hand ουt credit.

* ιι hether this
, comparable to
ice providers.a3
r policymakers Chapter 24
t n-haτ is sτill α
! bouseholds ßη
rc, banks which
Threats to Ευ Financial Sτability Amidst
hll ßη ιhe trap of
the Pandemic Crisis
ιbεßτ regulatory
rial crisis, such
b þεßτ ability to
*- Christos ν, Gortsos
romplete), and
¸αΙ framework
iye recourse to 1. The Robusτness of τhε Ευ Banking System before the Current Pandemic Crisis1

LΙßοη long term We are already ßη τhe second year of the lasting COVID-l9 pandemic crisis, which,
ι ιmprecedented unlike ßη τhe case of τhe 2007-2009 Global Financial Crisis (GFC), was not caused by failings
(mainly αΙbeßτ ηοτ exclusively) of the flnancial sector2 but rather by α low-probabilitY ηΟη-
ryainsτ τhe build
ιπßοη campaign financial risk. From αη economic point of view, ihe focus predominantly remains οη the rescue
of companies ßη τhe real sector of the economy. Banks, which were αt ihe Centre of the GFC,
Þ banks which
are currenτly, οη α global scale, much beττer capiιalised and with stronger liquidity, while
τßΙΙ continue to overall f,nancial sτabiliτy3 has also been enhanced. This also applies to the Ευ banking SYStem,
foding τhε best which jusτ before τhe ouτbreak of the pandemic crisis was quite robust, as manifested, inter
αΙßα, by the quarterly Risk Dashboard of the European Banking Authority (ΕΒΑ)4 of 14 April
ring,
2020, which covered data of the 4th quarter of 201θ.5

This Chapιer ιvas finalised οη 3Ι January 202l.

2
For α brief overview of τhe (vasτ exisτing) lßτeτατυτe οη τhe multiple causes of that crisis, see Christos ν. Gortsos,
Fυηdαmòηταιò of public ιητòτηατßοηαΙ Financial La\n/: International Banking -LaM/ \4/irhin the System of Public
ιητòτηατßοηαι Financial Laly, Schrifτen des Europa-Insτituts der Universiιlit des Saarlandes - Rechtswissenschaft,
Nomos Verlag, 2012, ρρ. Ι27 -L29 (with extensive further references).
3οη τhe various definiτions of τhis τeιm, see by means of mere indication Aerdt Houben, Jan Kakes, and GαΙτγ J,
Schinasi, ,Toward α Framework for Safeguarding Financial Stability', ΙΜF Working Paper WP/04/101, 2004, ρρ.
'Ρτòòòτνßηg FinanciaΙ SrabiliÞ/', 36 Economic Issues, 2005; and Kathaτina Pistor,
10_11 and 38-42; Garry J. Schinasi,
.Reguιaτing Financial Markeτs - Αη LTF Perspective', ßη Emilios Avgou]eas and David C. Donald (eds), The PoIitical
Economy of FinanciaI Regulation, Cambridge University Press, 2019, ρρ, 19-37.
aThis agencμ αη inτegral
ραιτ of τΙιe EuIopean System of Financial Supervision
(ESFS), was established bY virtue of
, l:l _\:ril 2020. Reguιiτion (Ευ) Νο 1093/2010 of τhe European Parliament and of the Council of 24 November 2010 establishing α
iL'Ιs Basel turning Euiopean Supervisory Auτhorlτy (European Banking Authority), amending Decision Νο 7161200θ/EC and rePealing
τ þΒ ι:erv Matthias Commission Decision 2009/7B/EC IOJ L 331, 15.12.2010, ρ.12-47].
5According ιο τhis Dashboard (available at < https://eba.europa.eýeu-banks-sail-tfuough-corona-crisis-sound-caPital-
η,Rτge. Pandemic
raτios >), which summarised τhe main risks and vulnerabilities ßη the Ευ banking system ahead of the crisis, Ευ
 Part Ιν. BANKING, FINANCE AND EURo

The relaτively beττer flnancial condiτions of Ευ credit institutions ßη the period before the exposed (αι leas
ouτbreak of τhε pandemic crisis can be aττributed to two main faciors, The flrst is the so-called they were eqιi:
'Basel ΙΠ ßmραòτ', namely τhε faci τhατ Crediτ insτitutions beneflted from having implemented micro-prudenιa
macro-prudential buffers, which were introduced, as international f,nancial standards, by virtue that was ηοτ þe

of τhε so-called 2010 'Basel ΙΙΙ regulaτory framework' of the Basel Committee οη Banking Furtherlιor
Supervision (hereinafτer τhe 'Basel Committee').6 These are currently available to allow them enhanced bι- ýε
to effecτively conτribuτe το τhε shorτ- and longer-term flnancing of economic activity and Resoluιion Dι:e
recovery ßη τhe Ευ wßτhουτ ρυττßηg ατ sταΚε their minimum capital adequacy requirements, and influenced bι,,-º
complemenτ τhε higher qualiτy of capiτal, which has also been α by-product of the Basel ΙΙΙ (FSB).13 For }1
regulaτory framework, as applied ßη τhε Ευ by the micro- and macro-prudential pillars of the Regulation (SRl
2013 single rulebook, namely τhε CαρßταΙ Requirements Regulation and Directive (CRR and Βυ, consising ,

CRD ΙΥ as currently ßη force7). (SRF). Even ýò

The second fαcτοτ is τhε improvemenτ ßη the quality of micro-prudential banking the progress :ß.
supervision carried ουτ since 2014, for τhose Member States participaiing ßη the Banking υηßοη (related) buili-::
(BIJ),' direcτly by τhe European Cenτral ΒαηΚ (ECB) for signiflcant credit institutions, and by considered aS ßΞ
national cοmρετεητ (supervisory) αυτhοτßτßεs (NCAs) for less signiflcant credit institutions flnancial stabiljr,
wiτhin τhe Single Supervisory Mechanism (SSM), The SSM, established ßη 2013 by virtue
of τhe SSM Regulaτion (SSMR),' cοηòτßτυτεs τhε f,rst Βυ pillar designed as α response to the
flscal crisis ßη τhe euro area.lo As illusτraτively noted ßη the Report drawn υρ οη 25 February Jean-Vicιor L o*r,
(eds), Inrernoπol:
2009 by τhε de tarosidre High-Level Group,l1 the flnancial system of several States was not
12
Directive 201_1 Ξ;
for the recovery -
EEC, and Dirc.:1
crediτ insýτuions' òαρßιαß raýos and asseτ qualiτy had (οη average) constantJy improved (even though return οη equity and 2013/36 ¸υ, ,

has worsened). Furτhermore, as noτed, ßητòτ αΙßα, by Andrea Enria, Chair of the ECB Supervisory Boπd: "Unlike of the Counci _C_l
ßη ýιe 2008 financial crisis, banks are not τhe source of the probiem this time. But ιve need to ensure that they can the European Ρ-_
be parτ of τhe sοlυτßοη" (see ατ < hττps://www.bankingsupervision.europa.eu/press/intervielgs/date/2020/htrnl/ssm. absorbing and re::
in200623-e668f871fa.en.html >). [oJ L 150, 7.6.: - :
6
The ßηßτßαΙ framework consisτed of τhree Reporτs: 'Baset ΙΙΙ: Α global regulatory framework for more resilient banks and 13See τhe FSB',. '_ι
banking sysτems', 'Base] ΙΙΙ: The Liquidiτy Coverage Ratio [LCR] and liquldity risk monitoring ιools' and 'Basel ΙΙΙ: (available at < ß:=
The neτ sτable funding raτio INSFR]'. Οη τhis framework, as ßη force, see at < https://wrv,ιv.bis.orgΔcbsΔase13.htm >.
ßη October 2Ο_:
7Regulaτion (Ευ) Νο 575/2013 of the European Parliament and of the Council of 26 June 2013 οη prudential standards rι,ere :-
requiremenτs for crediτ ßηsτßτυτßοηs and invesτment firms and amendlng Regulation (Ευ) Νο 648Ι20Ι2 and Direcýve 2020'Eva]uaιc: :

2013/36/Ευ of τhe European Ρατlßαmεητ aτιd of ýe Council of 26 June 2013 οη access to the activity of credlt ýe-effects-of-:c.:*ι
ßηsτßτυτßοηò and τhe prudenτial supervision of crediτ institutions and investment firms, amending Direcive 2002ΙΒ7Ι resilient and τεß:.l
EC and repealing Directives 2006/48/EC and 2006/49/EC IOJ L 176, 27.6,20Ι3, ρ. 1-337]. 1aRegulaýon (EL \
s
'Parτicipaτing' Member Sτατεs means boτh τhose whose cuπency is the euro and those with α derogaýon, which have rules and α υη,ß:,-
esτablished α 'close cooperaτion' ßη accordance rpith Article 7 SSMR (Arýcle 2, point (1)), such as, since October of α Single Re>:_-
2020, Bulgaria and Croatia. L 225,30.7.2α,,!,
9Council Regulaιion (Ευ) Νο 1Ο24Ι2ΟΙ3 of 15 October 2013 conferring specific tasks οη the European Central ΒαηΚ European Par-l.:::
concerning policies relating to the prudential supervision of credit insituιions IOJ L 2Β7, 2θ.10.2013, ρ. 63-89]. absorbing arιd
=::
10
Οη τhε causes of τhßs crisis and τhε relaτed policy responses, see by means of mere indication (ουι of α vast existing ρ.226-252].
liτeraτure) Horsτ Zimmermann, 'The deep rooτs of τhε governmenτ debt crisis', 3The Journal ofFinancial Perspectives
15See Christos \, G
1, 2015, ρρ, 33-42, and Chrisτos Hadjiemmanuil, 'The Euro Ατεα Crisis, 2008-2018', ßη Fabian Amtenbrink and aspects of τhe *ε::
Chlisτoph Hermann (eds), Oxford Ηα ndbook οη τhò EIJ Lαι,ι of Economic and Monetary υηßοη, Oxford University ssrn.com,/absτa::=
16The resoluιion:,:
Press, 2020, ρρ. 1253-1362.
11
For αη overvierv of this Repoπ, see Guido Ferarini and Filippo Chiodini, 'Regulating cτoss-border banks ßη Europe: α the legislaιiι,e a::s
commenτ οη τhe de LarosiÝre reporτ and α modesτ propos αΙ' , 4 Capital Markets Lauι Journal 1, 200θ, ρρ. 123-140, and applicable; seε ßι

2Β2
 THREATS ΤΟ Ευ FINANCIAL STABILITYAMIDST ΤΗΕ PANDEMIC CRISIS

ccc :efore the exposed (at least primarily), or were less signif,cantly exposed, tο τhe GFS noτ οηΙγ because
_. :e so-called theY were equipped with α strong institutional and regulatory framervork, bυτ also because
ι ι:lplemented micro-prudential supervision of their banking system (secτor) was, admiττedly, òυßταbιe; and
::ds, b1, γßττυe that was ηοt the case τhτουghουτ τhe Ευ.
òη Banking Furthermore, since 2014, the Ευ solvency crisis managemenτ framework has also been
=
:: allorv them enhanced by the (new) banking resolution framework laid down ßη τhε Βαηκ Recovery and
ò αòιßτ.ßtγ and Resolution Directive (BRRD), as currently ßη force,12 the òοητεητ of which was heavily
_:ετεηts, and influenced by the international financial standards developed by τhε Financial SταbßΙßτγ Board
ß :e Basel ΙΙΙ (FSB).Π For Member States participating ßη the Βυ, the Single Resoluτion Mechanism
] :ι_iars of the Regulation (SRMR)14 is also applicable, which forms the basis for τhε second pillar of τhe
:ι,ε ιCRR and Βυ, consisting of the Single Resolution Mechanism (SRM) and τhe Single Resoluτion Fund
(SRF). Even though resolution action has been taken οηΙγ ßη α few cases ατ euro area leve1,15
,:,*αΙ banking the progress made οη resolution planning to make credit ßηsτßτυτßοηò resolvable, and τhe
la:;lng υηßοη (related) build-up of minimum requirements for own funds and eligible liabiliτies (MREL) are
:_,-.1s, and by considered as important elements towards maintaining α strong banking sγsτεm and το preserve
L: _:sιitutions flnancial sταbßΙßτγ.16
_ _3 :l. virtue

eS],]ηSe to the
ι Ι3 February Jean-\Λctor Louis, 'The impJementation of ýe LaIosiüre repori: α progress report', ßη Mario Giovanoli and Diego Devos
S:a:es u,as not (eds), InternaΙion αΙ Monetary and Financiol LaVV: The GIoboI Crisis, oxford υηßνeτòßτγ PreSS, 2010,
ρρ. 146-176.
]2Directive 2014/59Ευ of the European Par]iament and
of the Council of 15 Μαγ 2014 esτablishing α framework
for the recovery and resolution of credit institutions and invesτment flrms and amending Council Direcιive Β21891/
EEC, and Directives 200Il24lEC,2002147lEC,2004/25lEC,2005/56/EC, 2007/36/EC, 2011/35/Ευ, 2012130/Ευ
: -.-r οη equity
and 2013/36/Ευ, and Regulations (Ευ) Νο 1Ο93/2Ο10 and (Ευ) Νο 648/2012, of the European parliamenτ and
_ι Ξ,.:ß: "Unlike
of the Council IOJ L 173, Ι2.6.20Ι4, ρ. 190-348]. This was substantlaliy amended by Direcτlve (Ευ) 2019/ò79 of
ò_Ξ ,,:]: ιhεγ can
the European Parliament and of the Council of 20 Μαγ 201θ amending Direcτive 2014/59/Ευ as regards τhe ιoss_
:: ], - hιml/ssm.
absorbing and recapitalisaion capacity of credit inStitutionS and ßηνεsτmεητ firms and Direcτive 98/26/EC (BRRD π)
IOJ L 150, 7.6.2019, ρ. 296-344].
:+-,=:. banks and 13
See the FSB's 'Key Attributes of Effective Resolution Reglmes for Financial Ιηsτßτυýοηs' of November 2011
:; ::: 'Basel ΙΙΙ:
(available at < https://w\v\l/.financia]stabilityboard.org/publications/r 111104cc.hτm >), currenτly ßη force as revised
::s:..ei3,htm >.
ßη October 2014 (avallable at < https://www.financialstabilityboard.org/2014/10/r 141015 >). These financia]
Ι: :_ :rudential standards rvere designed to address the 'tοο big to (be left to) fail problem'. The FSB òοηsυΙτατßοη Reporι of 28 June
],- :-,j Directive 2020 'Evaluation of ýε effects of too-big-to-faii reforms' (avallable at < hττps://www.fsb.org/2020/06/evaluaτion-of-
3:--,. ":\ of credlt the-effects-of-too-big-to-fail-reforms-consultation-report >) noτes τhατ τhεßτ αρρΙßcατßοη made banks, globally, more
Ι,-=::_,. ε 2002/Β7l resilient and resolvable, even though gaps still need to be addressed.
1α
RegulaΙion (Ευ) }Jo 806/2014 of the European Parliament and of the Council of 15 July 2014 esτablishing uniform
::: . hjch have
-.,,
rules and α uniform procedure for the resoluýon of credit instituiions and cerτaln ßηνεsαηεητ firms ßη τhe framework
ij ! '_e Ocτober of α Single Resoluion Mechanism and α Single Resolution Fund and amending Regulaτion (Ευ) Νο 1093/2010 IOJ
L225,30,7,201,4, ρ. 1-90]. This is currently ßη force as substanially amended by Regulaτion (Ευ) 2019/877 of τhe
ε:: ].::ral Βαηκ European Parliament and of the Council of 20 Μαγ 201θ amending Regulaιion (Ευ) Νο 806/2014 as regards τhe loss_
: : Ξ,:-89]. absorbing and recapitalisaýon capacity of credit institutlons and ßηνεsιmεητ firms (SRMR ΙΙ) tOJ L 150, 7.6.2019,
,: . ,. :s. exisiing ρ. 226-252].
1" ,- ;:-specrives 15See Christos ν Gortsos, The Single Resolurion Mechonism (SR\4) and thò SßηgΙò Resoluτion Fund (SRF) - LògaI
.l_:::._brink and aspeck of the second main pillar of the European Banking υηßοη, e-book, 5τh ediτion, 2019 (available ατ < hιτps://
]τ,:_:: - niversity ssrn.com/abstract=2668653 >), ρρ. 216-220.
16The resoluιion plannlng framework
was fuπher enhanced 1η January 2021 lvhen τhe revised rules laid down ßη
ε:-.: .: Europe: α the iegislative acts which amended (ßη 2019) the ßηßýα1 ones (as Sετ ουτ ßη τhε BRRD ΙΙ and τhe SRMR ßι) became
- f-Ι4υ, αι]α appllcable; see also below, section 5 of this Chapteι

2Β3
 Part Ιν. BANKING, FINANCE AND EURo

2. Α Brief Overvieιv of Ευ Economic Policy Responses to the Crisis and the Role of the The flnanciai
ECB designed as temμ
prudential buffers
Immediaτely after the outbreak of the crisis, the Ευ developed α (rather) consistent strategy, Second, the redι:c
which has ταΚεη into account the spill-overs and interlinkages between Ευ economies and the maintain their abi]
need το preserve confidence and stability. The measures taken ßη order to deal with healτh third, the αρρΙßεαυ
emergency needs: support economic activity and employment; preserve monetaΓy and f,nancial loans (NPLs), h:rτ
sτabiliτy and prepare the ground for recovery; and contain α combination of government fiscal (οη the basis of ýτ
sτimuli17 (wiτh extensive resort to the principle of solidarity), emergency liquidity and monetary and performing si,ι

policy measures, as well as measures relating to flnancial stability. pandemic ßη orde:

The role of τhε ECB ßη this context was (and remains) predominant. Ιη its capacity as α Noterponhι, :

moneτary αυτhοτßτγ within the Eurosystem, ßι adopted several bold monetary policy measures address panderιlc
(which are designed as temporary and are close to those taken by major central banks αΙΙ over the European Svs
τhe worldl8). Iτ did so, taking ßηßο account its primary objective of price stability, the instruments which the ECB's
ατ ßτò disposal and the limitations set by the TFEU (for example, the monetary flnancing of (of 6 and 27 ]\Ιαι
flscal policy (by purchasing government bills and bonds ßη the primary market) is prohibited issues: flnancia] s,

by νßττυε of Article 123), by applying both conventional (interest rate) and unconventional Sector; markeι ßΙßιι
(mainly, balance-sheet) measures, 19
of large-scale dοι,
Furτhermore, since the prudential regulatory framervork governing credit institutions
(CRR and CRD Ιν) provides certain elements of flexibility, and by considering that making
full use of τhis flexibility is essential to overcome the fi.nancing pressures faced by flrms and 20Ιη addition, ιhe Ξß:
households, τhe ECB, as α banking supervisory authority wiihin the SSM, and complemented and of the Cοιη:- :
by τhe ΕΒΑ, adopted speciflc supervisory measures to ensure that credit institutions have ihe adjustmenιs ßη re.;,:
ßη Karl-Philipp \',',,
capaciτy το foster credit flows to households and businesses ßη α flexible way during (at least the
:

ΕυΙοιν Ιive Ιι?ε..ε

initial phase of) the pandemic crisis. 21
For α more deτα,ε: .

the COVID-19 ::,.,,

òßι., ρρ. 339-36-- =:
crisis: moneιar, :,,
undertaken αι g_:,:,",
the ßmραòι of CC', .
17
Οη τhε early flscal sτimuli, see Christos Hadjiemmanuil, 'European economic governance and the pandemic: Fiscal
22
See belorr,. sec: _: :
crisis management under α flawed policy process', ßη Christos ν Gortsos, and Wolf-Georg Ringe (eds), Pandemic 23The flrst Reòετ::,τ:
Crisis and Financia1 SταbßΙßο/, ΕΒΙ,2020, ρρ. 175-243. Notable is the recently adopted fiscal package labe]led 'Νεχι repealing Rec:;:::_:
Generaιion Ευ' (including as key element the Recovery and Resilience Facility), the objectives of which are to boost 2020. This \òΞs ::]{
aggregaτe demand, suppoπ the most hard-hit Member States and strengihen economic growth ßη the Ευ. ßη tuIn \yas αß: :Ξ,
18
See Agusτin CaISτenS, 'Counιering COVID-19: The nature of central banks'policy response', Opening remarks at the ρ. 1). Under :Ι" ,::
UBS HighJevel Discussion οη the Economic and Monetaτy Policy Outlook, Zurich, 27 Μαγ 2020, ρρ. 2-4, available dividends shc*,: -
ατ < httpS://www.bis. org/speeches/sp200527,hτm >. capital (CETli:"--:
19For α deτailed presentation, see Christos a]so recommeni=:
ν. Gortsos, 'The response of the European Centra] ΒαηΚ to the cuπent
2aThe ESRB^ αη:-:-ε:
pandemic crisis: monetary policy and prudential banking supervision decisions', |7 European Company and
Financial Ιαιν Review 3-4,2020, ρρ, 240-248. For αη overview of the framework governing the ECB's conventional European Ρατ,ι:::ει
mοηeτατγ policy measures ('general framework'in its terminology) (ust) before ιhe pandemic crisis, see Christos of τhe financ]a_ :ß,r;
ν Gorτsos, European Central Banking Law - The RoIe of the European Central ΒαηΚ and National Central Banks Recommenda-*::.
υηdòτ European Ιανν, Palgrave Macmillan, 2020, ρρ. 2Β6-297; οη unconventional monetary policy measures and the europa.eu hοτηε
":r
framework governing such ECB measures (the 'temporary framework'in its teΓminology), see ibid., ρρ. 12-14 and Gortsos, Euro;ε,:,
297-300, respectively. under Europec,. -,:

284
 THREATS ΤΟ Ευ FINANCIAL STABILITYAMIDST ΤΗΕ PANDEMIC CRISIS

oft of the The flnancial stability-related measures taken by the ECB within the SSM (which were
designed as temporary as well) relate to the following:2o flrst, the relaxation of some macro-
prudential buffers and the adaptation of the composition of specific capital requirements;21
f SτΙαtegγ, second, the reduction of credit institutions' capital requirements for market risk (ßη order to
es and the maintain their ability to provide market liquidity and continue their market-making activities);
ßιh healτh third, the application of flexibility regarding, mainly, τhe regulaτory treatment of non-performing
Ι financial loans (NPLs), further discussed below;22 and finally, τhε recommendation to credit institutions
τηι f,scal (οη the basis of the 'comply or explain principle') to refrain from making dividend distributions
monetary and performing share buy-backs aimed αß remunerating shareholders during the duration of the
pandemic ßη order to maximise the support to the real economy,23
nciri, as α Noteworτhy is also ßτs conτribution ßη the field of flnancial macro-prudential oversight to
mea5ureS address pandemic-related systemic r,rrlnerabilities, by means of Recommendations adopted by
ks αΙΙ over the European Systemic Risk Board (ESRB), ßη the operaτion and decision-making process of
Istruments which the ECB's role is signif,cant,24 Furthermore, ßη accordance with the two sets of actions
εncing of (of 6 and 27 Μαγ 2020, respectively), its General Board addressed five major flnancial stability
prohibited issues: flnancial system implications of the flscal measures taken tο protect the economy's real
nνentional sector; market illiquidity and implications for asset managers and insurers, as well as the impact
of large-scale downgrades of corporate bonds οη financial markets and flrms (due to increased
mιßτυdοηs
Ει making
,flrms and
2cIn addiιion, the ECB also fully supported the adoption of Regulation (Ευ) 2020/873 of the European Parliament
plemented and of the Council of 24 June 2020 amending Regulations (Ευ) Νο 575/2013 and (Ευ) 2019/Β76 as regards certain
ò have the adjustments ßη response to the COVID-19 pandemic IOJ L 204, 26.6.2020, ρ. 4-17]. Οη this legisiative act, see details
ßη Karl-Philipp Wojcik, 'The EU's Response to ýe COVID-l9 Pandemic ßη ιhe Field of Ευ Banking Regu]ation', 24
αι least the
Ευ Low Live Weekend Εdßtßοη, 3 July 2020, ρρ. 19-21.
21For α more detailed presentation, see Bart Joosen, 'Balancing macro- and micro-prudential powers ßη ιhε SSM during
the COVID-19 crisis', ßη Christos ν Goπsos and Wolf-Georg Ringe (eds), Pandemic Crisis and Financial Sιabiliry,
cit., ρρ. 339-360, and Christos ν Gortsos, 'The response of τhe European Cenτral ΒαηΚ to the curreni pandemic
crisis: monetary policy and prudential banklng supervision decisions', crr., ρρ. 24Β-253. Equivalent initiatives weIe
undertaken at gtobat level by the Basel Commitιee 1η accordance with its Report of 3 April 2020 'Measures to reflect
ýe impact of COVID-19', avai]able at < https://wrvι,v.bls.org/bcbs/publ/d498.htm >,

fuc; Fiscal
22
See below, section 3 1η ýis Chapteι
bL Pandemic 23The first Recommendation relating to thls aspeci, "οη dividend distributions during the CΟνΙD-lθ pandemic and
ýe]_ed'Next repealing Recommendaýon (ECB/2020/1) (ECB/2020/19)" IOJ C 102Ι, 30.3.2020, ρ. 1], was adopιed οη 27 March
ß are :ο boost 2020. This was repealed οη 27 July by α new Recommendation (ECB/2020/35, OJ C 251, 3Ι.7,2020, ρ. 1), which
υ. ßη turn was also repealed οη 15 December by the οηε currently ßη force (ECB/2020/62, OJ C 437, LΒ.12.2020,
ιιηατκs αt the ρ. 1). Under the latter, credit institutions are asked to refrain from or limit divldends until 30 September 2021;
2-J. αι,αßΙαbΙe dividends should remain belolp 15% of cumulated 2019-20 proflts and not highel than 0.20 of ιheir core equity
capital (CET1) τατßο. The adoption of αη extremely moderate approach towards variable remuneraýon payments is
b ýe cuπent also recommended.
bnpanv and 'aThe ESRB, another integral part of the ESFS, was established by virtue of Regulation (Ευ) Νο 1Οθ2/2010 of the
ß coi]\ eηιßοηαΙ European Parliament and of the Council of 24 November 2010 οη European υηßοη macro-prudenýal oversight
, sεe Christos of ιhe financial system and esιablishing α European Systemic Risk Board IOJ L 331, 15,12,2010, ρ. 1-11]. Οη its
7ηποΙ Banks Recommendations (including οη the restrictlon of distributions during the pandemic), see at < hιtps://rv-ιvw.esrb.
rurεs and the europa,eu/home/search,/coronavirusΔtml/index.en.htm1 >. Οη the role of the ECB ßη the ESRB, see Christos ν
φ. 12-14 and Gortsos, European Central Banking Law - The RoIe of the European Central ΒαηΚ and 1{ational Centrol Banks
under European Law, cit., ρρ. 371-373.
 Part Ιν, BANKING, FINANCE AND EURo

νοΙατßΙßτγ and 'flßghτ το qualiiy'reacτions); system-wide restraints οη dividend payments, share decreased durilg ι

buybacks and other pay-outs; and liquidity risks arising from margin calls.2S of both τheir οι,eτ;
Wßτh α view το achieving τhe objecτive of preserving fi.nancial stability αt euro area level, expected tο Ιηòτeα
while also allowing flexibiliτy ßη τhe applicaiion of the resolution framework amidst the crisis, households beforε
τhe Chair of τhe Single Resoluτion Board (SRB26) also made specific targeted interventions by the severe s:o

ßη relaτion το crediτ insτiτuτions'resolution planning.27 It is finally noted that the European during τhε crisis ι

Securiτies and Markeis Auτhoriτy (ESMA)Σ has also taken α series of speciflc measures ßη The main òοηceΓτ]
τhe fietd of capiτal markeτs regulaτion,2g which included, inrer αΙßα, guidance οη accounting relevance' ιòhοse
implicaτions for lisτed companies, measures relating to short selling bans and the maintenance and evenruallι- 1ea

of conducτ of business obligaτions under the Markets ßη Financial lnstruments Directive30 The flexibi]rιι

(MiFID ΙΙ, as currently ßη force). of loans as non-per

of ttιe econom1-. \
3. Challenges Ahead and Alternative Means to Address them the 'moratoria'μr
the depth and Üιe
οη τhe basis of τhe ECB aggregaτe resulτs of its 'ι.ulnerability analysis'of credit institutionS insιituÜons ßη each
direcτly supervised by ßτ wßτhßη τhe SSM of 2Β July 2020, the euro area banking system was relation ßο exposuπ
considered ßη α ροòßτßοη το wiτhsτand τhε economic stress induced by the pandemic.3l The It is τακeη as ;

overall resilience of τhε euro area banking system continues to be α basic scenario taking financial stabilin".
ßητο αccουητ τhε forecasτs included ßη τhε December 2020 'Eurosystem staff macroeconomic the role of supeπ_ι
projecτions for τhe euro area',32 which are characterised by reduced uncertainty despite importance. Takir
ongoing challenges. Neverτheless, ßη addition to the (above mentioned) financial stability flnancial sτabilin,
issues idenτified by τhε ESRB, τhe expected increase ßη the ratio of credit institutions' NPLs being) applied. ý
(which are pari of α wider set of non-performing exposures (NPEs)), ιvhich signif,cantlY conditions will be
will navigaτe creC
25
See respecτively ατ < hττps://www,esrb.europa.eu/news/pr/date/2020/htmVesιb.pr200514-bblfθ6a327.en.html > and
>.
the current policι,
< htφs://rvιvvr.esrb.europa.eu/news/pr/date/202O,/hτmJ./esrb.pr200608-c9d7lf035a.en.htm]

The SRB is τhe hub wiτhin τhe SRM like τhe ECB iS wßτhßη τhe SSM; οη the SRB, See Christos ν. Gortsos, The Single ones: οη the οηe
'6
Resoluτion ]\4echanism (SR\.{) and τhò òßηgΙò Resoluiion Fund (SRF) - Legal aspec¸ of the second main pillar of the employment) αηß
European Banking υηßοη, cit., ρρ. 105-144 (ιvith exτensive further references).
27
The τ}ιree inτervenýons by Elke Künig are available, respectively, at < https://srb.europa.eu/en/node/θ65 >, < https://

srb.europa,eu/en/node/966 >, and < https://srb.euτopa.eu/en/node/θ67 >. 33This is αttτßbυιαb_ε ::

(Ευ) Νο 1095/2010 of
'sThe ESMA is also αη inτegral paIt of the ESFS and was established by virtue of Regulation
< https://wwι,.co",
τhe European ΡατΙßαmeητ and of τhe Council of 24 November 2010 establishing α Euτopean Supervisory Authority follow-up Progress ß
(European Securiτies and Markeτs Auτhoriτy), amending Decision Νο 716l200θ/ΕC and repealing Commission noted, ho.rιever. -iε:
Decision 200θΙ77/ΕC IOJ L 331, 15.12.2010, ρ. 84-119]. fisca] crisis ßη :he e_
29
οη τhis αòρeòτ, see Niamh Moloney aτιd Pierre_Henri Conac, ¸υ Financia_] Maτket Governance and the COVID-l9 tο banks οη ηοη--Ξ
Crisis: ESMAs Nimble, Responsive and Speedy Response ßη Coordinaιing Ναtßοηα1 Authorities tfuough Soft-Law pdf/guidance_on_:;,
ßα
Ιηòτιυmeητò', |7 Ευτορòαη Company and Financiol Law Ròνßòw 3-4,202Ο, ρρ. 363-385, as well as Luca Enriques and Οη the mοsι reae::
Marco Pagano, ¸mergency measures for equity τrading: the case against short-se}ling and stock exchange shutdowns', European Cornrr,ss::
ßη Chτisτos ν. Goπsos and Wolf-Georg Ringe (eds), Pandemic Crisis and Financial SÝabiliÞ/, cit., ρρ. 413-428. 35
See οη this Chrs::s
]0 Direcτive 2014/65Ευ of τhe European ΡατΙßαmeητ and of the Council of 15 Μαγ 2014 οη markets ßη financial crisis', ßη Chris:cò \'
instruments and amending Directive 2002l92lEC and Directive 2011/61/Ευ IOJ L 173, 12.6,2014, ρ. 349-496]. 36
It is noted ßη :}ι; -
31
ECB, ¸υτο area banking secτor resilienτ το sτIess caused by coιonavirus, ECB analysis shows', press release of 28 'Review of ιhe ò-,:,ß
July 2020. info/files/businesò_:
32The December 2020 Projecτions are available at < https://www.ecb.europa.eu/pub/projections/html/ecb. revierv-targeιed-< :es
projections202012_eurosysiemstaff-bf8254alOa,en.html >. the Commission-
 THREATS ΤΟ Ευ FINANCIAL STABILITY AMIDST ΤΗΕ PANDEMIC CRISIS

,menΒ, Share decreased during the years following the GFC and the euro area fiscal crises as α percenτage
of boτh τheir overall assets and their regulatory capita1,33 cαηηοτ be underesτimaτed. These are
ro area level, expected to increase across the board both ßη relation to credits and loans granted το f,rms and
Lla τhε crisis, households before the outbreak of the pandemic crisis, to the extent that these will be affecτed
interventions by the severe slowdown of the economy, as well as to credit and loans that are granτed
lhe European during the crisis (albeit ßη certain cases of ailing businesses covered by Staτe guaranτees).3a
: measures ßη The main concern ßη this respect is the exposure to NPLs of crediι institutions of 'sysτemic
π accounting relevance'whose insolvency could have α significant negative impact οη the financial sysτem
ι maintenance and eventually lead to α systemic crisis.
ls Directive3o The flexibility currentlyprovidedto creditinstitutions to prolongthe periods forthe classif,caÞon
of loans as non-performing is justified ßη terms of supporting the flnancing of the fragile real secτor
of the economy. Nevertheless, this entails the risk of accumulaÜon of problems after the lapse of
τhe 'moratoria'period, ýe extent of which will vary both among Member States (depending οη
τhe depth and the duraιion of the current and upcoming economic recession) and among crediτ
Ετßηsιßτυτßοηs
institutions ßη each Member State (depending οη the composition of their Ιοαη portfolio, mainly ßη
g s!-Stem was
relation to exposures οη individuals and companies ßη sectors most severely affected).3S
jemic.31 The
It is taken as α given that the ultimate public policy objective, namely the preservaτion of
rnario taking
financial stability, should not (and is not expected to) be compromised. Under this perspecτive,
Eoeconomic the role of supervisory and resolution authorities and the decisions theywill take are of υτmοòτ
ηßηι_ν- despite
importance. Taking into account the existing set of tools available36 ßη order to achieve τhe
rial sτability
financial stability objective and ßη view of the necessary flexibility that has to be (and is
htions'NPLs being) applied, the author argues that the effectiveness of policy reaction under the cυττεητ
ι signiflcantly
conditions will be basically tested against two benchmarks: first, how supervisory authorities
will navigate credit institutions ßη appropriately balancing tluo of the primary objectives of
@.en,hπnl > and
τhe currenτ policy agenda, which may, nevertheless, ßη the medium-term become conflicting
rιsos. The Single ones: οη the one hand, financially supporting the real sector of the economy (and hence
ηßη pillar of the
employment) and, οη the other, preserving flnancial stability; and second, howthe triggers
ιιS5 >, < https://
33
This is ατττßbυταblε to the 'Council Acýon Ρßαη to tackle non-performing loans ßη Europe' of July 2017 (available at
Νο Ι0θ5/2010 of < hττps:i/www.consiiium.europa.eýen/press/press-releases/2017l07l11lconclusions-non-performingJoans_>), to the
rτison,Auýority follow-up Progιess Repoπs of the Commission and (mainly) to accommodaθng macroeconomic conditions. Ιt is
hg Commission noτed, however, that the existing stock of NPLs, created as α by-product of the global financial crisis or the subsequent
fiscal crisis ßη τhε euro area ('legacy NPLs'), still significantly varies among Member States. The ECB 'Guidance
Ι þe COVID-19 το banks οη non-performing loans'of Μαγ 2017 (available at < https://www.bankingsupervision.europa.eu/ecb/pub/
La:gh Soft-Law pdf/guidance*on_npl.en,pdf >) iays down best pracices which constitute its supervisory expectation within the SSM.
Lm Enτiques and 3α
οη τhε mοsτ recent evoluýon ßη NPLs ßη the Ευ, see the 'Monitoring report οη risk reduction indicators' of the
hge shutdowns', European Commission, the ECB and the SRB of November 2020, ρρ. 9-32.
, al3_{28. 35
See οη τhis Chrisτos ν Gortsos, 'The application of ýe Ευ banking resolution framework amidst the pandemic
ýΕ ßη financial crisis', ßη Chrisτos ν. Gorτsos and Wolf-Georg Ringe (eds), Pandemic Crisis and Financial Stabiliγ, cit., ρ. 368.
F 319{96]. 36Ιτ is noted ßη this respect ιhαι ßη January 2021 the Commission issued α targeted consultation document οη the
rrs release of 28 'Review of ýe crisis management and deposit insurance framework' (avallable at < https://ec,europa.eýinfo/sites/
info/flles/business_economy_euroΔanking_and_finance/documents/202 1 -crisis-management-deposit-insurance-

ιctions hιml/ecb. review-targeted-consultation-document en.pdf >), which will (very probably) lead ιο α related formal proposal from
the Commission,
 Parτ Ιν. BANKING, FINANCE AND EURo

embedded ßη the framervork to activate the existing set of tools will be activated by both 4. The Role of Ι

supervisory and resolution authorities.37

Furτhermore, the European Commission's nelμ NPL Action ΡΙαη, set ουt ßη its National sυ;τ
Communication of 16 December 2020 'Tackling non-performing loans ßη the aftermath of the NPLs as α consθ;.
COVID-l9 pandemic',38 is intended to prevent α future build-up of NPLs across the Ευ due exercise of pΓLCε"
το τhe pandemic. The strategy proposed contains four pillars; flrst, the further development of NPLs problem. Ο:
secondary mατΚετs for distressed assets, which will allow banks tο move NPLs off their balance pursuant to the S-

sheeτs,while ensuring further strengthened protection for debtors; second, the reform of the EU's Aπicles 97-101 C]
cοτροτατε insolvency and debt recovery legislation; third, the support of the establishment and (and the latτer ß: :
cooperaτion of national asset management companies (AMCs)39 and eventually α cross-border οη α consistenι ]α-.

ηετwοτΚ among national AMCs at Ευ level;a0 and fourth, the implementation of precautionary risks ßη òαρßιαΙ α:
public supporτ measures to ensure the continued funding of the real economy under the BRRD institutions' ροτ:Ιι
and State aid frameworks.a1 identify weaknesx
The role of credit institutions' own credit risk management assessment is α decisive For the mec,
facτor as well. This applies (ßη particular) to the provision of new credit and loans το aSpeCtS desen-e α:

households and businesses during the entire cycle of the pandemic crisis.a2 While demand importance τòßΙΙ :ε

for bank credit has surged and is expected to further increase, it may nevertheless (ßη several Ευ banking sνsιε:
cases) ηοt be fully supported by solid economic fundamentals of (prospective) borrowers. under Article Ι0-:

Ιη addition, it is also more than evident that credit institutions'operational risk frameworks and of their earlv :

have also been impacted by the crisis, inducing them to accordingly revise their òαρßταΙ Furthermore, of ρα

planning scenarios. institutions meeιil

ßη α flexible (αηα
Current crisis.'' Ιß :

of 19 March 20],,,

37
These aspects ωe discussed, respectively, ßη sections 4 and 5 ßη this Chapter. For αη analysis of several alternaive
policy opτions ßη dealing with the crisis, see also Arnoud Boot, Elena Carletιi, Hans-Helmut Kotz, et. Αl., 'Coronavirus α3
See ßη ýis τesρε:: Ξ_
and banking: Evaluating policy options for avoiding α financial crisis', νοχΕÞ 25 January 2021. wwιy.eba.euro:a :, ,

s COM(2020) 822 final. Assessmento:c2'- R: :,:

39ουτ of τhe vast existing literature οη the optimal design of AMCs, see Caroline Cerruti and Ruth Neyens, Public and'ECB Bali:; S
htιps://wrvrι.ba:.-:,_ι
Αòòετ Managemenτ Companies: Α Toolkit, International ΒαηΚ for Reconstructing and Development, The World ΒαηΚ
aSee ßη ιhis res:e:,
Group, 2016. See also ihe Commission Staff Working Document ¶ΜC
Blueprint' accompanying the Commission's
Communicaýon of 14 March 2018'Second Progress Report οη ιhe Reduction of Non-Performing Loans ßη bankingsupen ,,,:: :
Europe', (COM(201B) 133 final). The AMC Blueprint is availab]e at < https://eur-lex,europa.eu/legal-content/EN/
α5
Βγ its decision :: , ß
TXT/?uri=SWD:2018:72:FIN >. europa. eu./eba-:-:=:
aOThe cιeation of α European Asset Management Company ('bad bank') has also been proposed as αη alternaιive a6See ΕΒΑ, 'ΕΒ.\ ,:,

òοlυτßοη, which could resemble the US Troubled Asset Relief Program (TARP) established by the Emergency as ραπ of ýe ]--- Ξ
Economic Sιabilization Act of 2008 amidst ýe GFC and ßη particular the US subprime mortgage crisis (α similar and meιhodo.cg:: ,-:
proposal was aired ßη 2017 by Andrea Enria (ßη his capacity then as Chair of the ΕΒΑ) but has not been formalised). pιocedures αηι] :::.,:
Οη τhis αsρεcτ, see Αηιοηßο Carracosa, ¶ European Bad ΒαηΚ - α necessary tool for flnancial stability?', SRB BIog, testing (ΕΒ_{ G- - - _
2Β December 2020. α7
See ßη this res:.:. _ ß
ar
Οη the latter, see also below, under secýon 4 ßη ýis Chapter. 2021, which d;εs :,::
α'Of primary importance ßη this context are ýe ΕΒΑ Guidelines of 2θ Μαγ 2020 οη 1οαη origination and ΦThis form of
ρε:--;..
monltoring (EBA/GL/202O/06), which will αρρlγ from 30 June 2021. point (d)(iii) Βß,ß] :

28Β
 THREATS ΤΟ Ευ FINANCIAL STABILITYAMIDST ΤΗΕ PANDEMIC CRISIS

inιed by both 4. The Role of Banking Supervisory Authorities

:τ ουι ßη its National Supervisory authorities, the ΕΒΑ and the ECB are αΙεττ οη τhe fronτ of increasing
ßππιαý of the NPLs as α Consequence of the severe economic dorvnturn.a3 Ιη τhßò respecτ, τhe qυαΙßτγ ßη τhe
rs ιhe Ευ due exercise of prudential banking supervision will be of primary imporτance ßη addressing τhe
hττlopment of NPLs Problem. Οη the basis of the single methodology and τhe seτ of harmonised τοοΙò used
Eιheir balance Pursuant to the Supervisory Review and ΕναΙυαtßοη Process (SREP) framework (governed by
rm of τhe EU's AΠicles 97-101 CRD Ιν), both the ECB and ηατßοηαΙ supervisory auτhoriτies wiτhin τhe SSM
ýlishmenτ and (and the latter ßη the case of non-participating Member Sτaτes) will be ßη α το assess,
ροòßτßοη
α cτoss-border Οη α consistent basis, αΙΙ areas covered by the
methodology and ßη parτicular crediτ ßηsτßτυτßοηs'
[ μεòαυtßοηατγ risks ßη capital and ßη liquidity.4 Furthermore, τhe EU-wide sτress τesτ-exercises of cτεdßτ
derýe BRRD institutions' portfolios to be conducted ßη 2021α5 by τhε ΕΒΑ and τhe ECBa6 are necessary το
identify weaknesses under current conditions.
1 is α decisive For the medium-term horizon, and to the εχτεητ τhaτ problems will accumulaτe, τhree
Ι and loans to aSPeCtS deserve atteηtion ßη relation to the action of supervisory auτhoriτies. Firsτ, of criτical
lYhile demand imPortance will be their (supervisory) approach to consolidaτion ßη τhε (admiττedly overbanked)
Ιεòò 11η severaι Ευ banking System,47 as well as the use, as appropriate, of τheir specific supervisory powers
re) borrowers. under Article 104 CRD Ιν (and Article 16 SSMR ßη parτicular for τhe ECB wßτhßη τhe SSM)
rt fτameworks and of their early intervention powers (ßη accordance wßτh AΓτicles 27 BRRD and 13 SRMR).
: iheir capital Furthermore, of paΠicular interest is whether the condiτions for granτing public supporτ το crediτ
institutions meeting the (stricQ conditions for'precauτionary recapiτalisaτion'will be inτerpreτed
ßη α flexible (and hence broader) ιναγ ßη order to accommodaτe τhe needs arising amidsτ τhε
Current crisis.a8 It is noted ßη this respect, that ßη accordance wiτh Commission Communicaτion
of 19 March 2020 οη α 'Temporary Framework for Staτe aid measures το òυρροΓτ τhe economy

sεral a]ternative
LAL,'Coronavirus α3
See 1η this respect 'Risk Assessment of the European Banking Sysτem', ΕΒΑ, December 2020 (available ατ < hττρs://
wrVιv.eba, europa.eu/sites/default/documents/files/document_library/Risk%20Analysis%20and%20Daτa/zuSk%20
Assessmento%20Reports/2020/Decembero/o202020/θ61060/Risk%20AsSeSSmenτ_Reporι_December_2020.pdf >)

ý \eι,ens, Public and ¸CΒ Banklng Supervision: Assessment of risks and r,ulnerabiliies for 2021', 2Β January 2021 (available ατ <
https://τvww.bankingsupeΓvision.europa.eu/ecb/pub/raΔtmVssm,ra2021-edbbealf8f,en.pdf
1The \Vorld ΒαηΚ >).
aSee ßη this respect ECB,'2020 SREP aggregate results',28
1& Commission's January 2021 (available ατ < hττps://www
fung Loans ßη bankingsupervision,europa.euΔanking/srep/2021/html/ssm.srepaggregaτeresulτs2021.en,hτml#τoc36 >).
ftgι-òοητεηι/ΕΝ/ α5Βγ its decision of 12
March 2020, the EBApostponed the 2020 EU-rvide sτress τεsτs - see ατ < hιιps://ιvιvw.eba.
europa.eu/eba-staτement-actions-mltigate-impact-covld-19-eu-banking-sector >,
Ι s αη alτernative a6See ΕΒΑ, ¸ΒΑ launches 2021 EU-wide stress test exercise'and ECB, ¸CΒ το sτress ιεsτ 38 euro-ωea banks
tr ιΚ Emergency as ραΠ of the 2021 EU-wide stress test led by ΕΒΑ, press releases of 29 January 2021. The common procedures
lr a"iS:S (α similar and methodologies laid down ßη the ΕΒΑ Guidelines of 19 July 201Β will be applicable, οη τhε revised common
rbcen formalised). Procedures and methodologies for the supervlsory review and evaluation process (SREP) and supeΓvisory sτress
§ΙÞ? . SRB Blog, testing (EBA/GL/2018/03), adopted οη the basis of Alticle 107(3) CRD Ιν.
α7
See ßη this respect the ECB 'Guide οη the supervisory approach ιο consolldaτion ßη τhe banking secτor'of 12 January
2021, which does not establish αηγ (new) regulatory requirements and conτains legally non-blnding principles.
ι οτß9ηαιßοη and α8
This form of permissible State aid under the existing banking regulaτory framework is provided for ßη Aπicles 32(4),
Point (d)(iil) BRRD and 18(4) SRMR; see Gortsos (201θ), cit., ρρ. 207-209 (wßτh εχτeηòßνe fuπher references).
 Part Ιν, BANKING, FINANCEAND EURo

ßη the currenτ COVID-19 ouτbreak' (as currently ßη force),ag this framework, which allows has not γεt bee:: :
public supporτ το be exτended το companies under more flexible conditions, while ensuring authorities, inclua
the necessary level playing field ßη τhe single market, also applies to credit institutions ßη condition (name.1
τεΙατßοη το τheir precauτionary τεcαρßταΙßsατßοη.50 Finally, ßη the worst-case scenario where credit fail criterion) is :
institutions would reach τhe point of meeting the 'failing or likely to fail' criterion,S1 resolution themselves, ει,ε::
action would have το be underiaken ßη relation ßο them. Iη this respect, it is (usually) the reSolution acior.
supervisory auτhoriτies τhατ will be called υροη to adequately assess the occurrence of this fi.rst The first re.a:
resoluτion condiτion, which òοηsτßτυτεs τhε clearest indication of the ΙßηΚ between supervisory whether, under Ýε
and resolution functions.52 can (or mΟre pr{
authorities take re
5. The Role of Banking Resolution Authorities distressed indiιrc,-
of τhis τοοΙ, αι iea
Wiτh regard το resoluiion planning, τhe SRB has already presented its approach ßη view of
proCyCliCal effecs
τhε υηòετταßητγ and disrupτion caused το τhε economy by the pandemic crisis, setting ουt its Γemit
loans of deposiιo::
οη ροτεητßαΙ ορετατßοηαΙ relief measures, ßτs acions to SuppΟrt efforts to mitigate the economic
non-performing. e
ßmραòτ of τhε crisis and ßτò dealing wiτh MREL targets. Resolution authorities are determined
institution under :
ηοτ το compromise οη τhεòε τατgετò, which τhey consider to be essential ßη terms of flnancial
ßητο equity or ýε
Of ραττßòυΙατ imporτance ßη τhis respect are the rules governing the application of the
stabiliτy.S3
capacity of τhe SR
MREL laid down ßη Arτicles 45-45m BRRD and Aπicles Ι2-Ι2Κ SRMR, which have applied
Ιη this respecτ, ιhε
since January 2021 (and rvere shaped by virtue of the amendments introduced by the BRRD ΙΙ
ßη the forthcomin;
and the SRMR ΙΙ) subjecτ το wriτe-down and conversion powers, and must be met at αΙΙ times
consensus οη ιhis
by credit insτiτuτions and oτher entiτies.
the Eurogroup ßη :

Οη τhe oτher hand, equal αττεητßοη must be paid to the application, amidst the crisis, of
the June 2018 Ευ:
the framerpork governing banking resolution, which (with the exception of Greece ßη 20155α)
backstop,5B

α9
οη τhε Temporary r.uτn..orι ;; ;;, ;;;;;;;;ητ amendmenτs, see Chapters 31 and 32 ßη this book by Juan Jorge ßη Stefan Gτηß:τ,::
Piernas Lüpez and Andrea Biondi. European Βυsßιε::,. ]
50
Ιη this respecτ, see the Commission's new NPL Action Ρlαη, Section 5.2, ρρ. 16-17 (based οη the above-mentioned 55
Another challeng: :,::
provisions of Aπicle 32(4) BRRD). See also Chrisτos ν. Goπsos, Michele Siri, and Marco Bodeilini, ¶Proposal for α for the proιisic:. -:
Temporarily Amended Version of Precautionary Recapitalisation Under the Single Resoiuion Mechanism Regulation is permissible,_:::.,:
lnvolving τhe European Stability Mechanism', 73 European Banking Insiirufe Working Paper Series,2020 (available BRRD and, b1- :=.,τ
ατ < hττps://ssrn.com/absτracτ=368B973 >). The auτhors propose ιhe amendment, for α limited period of time, of which have ορ:Ξ: :,
cerτain condiτions laid down ßη τhe SRMR for τhe precautionary recapitalisation of credit insýtutions estabLished ßη aciivaιion of GΞS].
ραττßòßρατßηg Member Sτατεs, ßη 1ine wßτh τhε measures adopted by the Commission to facilitate public intervention to ones),lt is εχρ€-.: _

suppoπ τhe economy. This should be combined with α European Stability Mechanism (ESM) facility, a]lo\^/ing it to 56See Chrisιos \, G::-.
buy hybrid instruments issued by the credit institutions that would be recapitalised.
ρρ.370-371.
51
Οη τhis and τhe oτher τwο condiτions for banking resolution under Ευ law, namely the criterion of the reasonable 57
Οη this backs:::. -:_ε
prospect for effective alternaτive privaτe secτor measures or supervisory action, and the 'public interest'criterion, See Mechanism (5RΙ| :,
Chistos ν Gorτsos, Τhò SßηgΙò RòòοΙυtßοη i4echanism (SRJ\4) and rhe Single ResoΙution Fund (SRF) - Legal aspects Banking Lhioη. : _
of thò òòòοηd main pillar of thò Ευτορòαη Banking tJnion, cit., ρρ. 205-215, with extensive further references. S8Euro Summli r::--_-
5'Ibld.,
ρρ. 206-2Ο9. media/47298 -,-_---
53Thls aspecτ is furτher analysed ßη Chrisτos ν. Gorτsos, 'The application of the Ευ banking resolution framework
ESM instrume:--.
".r
amidst the pandemic crisis', cit., ρρ. 363-367. ατe available α: < :.'
5α
See by means of indicaιion Cfuisτos ν Gorτsos, 'Safeguarding the Stabiliιy of the Greek Banking System Amidst the Aerts aτιd PeÜ: Ξ,:.
Fiscal Crisis ßη the Euro Area: Aτrangemenis Before and After the Establishment of the European Banking υηßοη', 2020, ρρ. 159-:-_1

290
 THRLATS ΤΟ Ευ FINANCIAL STABILITYAMIDST ΤΗΕ PANDEMIC CRISIS

ιιhßòh allows has not yet been tested under conditions of α generalised, sysτemic crisis. Banking resoluτion
ιtýle ensuring authorities, including the SRB, will also have to take delicate decisions once τhε flrsτ resoluτion
ßηsιßιυτßοηs ßη condition (namely, the determination concerning the fulfilment of τhe failing or likely το
ßο ι-here credit fail criterion) is met by credit institutions (οη top of their polver το make τhis deτeτmßηατßοη
τιΞ: resolution themselves, even though this is usually made by supervisory auτhoriτies), paving τhe way for
; (usually) the resolution action. Iη this respect, two main challenges arise:55
re of this f,rst The flrst relates to the application of resolution tools, Ιη this respecτ, τhε quesτion arises
ιπ supervisory whether, under the current circumstances and οη α generalised basis, τhε bail-in τεòοΙυτßοη τοοΙ
can (or more precisely should) be considered as the appropriate ßηsττυmεητ when resoluτion
authorities take resolution action, due to the amplifying effect of ßτs applicaτion for (already)
distressed individuals and businesses. The author defends the view that α decision το make use
of this tool, at least ßη relation to the deposits of companies (of αηγ size), could have severe
ach ßη vieιv of
procyclical effects to the detriment of economic as well as financial stabiliτy το τhe eχτeητ τhατ
Dg ουt its remit
loans of depositors affected by the application of the bail-in tool would, very probably, become
ιιhe economic
non-performing, either because these (depositors) may have been granτed loans by τhe crediτ
re determined
institution under resolution or due to overall liquidity problems arising from τhε conversion
ns of frnancial
into equity οτ the writing down of her/his/its deposiτs.56 The second challenge is linked το τhe
ιlicaιion of the
capacity of the SRF (at Βυ level) to support the financing of resoluτion acτions of α large scale,
r hal,e applied
Ιη this respect, the 'common backstop'to the SRB for the SRF may prove exτremely necessary
μ ιhε BRRD ΙΙ
ßη the forthcoming turbulent months and years,S7 Despite α prolonged hesiτaτion το achieve α
ρι ατ αΙΙ times
consensus οη this aspect, at the Euro Summit οη 11 December 2020, the agreemenτ reached ßη
the Eurogroup ßη inclusive format οη the reform of τhε ESM was rvelcomed (as mandaτed by
ι ιhe crisis, of
the June 201Β Euro Summit), paving the way, inter αΙßο, for the esτablishmenτ of τhe common
κε 1η 20155α)
backstop,58

χ* bν Juan Jorge
1η SΙefan Grundmann, Giorgio Μοηß, and Christy Αηη Petit (eds), 'The European Banking υηßοη ßη Αòτßοη', 18
European Business OrganIsation Lαιυ Review 3, 2017, ρρ. 479-502.
ýονε-meηιßοηed 55
Another challenge referS tο the potential activation of the so-called Governmenτ Financial Sτabilisaτion Toots (GFSTs)
, '.{ Proposal for α
for the provision of public support to ailing credit institutions, lvhich (exceptionally and under sτricτ condiτions)
ι:n:sιr Regulation is permissible under the regulatory framework ßη force. These τools ωe governed by Aπicles 37(10) and 56-5s
s.2020 (available BRRD and, by design, aIe tailor-made for systemic crises (even though they are ηοτ available 1η τhe Member òτατeò
a:od of ιime, of which have opted not to make use of the relevant discreιion under the BRRD). Since bail-in is α prerequisiιe for τhe
πs esιabLished ßη
actlvation of GFSTs, ßη view of the (above-menioned) negaÜve effects of bailing-in deposits (even if οηΙγ uncovered
Ý( tι:eη,eηιßοη to ones), it is expecτed τhaτ τhis will not be α ρτßοτßτγ ορτßοη.
lrv. ßßοιτßηg it to 56
See Christos ν Gortsos, 'The application of the Ευ banking resoluÜon framework amidst the pandemic crisis', cir.,
ρρ. 370-371.
ο( Þe reasonable 57
Οη this backstop, the legal basis of which will be Ατßòlε 74 SRMR, see Christos ν. Gortsos, The Single Resoluτion
π§'aΓßιεΓßοη, See
Mechanism (SRfuI) and the Single Resolution Fund (SRF) - Iegal aspects of the second main pillar of τhò Ευτορòαη
F1 - Legol aspects
Banking υηßοη, cit., ρρ. 256-258 (with extensive further references).
rεfe;e nces.
S8Euro Summit meeÜng (11 December 2020), Statement, point 3, available
at < https:/Λ.v,\,v,\v.consilium.europa.eu/
media/4729Bl11-12-20-euro-summit-statement-en.pdf >. The ESM reform also enτails τhe fuπher developmenτ of
hfcl tτamework ESM instrumenιs (see details at < https:/Λπιv,ιv.esm.europa.eu/about-esm/esm-reform >). ΑJl relevanτ drafτ documenτs
are available αt < htιps://www.esm.europa.eu,/about-esm/esm-reform-documents >. Οη τhε ESM reform, see Jasτer
ESieπ:,\midst the Aerts and Pedτo Blzarro, 'The reform of the European Stability Mechanism', Ι5 Capiτal ΜατΚòτs Lo,"v Journal 2,
Εα"ιηg υηßοη', 2020, ρρ. 1,59-\74.