What is a precautionary recapitalisation and how does it work?

27 December 2016

What is a precautionary recapitalisation?

A precautionary recapitalisation describes the injection of own funds into a solvent bank by the state when this is necessary to remedy a serious disturbance in the economy of a Member State and preserve financial stability. It is an exceptional measure that is conditional on final approval under the European Union State aid framework. It does not trigger the resolution of the bank.

What is the ECB’s role in a precautionary recapitalisation?

Precautionary recapitalisation measures are only available to solvent banks. Within the precautionary recapitalisation process, the ECB, as the competent authority for significant banks, is asked to confirm the solvency of banks it directly supervises.

Furthermore, precautionary recapitalisation is limited to the capital injections needed to address a capital shortfall under the adverse scenario of a stress test. The ECB is asked to confirm that the bank has a capital shortfall – and to determine the amount of the shortfall – under the adverse scenario of the most relevant European Banking Authority/Supervisory Review and Evaluation Process stress test exercise, while confirming that the bank has no shortfall under the baseline scenario in this case.

How can a bank get a precautionary recapitalisation?

The bank applies to the government authorities for a precautionary recapitalisation.

The ECB, as the competent authority, is informed and asked to confirm that the bank is solvent, meaning that it fulfils the minimum capital requirements (i.e. Pillar 1 requirements). The ECB is also asked to determine the amount of the capital shortfall under the adverse scenario of the relevant stress test.

Once this confirmation has been received, the authorities can go ahead with the precautionary recapitalisation process. The precautionary recapitalisation measures are conditional on final approval by the European Commission (Directorate-General for Competition) under State aid rules.

When is a bank solvent?

For the purposes of a precautionary recapitalisation, a bank is considered solvent if it fulfils the minimum capital requirements (i.e. Pillar 1 requirements). In addition, the bank should not have a shortfall under the baseline scenario of the relevant stress test.