The global financial crisis and ensuing European sovereign debt crisis were characterized by the widespread provision of government solvency support for failing, systemically important European banks. These rescues largely ceased by 2015, because the crises had mostly run their course by then. Furthermore, the public policy and resolution frameworks, notably the EU's Bank Recovery and Resolution Directive, started to move the dynamic away from government bailout to creditor bail-in.

However, just as the effort to make banks truly resolvable is proving to be a long-term project, many European governments' ability to exit their stakes in these rescued banks has taken far longer than they might ever have hoped. Nevertheless, the Italian government's recent sale of a sizable stake in Monte dei Paschi, the Dutch government's ongoing sell-down of more of its stake in ABN AMRO, and National Bank of Greece's partial exit from the Hellenic Stability Fund have thrown renewed light on this topic. Despite economic gloom, rescued banks are now on a much better footing, with cleaned-up balance sheets, which is conducive to governments being able to offload further stakes in rescued European banks. But with no strong catalyst to expedite sales, and still meaningful inhibitors, many of these assets are likely to remain on government balance sheets for a good while longer.

Bank ownership and governance and the role of the public sector are important factors in our assessment of banking systems and individual bank creditworthiness. However, aside from the initial bailouts, which typically supported bank obligations to senior creditors, governments' ownership of, and eventual divestment from, rescued commercial banks has rarely weighed meaningfully on our ratings. That said, while divestments in and of themselves might not move bank ratings, our assessments could be sensitive where there is an associated change in strategy, financial policy or targets, or risk appetite.

European governments' bailouts of troubled systemic commercial banks supported financial stability and likely saved significant cost to their economies. With resolution now an increasingly credible alternative path for many systemic European banks, and government ownership often proving to be costly and enduring, we continue to consider it unlikely that European governments will once again step in to bail out failing banks. However, with government-backed liquidity arrangements having proven their value when underpinning Credit Suisse's liquidity as it transitioned to UBS, other European central banks and governments may explore similar mechanisms.

After The Flood Of Bank Rescues, A Slow Trickle Of Divestments

European bank rescues took place in two main phases: the 2008-2009 financial crisis and the 2011-2014 sovereign debt crisis. In many cases, there was a concurrent sale or split of weak assets into "bad banks" (government-backed asset management vehicles, such as NAMA in Ireland or Sareb in Spain). In all cases we cite in table 1 in the Annex, public ownership (in whole or part) was intended to be "temporary," and indeed divestment within a defined deadline was often a requirement under the associated EC state approval. There were certainly some instances of quite rapid progress in divesting bank stakes. But 10-15 years later, governments have fully exited fewer than half those banks. This delay is far from unprecedented: for example, following the bailout of Nordbanken in 1992, the Swedish government finally exited its residual 20% stake in Nordea only in 2013.

We see several reasons why bank divestments have often taken many years:

• Delayed asset quality cleanup: This delay was worse where bad banks were not used, but also reflected that rehabilitation was undermined by the weak economic conditions prevalent for many years. In the euro area, the creation of the Single Supervisory Mechanism (SSM) and the European Central Bank's push to reduce nonperforming assets prompted the cleanup since 2017.
• Complexity: Some of the bank restructurings were incredibly complex, chief among them Royal Bank of Scotland Group (now NatWest).
• The tougher earnings environment: Most prominently for investment banking activities and due to the years of zero or negative policy rates, this led to further bank restructuring. Combined with regulations that hiked capital requirements and impeded securitization, this depressed equity valuations in the sector. As such, European banks remain lowly valued relative to peers in other regions.
• Political considerations: Most governments would prefer to avoid crystallizing a loss on their investment (which would be typical among these banks, with the notable exception of the Irish government's exit from Bank of Ireland). Furthermore, divestment windows that align with the bank's business planning cycle may not coincide with political election and economic cycles. Divestments can require significant planning, particularly for IPOs, and market and/or political conditions may change in the meantime.
• Governments are not distressed vendors: They can typically afford to wait, not least because deadlines set under state aid approvals have been routinely pushed back and, politically, bank divestments are not a hot topic with the electorate.
• Some of the stakes are sizable: Absent an IPO or trade sale, the shares need to be drip-fed into the secondary market.

The Dynamics Have Shifted In Favor Of Divestments, But Exits Will Remain Difficult

With balance sheets now cleaned up, a lot of operational restructuring completed, and earnings prospects brighter, conditions have improved for governments to reduce bank stakes or exit entirely (see chart 1). From a fiscal perspective, government finances are rarely meaningfully affected by the monetization of investments in banks, but a sell-down is nevertheless helpful at a time when government debt is at record levels and fiscal deficits need to be squeezed.

Chart 1

Depending on the size of the stake in the rescued bank, governments typically have various divestment options: IPO, trade sale (e.g., to an incumbent player or private equity), secondary placements into the market (such as book builds and trading plans), or a buyback of capital by the bank. We observe that European governments have deployed all these strategies to a degree, but secondary placements are favored in many countries, not only when the government only ever held a minority stake. IPOs have significant execution risk, and the case for trade sales is mixed (see box 2). By contrast, secondary placements allow a steady, low profile drip feed of the stake into the market and offer a chance to capture the benefits of any future appreciation in bank valuations.

In this context, UBS' March 2023 acquisition of Credit Suisse and Caixabank's 2020 acquisition of Bankia stand out. Notwithstanding the attendant risks, Credit Suisse was a once-in-a-lifetime opportunity for UBS to significantly grow its market share at a low price and with fewer-than-normal regulatory and shareholder approvals needed. Bankia was the agglomeration of several rescued banks, which Caixabank then acquired--at a cost of €5 billion and some modest anti-trust undertakings--to become the stand-out leader in Spanish retail and commercial banking.

We see as more typical the Irish government's gradual divestment of Bank of Ireland Group, and the U.K. government's gradual exit from Lloyds and NatWest. By contrast, among the banks where there has been no sell-down, 100% government-owned de Volksbank is rather typical, being a bank with a solid balance sheet but which the government does not yet see as ready for divestment (see box 3).

Some Governments Have Used Their Ownership To Serve A Wider Purpose

Government ownership of rescued banks in countries like Germany, Greece, The Netherlands, and the U.K. has not changed their role or meaningfully altered the shape of their national banking systems. But there are some exceptions elsewhere. The most dramatic changes have been in banking systems that have consolidated heavily, for example in Slovenia, Ireland, and, perhaps most notably, Spain (see box 4). While governments, as owners, and regulators have maybe not orchestrated this consolidation, they have been supportive of efforts to improve the structural profitability of their banking systems. At an individual bank level, we also see:

• Banque Internationale à Luxembourg, which is likely to remain 10%-owned by the government as it seeks to maintain a degree of control of this now substantially foreign-owned systemic bank.
• Landsbankinn, where in the most recent ownership policy the government states that it will hold a significant (at least 34%) equity stake in the long term to ensure stability in the domestic financial sector. By contrast, the government already divested from local peer Arion banki and plans to divest the remaining stake in Islandsbanki through 2025. Once completed, the government will only start the process for Landsbankinn.

Rating Implications Of Divestment Are Limited

The initial bailouts of troubled banks supported our issuer credit ratings, even if the banks were forced to default on subordinated obligations to assist with burden-sharing. Ongoing government ownership of these banks has implicitly supported our view of creditworthiness where it instilled counterparty and creditor confidence in the bank. However, governments have been clear about their intent to eventually divest and have not tried to control these banks' strategies. In addition, the banks' role as commercial institutions has not morphed into them becoming policy institutions. We have therefore never assessed them to be government-related entities, but rather remain as commercial banks. Initially, our ratings on many of the rescued banks would have continued to benefit from some uplift for possible further extraordinary support as they remained systemically important institutions. This ended in 2015 when we revised our government support assessments across much of Europe, seeing such a prospect as uncertain given the rise of bank resolution frameworks as offering a credible alternative path if these banks failed.

Given that since 2015 our ratings on these rescued commercial banks did not assume that governments would be willing to inject further solvency support, governments' eventual divestment has rarely weighed meaningfully on our ratings. That said, while divestments in and of themselves might not move bank ratings, we assess the rating implications for each bank of any associated change in strategy, financial policy or targets, or risk appetite.

European Authorities Continue To Bank On Resolution

With resolution now increasingly credible and government ownership often proving to be costly and hard to exit, we still consider it unlikely that European governments will once again step in to bail out failing banks. It's notable, for example, that if UBS had not acquired Credit Suisse in March 2023, the Swiss authorities have since confirmed that they were ready to put Credit Suisse into resolution--having dismissed the option of bailing out the banking group, as it had done for UBS in 2008.

However, liquidity is different. With the government-backed liquidity arrangement having proven its value to underpin Credit Suisse's liquidity as it transitioned to UBS, we see some European central banks and governments as likely to explore similar mechanisms.

Related Research

• European Banks: Cyclical Earnings Boost Is No Panacea, Nov. 21, 2023
• The Resolution Story For Europe's Banks: Making The Regime Fit For Purpose, Oct. 4, 2023
• Crisis Management Observations From Recent European And U.S. Banking Sector Volatility, April 19, 2023
• The Restructuring Of Spanish Savings Banks: A Profound Transformation Of The Spanish Banking Industry, Feb. 22, 2011
• Mounting Financial Pressures On Several Savings Banks Could Reshape The Spanish Financial System, April 8, 2009

Annex

Table 1