  proceedings69  requires  liquidators  to  cooperate 

69 

Council Regulation (EC) No 1346/2000  applies to the reorganisation or winding up of a single legal 
entity  with  establishments  in  multiple  jurisdictions,  and  does  not  deal  with  the  insolvency  of  groups. 
Banks, investment firms and collective investment undertakings are excluded from its scope. Its central 
principle  is  that  the  main  insolvency  proceedings  with  universal  scope  are  conducted  in  the  Member 
State where the debtor has the centre of its main interests ('COMI'), while retaining the possibility that 
secondary  local  proceedings  may  be  opened  in  other  Member  States  whether  the  debtor  has  an 

EN 

48 

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147. 

closely,  in  particular  by  exchanging  information.  In  order  to  ensure  the 
dominant role of the main insolvency proceedings, the liquidator has the power 
to intervene in concurrent secondary proceedings, for example, by proposing a 
restructuring plan or composition or applying for a suspension of the realisation 
of the assets in the secondary insolvency proceedings. 

Proposals  by  UNCITRAL70  to  facilitate  cooperation  between  insolvency 
officials and courts located in different jurisdictions could also provide a useful 
model  for  an  EU  cooperation  framework  for  the  resolution  and  liquidation  of 
cross border banking groups. This work focussed on the expansion of the Model 
Law  on  coordination  and  cooperation  for  enterprise  groups  (but  not  financial 
institutions).71  Under  the  draft  recommendations,  courts  and  administrators 
would  be  required  to  cooperate  and  communicate  with  foreign  courts  and 
administrators  responsible  for  other  members  of  the  group.  The  recommended 
measures include: 

–  the use of bilateral and multilateral agreements and the exchange of information 
between  administrators  of  enterprise  group  members  located  in  different 
jurisdictions;  

–  agreement  between  insolvency  representatives  on  the  division  of  powers  and 
allocation  of  responsibilities,  with  one  insolvency  representative  taking  a 
coordinating or leading role;  

–  the agreement of coordinated reorganisation plans;  

–  coordination  with  respect  to  administration  and  supervision  of  the  affairs  of  the 
including  day-to-day 
group  members  subject 
operations  where  the  business  is  to  be  continued,  post-commencement  finance, 
safeguarding  of  assets,  use  and  disposal  of  assets,  use  of  avoidance  powers; 
submission and admission of claims, and distributions to creditors. 

insolvency  proceedings, 

to 

148. 

UNCITRAL also considers that coordination may be achieved by appointing the 
same  insolvency  representative  in  multiple  proceedings  affecting  members  of 
the  same  group  in  different  States  where  that  person  meets  applicable  local 
requirements. 

70 
71 

establishment. It provides specific rules of jurisdiction, applicable law and recognition of judgements, 
while enhancing co-ordination of measures in relation to an insolvent debtor's assets. 
UNCITRAL Working Group V, Treatment of enterprise groups in insolvency.(See www.uncitral.org) 
The  UNCITRAL  Model  Law  on  Cross-Border  Insolvency,  adopted  in  1997,  offers  an  effective 
framework for cross-border insolvency where an insolvent entity has assets in more than one State or 
where creditors are established in a jurisdiction other than the one where the insolvency proceeding is 
taking place. It  applies  to  the  insolvency  of  a single  entity  with  establishments  and  assets  in  multiple 
jurisdictions,  and  does  not  address  groups.  The  Model  Law  does  not  attempt  a  substantive 
harmonisation  of  insolvency  law;  rather,  it  develops  mechanisms  for  cooperation  and  coordination, 
including foreign assistance for an insolvency proceeding taking place in the enacting State; access for 
foreign representatives to courts of the enacting State; recognition of foreign proceedings; cross-border 
cooperation; and coordination of concurrent proceedings.  

EN 

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Integration 

149. 

Because of the nature of groups and the way in which they operate, there may 
be  a  complex  web  of  financial  transactions  between  group  members. 
Centralisation of liquidity is a common feature in EU banking groups. Because 
of  the  intermingling  of  assets  that  centralised  liquidity  risk  management  may 
entail,  creditors  may  have  to  deal  with  different  members  in  insolvency 
proceedings  or  even  with  the  group  as  a  single  economic  entity.  The 
coordination  of  separate  national  insolvency  proceedings  may  not  achieve  an 
equitable  treatment  for  creditors  in  such  cases.  In  more  general  terms,  where 
subsidiaries are 'branch-like' in practice, it may be appropriate to allow creditors 
to file claims not only against the subsidiary that is their counterparty, but also 
against the parent, as the 'dominant' company.  

150. 

Some  national  regimes  contain  remedies  for  overcoming  the  perceived 
inefficiency  and  unfairness  of  the  traditional  single  entity  approach  where  the 
disentangling  of  operations  or  assets  is  excessively  complex,  or  other  reasons 
justify  treating  the  group  as  a  single  enterprise.  Such  remedies  include: 
extending  liability  for  debts  of  an  affiliate  to  other  solvent  group  members,  as 
well  as  to  corporate  office  holders  and  shareholders;  contribution  orders;  and 
asset pooling or substantive consolidation orders. 

Extension of liability to affiliated entities  

151. 

Certain  laws  recognize  circumstances  in  which  exceptions  to  the  limited 
liability of corporate entities can be made, so that another group member and its 
office  holders  may  be  made  liable  for  the  debts  and  actions  of  an  affiliate. 
Extending  liability  for  external  debts  and,  in  some  cases,  the  actions  of  the 
group  members  subject  to  insolvency  proceedings  to  solvent  group  members 
and  relevant  office  holders  is  a  remedy  available  to  individual  creditors  on  a 
case-by-case basis and is generally subject to rigorous conditions. The following 
conditions are typical: 

–  A subsidiary has been operated as the parent company’s agent, trustee or partner;  

–  A group member has exploited or abused its control over another group member, 

including operating a subsidiary continually at a loss in its own interests; 

–  Creditors  have  been  misled  to  believe  that  they  are  dealing  with  a  single 

enterprise, rather than with a member of a group. 

Contribution orders 

152. 

A  contribution  order  is  an  order  by  which  a  court  can  require  a  solvent  group 
member  to  contribute  funds  to  cover  all  or  some  of  the  debts  of  other  group 
members  subject  to  insolvency  proceedings.  Considerations  relevant  to  the 
granting of such an order may include:  

–  the  extent  to  which  a  related  group  member  took  part  in  the  management  of  the 

group member;  

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–  the extent to which the reasons for liquidation are attributable to the actions of the 
related group member, for example, failure to perform a contract or the fact that 
the parent had permitted the subsidiary to continue trading whilst insolvent. 

Substantive consolidation 

153. 

154. 

155. 

Substantive  consolidation,  in  insolvency  proceedings  involving  two  or  more 
group members, generally permits authorities to disregard the separate identity 
of each group member in appropriate circumstances and consolidate their assets 
and liabilities, treating them as though held and incurred by a single entity. This 
has the effect of creating a single estate for the general benefit of all creditors of 
the consolidated group members. 

Consolidation might be appropriate where it leads to greater return of value for 
creditors,  either  because  of  the  structural  relationship  between  the  group 
members and their conduct of business and financial relationships or because of 
the value of assets common to the whole group, such as intellectual property.  

However this technique pierces the corporate veil and the claims of creditors of 
a  more  solvent  entity  are  treated  pari  passu  with  creditors  of  a  financially 
weaker affiliate. Because this undermines a fundamental principle of company 
law,  consolidation  is  generally  restricted  to  situations  when  the  assets  or 
liabilities  of  the  enterprise  group  members  are  intermingled  to  such  an  extent 
that the ownership of assets and responsibility for liabilities cannot be identified 
without  disproportionate  expense  or  delay;  or  where  the  enterprise  group 
members  are  engaged  in  a  fraudulent  scheme  or  activity  and  substantive 
consolidation is essential to rectify that scheme or activity. 

156.  Where  these  techniques  are  available  under  national  law,  their  application  is 
necessarily restricted to entities within the same jurisdiction, and subject to the 
same  insolvency  regime.  If  similar  measures  were  to  be  developed  for  use  in 
insolvency proceedings for cross-border banking groups, the new dimension of 
different insolvency regimes - with different substantive rules on, for example, 
priority and avoidance powers – would need to be addressed. 

157. 

158. 

In the EU, a single set of harmonised insolvency rules, covering procedural and 
substantive  elements,  might  be  developed  for  cross-border  banking  groups. 
They could ensure, as a minimum, that core powers such as repudiation and the 
avoidance  of  security  interests  were  exercisable  in  the  same  way;  harmonised 
rules  on  priority;  and  in  particular  that  unsecured  claims  of  depositors  (or,  if 
applicable, any subrogated claim by a Deposit Guarantee Scheme). 

One  possible  approach  might  be  to  introduce  changes  via  a  "28th  regime":  a 
separate  and  self-contained  insolvency  regime  that  would  be  available,  and 
would replace the otherwise applicable national regimes, for the reorganisation 
and winding up of cross-border banking groups in the EU. Such a regime would 
only  fully  address  the  problems  associated  with  the  separate  entity  approach 
under  national  insolvency  law  if  it  permitted  an  integrated  treatment  of  the 
group entities. Careful thought would need to be given to the application of such 
a  regime  and  the  extent  –  if  at  all  –  to  which  it  should  be  optional  for 
systemically important cross-border banking groups.  

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159. 

Clearly, the difficulty of such work cannot be underestimated. Insolvency law is 
closely  related  to  other  areas  of  national  law  such  as  the  law  of  property, 
contract and commercial law, and rules on aspects such as priority reflect social 
policy.  Accommodating  distinct  national  concepts,  such  as  trusts  or  floating 
charges,  in  a  unified  code  would  be  complex.  Moreover,  like  commercial  law 
generally, national insolvency law enhances the commercial attractiveness of a 
jurisdiction, and harmonisation could remove competitive advantages that States 
currently perceive to be conferred by their national systems. It is recognised that 
any imposition of a new EU insolvency regime on existing entities would raise 
transitional  problems,  including  the  impact  on  creditors  and  counterparties.  A 
single  set  of  harmonised  insolvency  rules  is  likely  to  change  the  contractual 
terms  of  bilateral  agreements  between  firms  and  counterparts,  which  may  be 
disruptive on specific market segments.  

Section 4 –Questions 

(23)  Are  mechanisms  for  cooperation  and  communication  between  authorities  and 
administrators responsible for the resolution and insolvency of a cross border banking 
group  desirable?    The  Commission  services  would  also  welcome  views  on  the  form 
that such mechanisms might take. 

(24) 

Is a more integrated resolution and insolvency framework for banking groups feasible 
and desirable?   

–  In  particular,  should  the  Commission  explore  mechanisms  at  EU  level  for  the 
extension of liability, contribution orders and pooling or substantive consolidation 
in relation to cross border banking groups. 

(25)  Would  a  "28th  regime"  be  useful  and  feasible?  If  so,  what  would  be  the  appropriate 
scope of its application, and the difficulties of applying it to existing entities? 

EN 

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