Rescued Banks Back to the Market?

28 Pages Posted: 29 Nov 2023 Last revised: 9 Jan 2024

See all articles by Edoardo D. Martino

Edoardo D. Martino

University of Amsterdam - University of Amsterdam Faculty of Law; European Banking Institute

Andrea Perini

University of Florence - Law School

Date Written: November 28, 2023

Abstract

Precautionary recapitalization is instrument of flexibility into the post-financial crisis regulatory framework whereby solvent but undercapitalized banks can receive capital aids under stringent conditions. Nonetheless, this instrument confronts a credibility challenge due to poorly articulated provisions and opportunistic behavior by National States. Specifically, the crucial but under investigated issues concern the persistent public ownership of financial institutions several years after the use of precautionary recapitalizations.

This is the first article directly providing an in-depth analysis of such critical issue, proposing an analytical framework to approach the matter. The key insight from this framework is a challenge to the consensus approach on the design of public interventions in banking that looks at the trade-offs among minimizing ex-ante moral hazard of bankers, preserving financial stability and protecting taxpayers. We contend that this approach is incomplete as it overlooks completely the ex-post effect of the intervention which may bring about significant social costs.

Against this framework, we delve into the current legal framework for precautionary recapitalization and provide a detailed analysis of its implementation in the cases of National Bank of Greece, Piraeus Bank, and Monte dei Paschi di Siena. The analysis identifies the key factors in precautionary recapitalizations, encompassing the assessment of institutional solvency, the timing of recapitalization, the type of instruments employed, and the political economy of the recapitalization process. This nuanced examination contributes to the studies aimed at enhancing the effectiveness of the overall supervision and resolution framework for EU banks.

Finally, we briefly confront our findings with the reform proposals on the matter put forward by the Commission in the Crisis Management and Deposit Insurance (CMDI) framework. We conclude that the proposed reform would result either in a useless instrument because of its rigidity or in potentially subject to abuse one because of the potential lax interpretation of the new norms. In either case, it would not serve the purpose of having a credible but flexible instrument to address crisis in a preventive manner.

Keywords: banking, precautionary recapitalization, bank crisis, State aid, bank resolution, CMDI

JEL Classification: G21, G28, K29

Suggested Citation

Martino, Edoardo D. and Perini, Andrea, Rescued Banks Back to the Market? (November 28, 2023). European Banking Institute Working Paper Series 2023 - no. 157, Amsterdam Law School Research Paper No. 2023-38, Amsterdam Center for Law & Economics Working Paper No. 2023-13, Available at SSRN: https://ssrn.com/abstract=4646777 or http://dx.doi.org/10.2139/ssrn.4646777

Edoardo D. Martino (Contact Author)

University of Amsterdam - University of Amsterdam Faculty of Law ( email )

Postbus 15654
1001 ND
Amsterdam, Noord-Holland 1001 ND
Netherlands

European Banking Institute ( email )

Frankfurt
Germany

Andrea Perini

University of Florence - Law School ( email )

Firenze, 50129
Italy

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