Precautionary Recapitalisations: Time for a Review

With the introduction of the Bank Recovery and Resolution Directive (BRRD), public capital contributions to insolvent banks should have become a thing of the past or at least an extremely unlikely eventuality. The supposedly exceptional precautionary recapitalisation of Banca Monte dei Paschi (MPS)...

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Bibliographic Details
Published in:Policy File 2017
Main Author: de Groen, Willem Pieter
Format: Report
Language:English
Subjects:
Banking/Finance
Centre for European Policy Studies
Government
Online Access:Request full text
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Summary:With the introduction of the Bank Recovery and Resolution Directive (BRRD), public capital contributions to insolvent banks should have become a thing of the past or at least an extremely unlikely eventuality. The supposedly exceptional precautionary recapitalisation of Banca Monte dei Paschi (MPS) seems to offer evidence to the contrary. Based on a review of the empirical literature and the resent resolution of Banco Popular and MPS, this paper argues that a precautionary recapitalisation facility can be in the taxpayers' interest, but only under very specific circumstances and conditions. The current rules on precautionary recapitalisation and guidelines for the supervisory exercises used to determine the shortfall should therefore be revised. On the one hand, the current requirements are too flexible leaving room for public capital injections into de facto insolvent banks, while on the hand, the requirements imposed on the recapitalisation amounts are too rigid to allow the realisation of maximum economic returns.