Opinion of the European Central Bank of 19 November 2010 on the restructuring of banks (CON/2010/83)

Date: 2010-11-19
Institutions: European Central Bank
Subjects: Germany, aid for restructuring, bank, company in difficulties, financial stability, financial supervision, national law

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 19 November 2010 

on the restructuring of banks 

(CON/2010/83) 

Introduction and legal basis 

On  4  October  2010,  the  European  Central  Bank  (ECB)  received  a  request  from  the  German  Federal 

Ministry of Finance for an opinion on a draft law on the restructuring and organised winding up of banks, 

the creation of a restructuring fund for banks and the extension of the limitation periods for management 

and  supervisory  board  members’  liability  towards  listed  companies  and  banks  (Law  on  restructuring) 

(hereinafter the ‘draft law’). 

The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the 

Functioning  of  the  European  Union  (TFEU)  and  the  third  and  sixth  indents  of  Article 2(1)  of  Council 

Decision 98/415/EC  of  29 June  1998  on  the  consultation  of  the  European  Central  Bank  by  national 
authorities regarding draft legislative provisions1, as the draft law relates to the Deutsche Bundesbank and 

contains  rules  applicable  to  banks  which  materially  influence  the  stability  of  financial  institutions  and 

markets. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European 

Central Bank, the Governing Council has adopted this opinion. 

1.  

Purpose of the draft law 

1.1  The general purpose of the draft law is to afford the competent authorities the powers and tools to 

resolve  situations  of  distressed  banks  whose  failure  would  pose  a  risk  to  the  stability  of  the 

financial system. The draft law also aims to ensure that the consequential costs of dealing with the 

failure of such institutions are met by the private sector, i.e. the banking industry, and not by public 

funds, to the extent possible.  

1.2  The draft law introduces new supervisory and resolution tools and procedures for the stabilisation, 

reorganisation,  and,  as  a  last  resort,  the  orderly  winding  up  of  banks  with  a  registered  office  in 

Germany  which  are  in  financial  difficulties.  For  this  purpose,  the  draft  law  introduces  two  main 

sets of measures.  

(i)  

It provides for a two-stage procedure for the stabilisation and reorganisation of banks. Both 

1  

OJ L 189, 3.7.1998, p. 42.  

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stages  of  the  procedure  are  introduced  voluntarily  at  the  credit  institution’s  initiative  and 

serve  to  enable  it  to  overcome  the  financial  difficulties  under  its  responsibility.  When 

initiating  this  procedure,  the  credit  institution  will  provide  a  plan  for  the  stabilisation  or 

reorganisation.  Moreover,  the  relevant  procedure  and  its  underlying  plans  only  become 

effective if the Federal Financial Supervisory Authority (BaFin) regards them as appropriate 

and if they are approved by the Higher Regional Court. In both stages of the procedure, an 

advisor is to be appointed by the Court. The role for this advisor is modelled on that of the 

special  representative  under  the  Law  on  banking  and  the  provisional  insolvency 

administrator.   

The  stablilisation  stage  of  the  procedure  is  designed  as  an  early  intervention  measure  to 

correct financial difficulties. It does not involve any interference with shareholder or creditor 

rights.  

The reorganisation stage does interfere with such third party rights. It may only take place if 

the  existence  of  the  distressed  bank  is  at  risk  and  this  constitutes  a  threat  to  the  system, 

meaning  that  the  measures  taken  must  be  covered  by  a  manifest  public  interest.  The 

reorganisation  stage  provides  for  rules  on  creditor  voting  and,  if  relevant,  shareholders  as 

regards the reorganisation plan under which they give or are deemed to give their consent to 

the plan. If the procedure described above is unlikely to succeed, the BaFin may immediately 

take  the  intervention  measures  set  out  under  Article  2  of  the  draft  law  (amendment  to  the 

Law on banking). 

(ii)   The draft law also significantly increases Bafin’s powers and tools to restructure and wind 

up  banks  by  amending  the  current  law  on  banks  (Article  2  of  the  draft  law,  as  mentioned 

above).  This  amendment  contains,  as  a  measure  of  last  resort,  BaFin’s  power  to  order  the 

transfer  of  assets  from  the  failing  bank  to  a  new  safe  haven  entity  (‘bridge  bank’)  (new 

Section  48a  of  the  Law  on  banking),  if  the  distressed  bank  is  at  risk  and  this  constitutes  a 

threat to the system. A bridge bank is a bank which is independent from an organisational 

and  financial  perspective.  The  establishment  of  such  a  bank  may  be  necessary  if,  at  the 

relevant time, no credit institution is available to take over the relevant assets and liabilities. 

This  is  intended  to  ensure  that  stabilisation  measures  can  subsequently  focus  on  the  new 

bank, whilst the non-systemically relevant parts of the old institution can be wound up under 

the ordinary insolvency procedure. The draft law also enables the BaFin to appoint a special 

representative, who may be given the power to act as the institution’s statutory organs. These 

new  measures  can  be  taken  by  the  BaFin  without  prior  agreement  of  creditors  or 

shareholders.  

1.3 

In addition to these new procedures and tools, Article 3 of the draft law establishes a restructuring 

fund for banks (the ‘Fund’) and transfers new duties related to the management of this Fund to the 

Federal Authority for Financial Market Stabilisation (FMSA). The purpose of the Fund, a Federal 

special-purpose  vehicle,  is  to  finance  future  bank  restructuring  and  winding-up  measures.  All 

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German banks will be obliged to contribute to the Fund. The amount of an individual institution’s 

contribution will be based on the systemic risk it poses, and this is determined according to the size 

of  the  bank  and  its  cross-linkage  within  the  financial  market.  In  this  regard,  an  institution’s 

liabilities  must  be  taken  into  account  and  other  relevant  indicators  may  also  be  considered.  The 

FMSA will be responsible for implementing restructuring measures and administering the Fund.  

1.4 

In addition to these key elements, the draft law extends the period of limitation for claims against 

Members  of  the  Board  of  Management  and  the  Supervisory  Board  who  breach  their  managerial 

duties  under  the  Law  on  stock  corporations  from  5  to  10  years.  It  also  amends  the  Law  on  the 

Financial Market Stabilisation Fund and the Law on financial markets stabilisation acceleration so 

that the new procedures and tools mentioned above would, in the application of some transitional 

provisions, replace the stabilisation measures of the Fund.  

2. 

General observations  

2.1  The ECB welcomes the draft law as it strengthens the tools and procedures available to the national 

authorities for effective early intervention, reorganisation and restructuring of distressed banks.  

The  ECB  notes  that,  in  accordance  with  the  Council  conclusions  of  May  2010,  the  European 

Commission presented a communication which defined the milestones for a major overhaul of the 

Union’s regulatory framework. This overhaul is to be undertaken from 2011 onwards and aims to 

establish  a  holistic,  coordinated  and  more  harmonised  framework  for  preventative  action,  early 

intervention  and  resolution  management.  In  particular,  the  Commission  announced  legislative 

proposals aiming at further harmonisation of a wide set of early intervention and resolution tools. 

The  ECB  broadly  supports  such  plans  and  notes  that  a  common  set  of  tools  should  be  designed 

with the aim of allowing authorities to address problems with a distressed bank, without needing to 

resort to public support. In turn, such tools should also facilitate a private sector solution or, when 

appropriate,  ensure  the  liqidation  of  the  bank  in  a  way  which  has  minimal  effects  on  financial 

stability.  

In this context, it is noted that the draft law significantly enhances the tools available to the national 

authorities,  in  particular  by  introducing  a  comprehensive  framework  for  reorganisation  which 

would enable the transfer of assets, or parts of thereof, of a systemically relevant bank to a private 

bank, or temporarily to a State ‘bridge bank’ or a debt to equity swap. 

2.2  The  ECB  welcomes  the  acknowledgement  of  the  German  Government,  as  reflected  in  the 

explanatory notes to the draft law, of the need for coordinated action at Union level and the need 

for  any  national  proposal  to  be  integrated  and  aligned  with  the  current  preparatory  work  of  the 

European Commission on a cross-border crisis management framework for the financial sector (EU 
crisis management framework)2. Member States may need to adopt measures on crisis management 

2  

Communication  from  the  Commission  to  the  European  Parliament,  the  Council,  the  European  Economic  and  Social 
Committee, the Committee of the Regions and the European Central Bank on ‘An EU Framework for Crisis Management 

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in the interests of urgency. However, prior to the adoption of the EU crisis management framework 

in the form of a Union legal instrument, and even before its implementation, Member States should 

take into account developments at Union level in the preparation of such a framework and should 

thus avoid any national legislation conflicting with it, in accordance with the general principle of 

sincere cooperation and loyalty pursuant to the Treaty on European Union. In this respect, the ECB 
also refers to guidance provided by the Council (ECOFIN)3, as well as the Declaration issued by 
the Heads of State of the euro area4.  

2.3 

It  should  also  be  ensured  that  the  application  of  the  draft  law  complies  with  Article  107(3)(b) 

TFEU, meaning that domestic support measures to banks in distress and their terms of application 

must comply with the principle of non-discrimination and competition law and the State aid rules 

of the Union. 

3. 

Procedure for the stabilisation and reorganisation of banks 

3.1 

In Section 19(4) of Article 1, the draft law provides for the deemed consent of shareholders to the 

reorganisation  plan,  where  the  majority  of  the  creditors  have  voted  in  favour  and  where  the 

measures  under  the  plan  are  proportionate  and  aim  to  prevent  serious  negative  effects  on  other 

financial institutions arising from the failure of the bank concerned. This constitutes an interference 
with shareholder rights as guaranteed by Directive 77/91/EC5, notably Article 25(1) on the increase 

of capital, for example in the case of a debt to equity swap. The explanatory notes to the draft law 

extensively  address  this  legal  issue.  The  ECB  recognises  the  manifest  conflict  arising  between 

shareholder rights and public interest issues in such a situation, and this may need to be addressed 

at  national  level  as  a  matter  of  urgency.  However,  legal  uncertainty  could  be  exacerbated  by 

provisions which clearly breach the Directive and merely rely on a possible future change in Union 

law in this regard. The existing conflict between the strong protection of shareholder rights and the 

legitimate  protection  of  public  interests  needs  to  be  addressed  at  Union  level,  respecting  the 

principle of the primacy of Union law.  

3.2  The stabilisation and reorganisation plans may only enter into force if they have been approved by 

the Higher Regional Court. Under this procedure, the Court is the final authority, after the BaFin’s 

prior  involvement.  As  the  ECB  has  stated  in  previous  opinions,  in  many  cases  the  banking 

supervisory authority will be best placed to assess whether a distressed bank is able to continue in 

3  

4  
5  

in the Financial Sector’, COM(2010) 579 final of 20 October 2010; Commission Communication on an EU Framework 
for Cross-Border Crisis Management in the Banking Sector on 20 October 2009. 
See the recent Council (ECOFIN) report to the European Council on the state of play on financial levies and taxes, and 
for  guidance  to  the  Member  States  in  the  conclusions  of  the  ECOFIN  meeting  see  ‘Immediate  responses  to  financial 
turmoil’, Council Conclusions of 7 October 2008, both available on the Council’s website at www.consilium.europa.eu.  
The text of the declaration of 12 October 2008 is available on the former French Presidency’s website at www.ue2008.fr.  
Second Council Directive 77/91/EC 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). 

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business6 and therefore will also be able to assess the appropriateness of such plans. Whilst this is 

reflected  in  the  draft  law,  the  requirement  for  the  Court  to  approve  the  plans  may  mean  that  the 

restructuring is not always quick. 

3.3  The provisions concerning the content of the reorganisation plan (Section 8(2) of Article 1) provide 

for the building of voting groups among the creditors, whose composition depends not only on the 

creditors’ legal position but also their respective economic interests. The sub-division following the 

concept of ‘economic interest’  might create legal uncertainty unless the criteria for  making these 

decisions, which may have direct consequences on creditor rights, are more clearly stipulated. 

4. 

Amendments  to  the  Law  on  banking  –  Improved  instruments  for  resolution  of  systemically 

relevant banks 

4.1  The draft law’s introduction of the option of a full or partial transfer of a distressed bank’s assets 

and liabilities to a bridge bank is welcomed. The Eurosystem highlighted the importance of such a 

resolution tool in ensuring the continuity of essential business operations of systemically important 

banks  when  replying  to  the  Commission’s  initial  analysis  of  a  future  EU  framework  for  crisis 
management  and  resolution7.  The  availability  of  such  resolution  tools  is  also  in  line  with  the 

recommendations on the need for an enhanced convergence of national crisis management regimes 
adopted  at  both  international  and  Union  levels8.  In  view  of  the  increasing  inter-dependencies 

between  financial  systems  and  the  need  to  address  the  possible  systemic  impact  of  the  failure  of 

cross-border  financial  institutions,  the  domestic  crisis  management  frameworks  may  need  to  be 

further aligned with future regulatory initiatives at Union level. These initiatives address, inter alia, 

existing problems in the coordination of resolution and insolvency proceedings concerning cross-

border banks.  

4.2 

In line with its previous position, the ECB sees the need for the close involvement of central banks 
in prudential supervision9. The ECB notes the involvement of the Deutsche Bundesbank, together 

with the BaFin, in assessing whether an existential risk to the credit institution and a systemic risk 

are present (Section 48b(3) of Article 2 of the draft law). The involvement of the Bundesbank is 

consistent with its role as a member of the European System of Central Banks in contributing to the 

stability of the financial system (Article 127(5) TFEU). 

4.3  Pursuant to the provisions on transfer orders (Section 48a et seq. of Article 2), the choice of assets 

and liabilities to be transferred from the distressed credit institution to another entity will depend 

6  
7  

8  

9  

Opinion CON/2005/36, paragraph 10. All ECB opinions are available on the ECB's website at www.ecb.europa.eu. 
See  the  Eurosystem’s  reply  of  8  February  2010  to  the  public  consultation  by  the  Commission  launched  in  its 
Communication on an EU Framework for Cross-Border Crisis Management in the Banking Sector on 20 October 2009. 
See in particular ‘Report and Recommendations of the Cross-border Bank Resolution Group’, March 2010, available at 
www.bis.org  and  ‘Practical  Guide  on  Cross-Border  Insolvency  Cooperation’  adopted  by  UNCITRAL  on  1  July  2009, 
available at www.uncitral.org; and the Communication of the Commission of 20 October 2010 on ‘An EU Framework 
for Crisis Management in the Financial Sector’, COM(2010) 579 final. 
Opinion CON/2010/7, paragraph 2.1.1; Opinion CON/2007/33, paragraph 2.1. 

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considerably on the BaFin’s discretion. There are no specific rules or other criteria in the draft law 
which  provide  the  basis  on  which  assets  should  be  selected  for  transfer10.  Although  it  may  be 

necessary to retain some flexibility to allow the BaFin to address different possible situations, some 

basic  rules  to  be  respected  by  the  authorities  in  exercising  this  power  would  be  useful  as  there 

could  be  considerable  intrusion  on  the rights  of  creditors  and  on  the  principle  of  equal  treatment 

(priority rights etc.). Whilst such basic rules would maintain a degree of flexibility, they would also 

limit the discretion in exercising this power with a view to promoting legal certainty on the market 

for bank debt. 

5. 

Suspension of close-out netting clauses 

5.1  Section  13  of  Article  1  fo  the  draft  law  provides  that  contractual  relationships  with  a  credit 

institution  cannot  be  terminated  until  the  business  day  following  the  date  of  an  institution’s 

application  to  BaFin  for  the  initiation  of  the  reorganisation  procedure.  The  ECB  supports  the 

rationale behind this temporary prohibition, as it may be essential to efficiently and safely transfer 

en  bloc  assets,  such  as  derivative  contracts  with  counterparties,  to  a  bridge  bank  or  another  new 

entity to preserve the distressed bank’s business operations until it can be safely reorganised.  

Moreover, Section 48g(7) of Article 2 of the draft law contains an outright ban on counterparties 

terminating  contracts  with  banks  which  are  the  subject  of  a  spin-off  of  assets  to  another  entity 

based on a BaFin transfer order.    

As  stated  in  recommendation  9  of  the  Report  and  Recommendations  of  the  Basel  Committee  on 
Banking  Supervision’s  Cross-border  Bank  Resolution  Group11,  ‘the  ability  of  relevant  [national] 

authorities  to  impose  a  brief  delay  on  the  exercise  of  early  termination  and  netting  rights  would 

maximise the possibility of transfer to a sound financial institution, a bridge bank or another public 

entity provided that the period of time during which the authorities can delay immediate operation 

of contractual early termination rights pending a transfer is clearly defined and limited, after which 

full termination and close-out rights would be available for all financial contracts not transferred to 

a solvent transferee;’.  

5.2  The  ECB  notes  that  any  suspension  of  counterparties’  close-out  netting  rights  conflicts  with 
Directives  98/26/EC12,  2002/47/EC13  and  2001/24/EC14.  Article  7(1)(b)  of  Directive  2002/47/EC 

10     Article 2 Section 48j(3) only provides that the selection of the remaining spin-off assets depends on how significant they 
are to an effective, cost-efficient defence of the systemic risk emanating from the credit institution. It is unclear if this 
sentence is at all applicable in the case of partial transfer, as Section 48k(2) only refers to the fourth to sixth sentences. 
This seems to be a drafting error as Section 48j(3) only has five sentences. Therefore the reference is understood to be to 
the third to fifth sentences; i.e. the main sentence dealing with selection of remaining spin-off assets for re-transfer. 
Basel Committee on Banking Supervision, ‘Report and Recommendations of the Cross-border Bank Resolution Group’, 
March 2010, available at www.bis.org.  
Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and 
securities  settlement  systems  (OJ  L  166  ,  11.06.1998  p.  45),  as  amended  by  Directive  2009/44/EC  of  the  European 
Parliament and of the Council of 6 May 2009 (OJ L 146, 10.6.2009, p. 37). 

11  

12  

13     Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements, 

(OJ L168, 27.6.2002, p. 43). 

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requires Member States to ensure that in case of financial collateral a close-out netting provision 

can take effect in accordance with its terms notwithstanding the commencement or continuation of 

winding-up proceedings or reorganisation measures or any purported assignment, judicial or other 

attachment  or  other  disposition  of  or  in  respect  of  such  rights.  Similarly,  settlement  finality  is 

required  by  Directive  98/26/EC  for  netting  within  Union  designated  payment  and  securities 

settlement  systems.  Article  25  of  Directive  2001/24/EC  further  provides  that  netting  agreements 

shall be governed by the law of the contract which governs such agreements. The ECB notes that 

the master agreements on which close-out netting rights are based are often concluded by German 

banks under the laws of other jurisdictions, such as English or New York law. It is legally uncertain 

whether  the  proposed  temporary  stay  would  be  consistent  with  the  existing  provisions  of  Union 

law.  Also,  it  is  unclear  under  Union  law  whether  the  proposed  stay  could  be  enforced  against  a 

German credit institution which has entered into a netting agreement governed by English or New 

York law or other non-German laws. In view of these legal uncertainties, any statutory powers to 

impose a temporary stay on such contracts should be coordinated closely at Union level. 

6. 

The restructuring fund and bank levy  

6.1  The ECB welcomes the establishment of the Fund as part of a broader range of initiatives aiming at 

strengthening financial stability. The Fund regime entails the further disengagement of the State in 
favour of restructuring primarily financed by the banking sector15. This financing regime is in line 
with the G20 and the European Commission communications16. 

6.2  Nonetheless,  the  ECB  considers  that  the  Fund  should  provide  financial  support  to  mitigate  the 

impact of an institution’s distress, i.e. in the context of a resolution, and should not be used for the 

purposes  of  a  bail-out.  The  purpose  of  resolution  funds  is  to  mitigate  the  effects  of  a  failure  on 

different stakeholders by trying to maximise the value of remaining assets and facilitate, if possible, 

a  quick  return  to  their  productive  use.  In  some  cases,  this  type  of  fund  may  help  to  continue  the 

performance  of  core  services  by  creating  a  bridge  bank  that  will  be  sold  afterwards.  The  costs 

incurred in these activities should be borne by the private sector, thus avoiding recourse to public 

funds to support distressed institutions. From this perspective, the ECB acknowledges the intention 

of the German authorities to establish a fund with a wider scope.  

6.3 

It cannot be excluded however that in a crisis situation, funding by the industry may be insufficient 

and  that  supplementary  use  of  public  funds  may  be  necessary.  In  that  case,  the  banking  sector 

should be called upon to reimburse the State for the public funds it has provided. The principle of 

ex post recovery from the banking sector should promote additional market discipline and address 

moral hazard risk. 

14  

15 
16  

Directive 2001/24/EC of the European Parliament and of the Council of 4 April 2001 on the reorganisation and winding 
up of credit institutions (OJ L 125, 5.5.2001, p 15). 
See Opinion CON/2010/45. 
Commission Communication on Bank Resolution Funds, COM (2010) 254 final, 26 May 2010. 

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This opinion will be published on the ECB’s website. 

Done at Frankfurt am Main, 19 November 2010. 

[signed] 

The President of the ECB 

Jean-Claude TRICHET 

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