How Europe Is Rethinking Bank Failure Valuations

European regulatory framework for bank resolution, in particular the EU’s Bank Recovery and Resolution Directive (BRRD with its subsequent amendments[1]), are undergoing significant refinement. The traditional approach, meaning valuing an institution based on observable financial data close to the point of insolvency, is being replaced by forward-looking valuations conducted earlier in the distress cycle. This shift reflects supervisors’ preference for preventative actions, but it also increases the complexity of determining fair outcomes for equity and subordinated bonds investors. 

Under BRRD2[2] and the expected BRRD3[3]  updates, resolution authorities are encouraged to intervene when a bank is “failing or likely to fail”, even if insolvency is not imminent. In such contexts, book values and conventional earnings metrics often fail to reflect economic reality. Instead, stressed-scenario models increasingly drive the assessment: liquidity deterioration, collateral markdowns, asset-quality adjustments and contagion risk all influence the final valuation. 

These changes heighten the importance of transparency in the valuation methodologies applied, especially by shareholders and subordinated bondholders, who could – under the rules of the BRRD – find themselves as the only parties affected by the costs of rescuing the issuer. In several recent European cases, the correct application of the rules for identifying who should bear the burden-sharing has been the subject of disputes, sometimes resurfaced even years after the intervention. 

The SNS nationalization remains a central reference point in this sense. Although the expropriation occurred before the BRRD entered into force, it raised the key question later codified by BRRD: how losses should be allocated between shareholders, subordinated bondholders, and other creditor classes, and on the basis of which valuation methodology. 

BRRD formalized this burden-sharing framework, placing shareholders in first line and then subordinated creditors immediately after to absorb losses. More recent interventions, such as the 2016 Banca Monte dei Paschi di Siena S.p.A. (BMPS) case and the and the 2023 Credit Suisse resolution case, illustrate how the BRRD hierarchy operates in practice and how valuation methodology directly determines the extent of creditor participation in loss absorption. 

SNS and BMPS lessons still shape modern recovery processes. Both pre- and post-BRRD interventions depend on the same issue: the interaction between valuation methodology and legally mandated burden-sharing, including correct application of rules to identify who bears the costs. Experience from SNS and BRRD-aligned cases like BMPS shows structured negotiation remains the most effective route for investors to resolve valuation discrepancies and secure fair compensation. 

Read the full SNS-case here

[1] Directive 2014/59/EU establishing a framework for the recovery and resolution of credit institutions and investment firms, as amended, including by Directive (EU) 2019/879 (BRRD2) and the forthcoming BRRD3 proposal.

[2] Directive (EU) 2019/879.

[3] On 18 April 2023, the European Commission published legislative proposals to reform the bank crisis management and deposit insurance (CMDI) framework, which includes proposed amendments to the BRRD (BRRD3). The EU Parliament and EU Council adopted their negotiating mandates in April and June 2024 respectively, and negotiations are ongoing.