A critical assessment of the no creditor worse off principle (NCWO)

Abstract

Following the 2008 global crisis, the need for an effective crisis management framework was brought to the fore. As a reaction to this, the Single Resolution Mechanism was established within the EU, regulated by the Single Resolution Mechanism Regulation and the Bank Recovery and Resolution Directive. The resolution framework provides authorities with a toolkit that ensures that should an institution of a significant size, satisfying the public interest assessment, fail, resolution action may be taken to minimise the system impact and financial stability risks. To ensure that this outcome is achieved efficiently, powers are granted to authorities that allow for the write-down and conversion, or transfer of assets, without the consent of the respective shareholders and creditors. Due to the far-reaching implications of such action, the No Creditor Worse Off safeguard was included in the framework to protect property rights and uphold credibility and certainty. It essentially guarantees compensation to affected shareholders and creditors if the losses endured in resolution exceed those that would have been incurred in the counterfactual scenario of insolvency. Albeit being a fundamental aspect of the resolution framework, several challenges arise in implementing the safeguard effectively. To this end, the study assesses academic contributions on the topic and reflects on whether the intrinsic difficulties that emerge in conducting a prudent No Creditor Worse Off assessment hinder a proper application. The study also looks into the impact and implications that other overarching policy challenges in the BRRD have on the application of the safeguard. This is reviewed within the context of two prevalent cases, specifically the Banco Popular case, and the Veneto Banca and Banca Populare di Vicenza case. Furthermore, reference is made to the U.S. Framework as a model for EU legislators moving forward.