The presentation addresses the Kotnik case decided on July 19th by the CJEU on the bail-in vs bail-out attempts by the Slovenian Central Bank. The CJEU considered the haircut to bond holders decided by the Cebtral bank consistent with EU law and with the Communication to the Banking sector by the Commission. It has been used at the Faculty of Economics, University of Ljubljana

1. Taxation, State Aids and Financial Stability
The Slovenian Lesson in Kotnik (C-526/14)
Marco Greggi
Faculty of Economics – Summer School
University of Ljubljana

2. Yesterday - Today
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3. Three Years Ago …
• Decision by the Slovenian
Central Bank / Government to
address local bank crisis;
• Five banks involved:
1. Recapitalization of two banks;
2. Rescue of one;
3. Winding up of two;
• Method adopted:
• Possibility to grant State aid by
the State (Commission decision
on December 18th 2013).
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4. Method Adopted by the Slovenian
Authorities
• 3,2 Billion Euro injected in the Banking sector to support the banks in
order to prevent an International-driven bail out;
• Haircut (write off) of:
• Equity capital owners (shareholders);
• Subordinated debts holders;
• Hybrid financial instruments resembling debt products and equity capital
• Overall amount of 600 Million Euro (?)
• Most significant (first) case of Bail in in the Adriatic Region,
anticipating the Italian situation.
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5. The Legal Framework
• State Aid Prohibition: Articles 107 and sub TFEU;
• Aid provided via public resources;
• Selective;
• Distortive;
• Potential cross-border impact;
• Communication from the Commission on the application of State aid
rules to support measures in favour of banks in the context of the
financial crisis: 2013/C 216/01;
• Ratione temporis, directive 2014/59/EU (framework for the recovery
and resolution of credit institutions and investment firms) was not
applicable.
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6. The Core of the Communication
• (40) State support can create moral hazard and undermine market discipline. To
reduce moral hazard, aid should only be granted on terms which involve
adequate burden-sharing by existing investors.
• (43) Where the capital ratio of the bank … above the EU regulatory minimum, the
bank should normally be able to restore the capital position on its own, in
particular through (1) capital raising measures as set out in point 35. If there are
no other possibilities, including any other (2) supervisory action such as early
intervention measures or other (3) remedial actions to overcome the shortfall as
confirmed by the competent supervisory or resolution authority, then (4)
subordinated debt must be converted into equity, in principle (5) before State aid
is granted.
• (44) In cases where the bank no longer meets the minimum regulatory capital
requirements, subordinated debt must be converted or written down, in
principle before State aid is granted. State aid must not be granted before equity,
hybrid capital and subordinated debt have fully contributed to offset any losses.
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7. The Slovenian Move
• The relevant provisions of Slovenian law are set out in the law on the
banking sector (Zakon o bančništvu) and the law amending or
completing the ZBan-1 (Zakon o spremembah in dopolnitvah Zakona
o bančništvu);
• Coherent with the Communication in writing off subordinated debts
owned by investors (Slovenian and not);
• Condicio sine qua non for the possibility to grant state aid;
• Unprecedented decision by the Government virtually jeopardizing
legitimate expectations by the investors (protection under law =?).
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8. The Point under Law
• Financial / Banking issue turned into a legal one;
• What is the Role of the Banking Communication in 2013 ?
• Is it binding on the States (Slovenian Bank position) ?
• Is the write off of debts (burden sharing) compulsory for the State aid
to be granted ?
• Are there feasible alternatives that may overtake the Communication
and could be consistent with EU law and the prohibition of State Aids
under article 107 TFEU ?
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9. Advocate General Wahl’s View
• Opinion delivered on February 18th 2016:
• Communication is not directly binding on the states;
• No legitimate expectations of investors (in this case) may be considered if it is
in contrast with Article 107 (State Aid Prohibition);
• The essential part:
• Conversion or writing down of hybrid capital and subordinated debt
instruments … is not an essential precondition for the granting of State aid
and is not required when it would lead to disproportionate results;
• It is for the national Courts to verify that, when aid measures adopted in accordance
with the Banking Communication are executed, the principle of proportionality has
been observed;
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10. Decision by the Court
• Court:
• Burden – sharing by shareholders
and subordinated creditors as a
prerequisite for the authorization
of state aid to a Bank with a
shortfall is not contrary to EU law;
• But the Communication per se is
not binding
• Advocate General:
• Burden - sharing it is not an
essential precondition.
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11. The Legal Point
• The Commission cannot waive, by the adoption of guidelines, the
exercise of the discretion that Article 107(3)(b) TFEU confers on it.
• The adoption of a communication such as the Banking
Communication does not therefore relieve the Commission of its
obligation to examine the specific exceptional circumstances relied on
by a Member State, in a particular case, for the purpose of requesting
the direct application of Article 107(3)(b) TFEU, and to provide
reasons for its refusal to grant such a request;
• What about the opposite ? Apparently not possible …
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12. The Slovenians and the Others
• What about the legitimate expectations ?
• Slovenian Banks were not the first in Europe to be in need of Financial support, in
the past, other means have been used and investors left immune;
• The Court (§§ 65 and 66):
• The fact that, in the first phases of the international financial crisis, the subordinated
creditors were not called upon to contribute to the rescue of credit institutions does not put
the creditors concerned in the main proceedings in a position to rely on the principle of
protection of legitimate expectations;
• Such a circumstance cannot be regarded as a precise, unconditional and consistent
assurance capable of engendering a legitimate expectation on the part of the shareholders
and the subordinated creditors that they would not be subject to burden-sharing measures in
the future. Economic operators are not justified in having a legitimate expectation that an
existing situation which is capable of being altered by the EU institutions in the exercise of
their discretion will be maintained, particularly in a field such as State aid in the banking
sector, whose subject matter involves constant adjustment to reflect changes in the
economic situation.
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13. The Slovenian Lesson
• Point of convergence between Commission, Court and Advocate:
• Paragraph 45 of the Communication:
• An exception … can be made where implementing such measures would
endanger financial stability or lead to disproportionate results;
• This exception could cover cases where the aid amount to be received is small
in comparison to the bank’s risk weighted assets and the capital shortfall has
been reduced significantly in particular through capital raising measures.
• Disproportionate results or a risk to financial stability could also be addressed
by reconsidering the sequencing of measures to address the capital shortfall.
• Best effort approach in case of systemic risk ?
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14. Today - Tomorrow
• MPS (Monte Paschi Siena) alleged
capitals needed in April 2016 around
5 Billion Euro (???) (and counting);
• NPL to be reduced from around 24,2 to
14,6 billion Euro;
• Some minor banks to be considered
as well;
• Atlas Fund activated using private
resources to support the bank;
• Insufficient capitals ? Systemic risk ?
Size matters ?
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15. Thanks for your Attention !
marco.greggi@unife.it
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