The developments of the precautionary recapitalization rules: from its inception to the recent amendments and the Covid 19 pandemic

Abstract

In the aftermath of 2008 financial crisis, new legislative frameworks have been introduced at European level and the Banking Union has been established. This meant that stricter rules on State Aid policy have been implemented and the bail in tool has been created. One of these measures is precautionary recapitalization, provided under the Bank Recovery and Resolution Directive (BRRD) in extraordinary circumstances, to remedy a significant disturbance to the economy of a Member State and maintain financial stability. In these situations, exceptional State aid of a precautionary and temporary nature is allowed in order to boost a bank's resources, as long as the bank is solvent and the intervention complies with State aid laws. Nevertheless, recent developments in the Italian banking sector highlighted some major flaws in the new Banking Union design, which must be addressed by European authorities in order to prevent future threats to the Union's financial stability. This study aims to investigate the application of precautionary recapitalization on cases of Monte dei Paschi di Siena and Piraeus Bank. This has been done by analyzing their scenarios and comparing them with other banks in similar situations. The results show that it is crucially important that the authorities intervene before the bank in trouble ‘crosses the line’ of insolvency. Additionally, this thesis finds evidence indicating that it is time for a review and lessons learnt from Italian and Greek case should be used as a foundation. Furthermore, this thesis explains the measures used by EU to support banking sector during the pandemic of Covid 19.