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Creditor protection in bank resolution: a case for

international investment arbitration?
Michael Wolfgang Muller*

Key points

1. Introduction
On 15 April 2014, the European Parliament adopted the Bank Recovery and Resolution
Directive (BRRD)1 and endorsed the Commissions proposal for a European Single
Resolution Mechanism (SRM).2 Together, these two instruments create the new
European Union law framework for bank resolution, which is in line with an
international regulatory response to the financial crisis addressing the failure of
systemically important financial institutions.3
It aims at providing a middle way between liquidation and bail-out, which achieve[s]
the continuity of essential functions by . . . recapitalising the entity [or] by capitalising a
newly established entity or bridge institution to which [its] functions have been
transferred while not rely[ing] on public solvency support and not creat[ing] an
expectation that such support will be available.4 Instead, the costs of recapitalization are
to be borne by firm owners (shareholders) and unsecured and uninsured creditors.5
While the instruments aim at taking shareholders and creditors interests into
* Michael Wolfgang Muller, LL.M. (Cambridge), Research Assistant, LMU Munich.
1 Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery
and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/
EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/
2010 and (EU) No 648/2012, of the European Parliament and of the Council, OJ L 173/190 (BRRD).
2 Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and a
uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution
Mechanism and a Single Resolution Fund and amending Regulation (EU) No 1093/2010, OJ L 225/1 (SRM).
3 cf R Smits, Is My Money Safe at European Banks? Reflections on the Bail-In Provisions in Recent EU Legal Texts (2014) 9
CMLJ 137.
4 Financial Stability Board, Recommendations: Key Attributes of Effective Resolution Regimes for Financial Institutions, 2011
5http://www.financialstabilityboard.org/publications/r_111104cc.pdf4accessed 18 May 2015; Preamble (iv), Key Attribute 3.2 (ix);
BRRD, Recital 45; SRM, Recital 58.
5 FSB Recommendations (n 4), Preamble (iii); BRRD, Recital 5; SRM, Recital 60.
The Author(s) (2015). Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oup.com

doi:10.1093/cmlj/kmv029

Accepted 15 May 2015

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 The Bank Recovery and Resolution Directive and the Single Resolution Mechanism build the new
framework for bank resolution in the European Union.
 The article discusses the legal protection of creditors who may be affected by a resolution, particularly
as the bail-in tool allows for a cancellation or conversion of debt.
 It is argued that besides claims before domestic courts, the ECJ and the ECtHR, investment arbitration
can be a suitable forum for bank resolution disputes.

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2. The EU framework for bank resolution and creditor protection

The consensus adopted in EU policymaking after the global financial crisis saw both
regulatory and supervisory failures as responsible for its devastating effects. While,
according to the de Larosie`re report too, lax capital requirements and insufficient
surveillance let the US mortgage crisis turn into a global banking crisis,9 the lack of a
coordinated response to bank failures endangered national budgets. In the absence of a
special resolution regime, governments adopted the doctrine of too big to fail, bailing
out financial institutions that were considered to be systemically important.10
6 cf BRRD, Recital 13: any interference with rights of shareholders and creditors which results from resolution action should be
compatible with the Charter of Fundamental Rights of the European Union; SRM, Recital 61: should comply with Article 51 of the
Charter.
7 For the debate before the new regime was enacted, cf V Babis, The Impact of Bank Crisis Prevention, Recovery And Resolution
on Shareholder Rights (2012) 6 LFMR 387; JL Douglas, The Treatment of Creditors in Bank Insolvencies in PS Kenadjian (ed),
Too Big To FailBrauchen wir ein Sonderinsolvenzrecht fur Banken? (de Gruyter 2012) 199; C Thole, Glaubigerschutz in einem
Sonderinsolvenzrecht fur Banken in PS Kenadjian (ed), Too Big To FailBrauchen wir ein Sonderinsolvenzrecht fur Banken? (de
Gruyter 2012) 219; DH Bliesener, Legal Problems of Bail-ins under the EUs Proposed Recovery and Resolution Directive in A
Dombret and PS Kenadjian (eds), The Bank Recovery and Resolution Directive: Europes Solution for Too Big To Fail (de Gruyter
2013) 189.
8 C Tietje, Bilaterale Investitionsschutzvertrage zwischen EU-Mitgliedstaaten (Intra-EU-BITs) als Herausforderung im
Mehrebenensystem des Rechts (Martin-Luther-Universitat Halle-Wittenberg 2011) 6, counts 190 intra-EU-BITs and 1200 BITs
concluded by EU Member States with third states. Currently, intra-EU-BITs are successfully invoked before investment treaty
tribunals, cf Achmea BV (formerly Eureko BV) v The Slovak Republic, UNCITRAL, PCA Case No. 2008-13, Decision on Jurisdiction,
Arbitrability and Suspension, 26 October 2010; Decision of the Frankfurt Higher Regional Court, 10 May 2012; Award, 7 December
2012; Preliminary Decision of the German Federal Supreme Court, 19 September 2013; all investment cases cited in this article can
be downloaded from 5http://www.italaw.com/4 accessed 18 May 2015. The Commissions call on Member States to denounce
intra-EU-BITs could, however, lead to a limitation of investment protection for creditors from EU countries; cf European
Commission Staff Working Document, Capital Movements and Investments in the EU, Commission Services Paper on Market
Monitoring, SWD (2012), 6 final, 3 February 2012, 135http://ec.europa.eu/finance/capital/docs/reports/2012-market-monitoringworking-document_en.pdf4 accessed 18 May 2015.
9 See, eg, The High-Level Group on Financial Supervision in the EU, Report, 7125ec.europa.eu/internal_market/finances/docs/
de_larosiere_report_en.pdf4 accessed 18 May 2015.
10 TH Jackson and DA Skeel, Dynamic Resolution of Large Financial Institutes (2012) 2 HBLR 436; PS Kenadjian, Between
Bankruptcy and Bailout: The Need for a Special Resolution Regime for Financial Institutions, in Kenadjian (n 7) 5.

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consideration,6 their procedural protection is an important aspect in setting up a

balanced framework for future bank crises.7
This article aims at discussing the legal protection of creditors who claim to have
suffered loss in a bank resolution. In the first part, it sets out the framework provided for
by the respective instruments, EU Law in general and the European Convention of
Human Rights (see Section 2). Thereafter, it discusses whether another international law
forum could be available for bank resolution disputes: international investment law. EU
Member States have concluded a huge number of mainly bilateral investment treaties
(BITs) among themselves and with third states,8 which could allow foreign creditors to
fall into the scope of an investment treaty. In Section 3, the article argues that jurisdiction
of investment tribunals is likely to be established for at least most of the financial
instruments that are subject to bank resolutions. Moreover, in Section 4, the
substantive standards of investment protection provide a check for creditor rights in
bank resolution.

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Bank resolution under BRRD and SRM

The resolution powers provided for in the BRRD and SRM are part of a broader
framework that also encapsulates preventive and preparatory measures (particularly the
establishment of living wills on how a resolution could be executed and plans for intragroup support)17 as well as early intervention powers that allow for arrest measures when
11 An outline of the various measures can be found on the Commissions website, cf 5http://ec.europa.eu/internal_market/
publications/docs/financial-reform-for-growth_en.pdf4 accessed 18 May 2015, and more detailed 5http://ec.europa.eu/finance/
general-policy/index_en.htm4accessed 18 May 2015. cf E Avgouleas, Governance of Global Financial Markets (CUP 2012) 289, 394;
E Ferran and Others, The Regulatory Aftermath of the Global Financial Crisis (CUP 2012); M Andenas and IHY Chiu, The
Foundations and Future of Financial Regulation. Governance for Responsibility (Routledge 2014).
12 cf 5http://ec.europa.eu/finance/general-policy/policy/index_en.htm4; 5http://ec.europa.eu/finance/general-policy/committees/index_en.htm4; 5http://ec.europa.eu/finance/bank/crisis_management/index_en.htm4; 5http://www.eba.europa.eu/regulation-and-policy/single-rulebook/interactive-single-rulebook4 accessed 18 May 2015.
13 Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring special tasks on the European Central Bank concerning
policies relating to the prudential supervision of credit institutions, art 2(1), 7; SRM, art 4(1). cf B Reisenhofer, Completing the
Banking Union (European Law Blog, 22 April 2014) 5http://europeanlawblog.eu/?p23144 accessed 18 May 2015; K Alexander,
Bank Resolution and Recovery in the EU: Enhancing Banking Union? (Springer Online DOI 10.1007/s12027-013-0284-1) 2.
14 BRRD, arts 130, 132. According to art 3 BRRD, resolution authorities under the BRRD shall be national authorities with
public administration powers.
15 The Boards adoption of the resolution scheme is, however, subject to an objection by both Council and Commission; SRM,
art 18(1), (7). This is in accordance with the ECJs Meroni doctrine, pursuant to which discretionary powers may only be exercised
by an institution of the Union. cf Case C-9/56 and C-10/56 Meroni v High Authority [1957/1958] ECR 133; Reisenhofer (n 13); cf
also SRM, Recital 26.
16 SRM, art 67.
17 BRRD, arts 526; SRM, arts 812; M Schillig, Bank Resolution Regimes in EuropePart I: Recovery and Resolution Planning,
Early Intervention (2013) 24 EBLR 751; VSG Babis, European Bank Recovery and Resolution Directive: Recovery Proceedings for
Cross-Border Banking Groups (2014) 25 EBLR 459; E Avgouleas and Others, Bank Resolution Plans as a Catalyst for Global
Financial Reform (2013) 9 J Finan Stab 210.

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The European Unions regulatory response to the financial crisis thus encapsulates
both crisis prevention measures and crisis management tools.11 Its approach is two-fold.
On the one hand, a number of legislative acts aim at harmonizing the banking regulation
and supervision regimes of the Member States and creating a single rulebook for all banks
in the European Union.12 On the other hand, in order to strengthen the euro, a closer
cooperation is envisaged for the Member States of the eurozone and states that
voluntarily enter into a cooperation agreement: in the context of this, so called Banking
Union supervisory and regulatory powers are transferred to the EU level.13
The new framework of banking resolution as a crisis management measure mirrors
this two-fold approach. While the BRRD obliges all EU Member States to introduce a
bank resolution mechanism,14 the SRM applies only to the eurozone and to states that
opt in to the Banking Union. It transfers powers in the resolution process to a newly
created EU agency, the Single Resolution Board that is separate from national resolution
authorities.15 Moreover, a Single Resolution Fund is established to support the SRM.16
This section gives an overview of the resolution framework that in substantive terms is
the same for both BRRD and SRM (see Bank resolution and BRRD and SRM section),
analyses creditor rights in a bank resolution (see The position of creditors in a bank bailin section), and discusses the claims creditors could bring against a violation of these
rights (see The protection of creditor rights under the EU framework).

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The position of creditors in a bank bail-in

The EU framework deals with the position of creditors in three important provisions: it
exempts certain types of liabilities from the bail-in (see Carve-outs section) and
stipulates a waterfall approach, according to which the remaining liabilities are treated
18 BRRD, arts 2730; SRM, art 13; Schillig (n 17) 775779.
19 BRRD, arts 31, 32; SRM, art 18.
20 BRRD, art 37(3); SRM, art 22(2); Babis (n 7) 391.
21 BRRD, arts 3839; SRM, art 24.
22 BRRD, arts 4041; SRM, art 25.
23 BRRD, art 42; SRM, art 26.
24 M Schillig, Bank Resolution Regimes in EuropePart II: Resolution Tools and Powers (2014) 25 EBLR 65, 88.
25 S Gleeson, Legal Aspects of Bank Bail-Ins (2012) LSE Financial Markets Group Paper Series, Special Paper 205, 16.
26 P King and A Wood, The EU Recovery and Resolution Directive: Preventing Another Financial Crisis (2013) 28 JIBFL 641,
642.
27 BRRD, art 43ff; SRM, art 27ff.
28 TH Huertas, Resolution Requires Reform in Kenadjian (n 7) 63, 78.
29 BRRD, arts 43(2), 44(1); SRM, art 27(1), (3); Gleeson (n 25) 5; Huertas (n 28) 79.
30 DoddFrank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 12 USC 5301 [H.R. 4173], 21.07.2010,
Title II.
31 For a comparative analysis of the US and European approaches to bail-in, see C Goodhart and E Avgouleas, A Critical
Evaluation of Bail-Ins as Bank Recapitalisation Mechanisms (Centre for Economic Policy Research, Discussion Paper 10065, July
2014) 5http://ssrn.com/abstract24786474 accessed 18 May 2015.
32 BRRD, art 43(3); SRM, art 27(2); Schillig (n 24) 90.
33 Babis (n 6) 392.

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prudential requirements are infringed.18 The actual resolution process is triggered by the
determination that the financial institute is failing or likely to fail, the failure cannot be
prevented by private or supervisory actions and its prevention is necessary in the public
interest (ie the resolution objectivesensuring the continuity of critical functions,
avoiding a significant adverse effect on the financial system, protecting public funds,
depositors and clientscould not be met to the same extent by ordinary resolution
proceedings).19
In this case, authorities can make use of four different tools:20 selling parts of the
business,21 setting up a bridge institution22 or separating assets.23 When these
instruments fail (ie when authorities cannot find any buyer for the institution or do not
deem any market player able to fulfil the banks functions without endangering
themselves24 or if financial institutions are too complex for the application of a good
bank/bad bank model),25 a bail-in[b]y far the most controversial element26 of the
frameworkwill be likely to be carried out.27
The bail-in aims at increasing the immediate loss-bearing capacity of the bank28 by
cancelling shares and writing down debt or converting it into equity.29 Unlike under the
United States Orderly Liquidation Authority (OLA) Approach,30 the EU framework aims
at restoring banks in an open bank process.31 Only if the institution cannot be
recapitalized as a whole, do the bail-in funds have to be used to capitalize a bridge
institute.32 Owing to this immediate interference with legal property,33 it is here that the
question of creditor protection arises most dramatically.

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(see Waterfall approach section). Moreover, it guarantees creditors not to be worse off
than in the banks insolvency (see No creditor worse off than in insolvency section).
Carve-outs

Waterfall approach

Since shareholders as owners of the firm are generally meant to bear losses prior to
creditors, shares are cancelled in the first step of the bail-in.37 Only if this is insufficient to
recapitalize, the institution liabilities are written down or converted. The order follows
the classification of capital for prudential purposes:38 the closer an instrument is to
equity, the more likely it is subject to the bail-in. According to the waterfall approach
provided for by the BRRD, only after one category has been fully subjected to bail-in, the
next category can be taken into account. Creditors of the same class in general have to be
treated in an equitable manner.39
No creditor worse off than in insolvency

According to the no creditor worse-off standard, no creditor may be subjected to

greater losses than would be incurred if the institution would have been wound down
under normal insolvency proceedings.40 However, it has been argued that the exemption
of some creditors from the bail-in makes others likely to be worse off than in
insolvency.41 In this case, the EU framework provides for compensation payment to be
34 BRRD, art 44(2); SRM, art 27 (3); Smits (n 3) 147.
35 This protection of the banks clients is, however, not meant to be to the detriment of the other creditors: instead, under art
109(1) BRRD, Member States are required to ensure that the deposit guarantee scheme . . . is liable for . . . the amount by which
covered deposit would have been written down; cf Bliesener (n 7) 220.
36 Schillig (n 17) 756.
37 BRRD, art 34(1)(b); SRM, art 15(1)(b).
38 BRRD, arts 48, 60, 2(1)(68, 69, 73); SRM, arts 21(10), 3(1)(4547); Regulation (EU) No 575/2013 of the European Parliament
and of the Council of 26 June 2013 on Prudential Requirements for Credit Institutions and Investment Firms and Amending
Regulation (EU) No 648/2012, art 25ff; cf also Basel Committee on Banking Supervision, Basel III: A Global Regulatory Framework
for More Resilient Banks and Banking Systems (rev. June 2011, ss 49ff)5http://www.bis.org/bcbs/basel3.htm4accessed 18 May 2015.
39 BRRD, art 34(1)(f); SRM, art 15(1)(f).
40 BRRD, art 34(1)(g); SRM, art 15(1)(g); on the valuation, cf BRRD, art 74; SRM, art 20; P Athanassiou, Valuation in
Resolution and the No-Creditor-Worse-Off Principle (2014) 29 JIBFL 16.
41 TF Huertas, The Case for Bail-Ins (2012) University of Pennsylvania, Wharton Financial Institutions Center Working Paper
1217, 6 5http://fic.wharton.upenn.edu/fic/papers/12/p1217.htm4 accessed 18 May 2015; Schillig (n 24) 96.

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Certain types of liabilities are exempted from the bail-in regime:34 secured liabilities;
deposits covered by a guarantee scheme; liabilities arising out of holding client assets or
client money or out of a fiduciary relationship; short-term liabilities towards institutions
(excluding intra-group liabilities) with an original maturity of less than 7 even days;
liabilities under payment and securities settlement systems with a remaining maturity of
less than 7 days; and liabilities to employees and commercial or trade creditors. The bailin thus excludes those liabilities that would receive preferential treatment in insolvency as
well, aims at preventing bank-runs by offering retail protection35 and seeks to uphold the
banks business functions36 by keeping short-term creditors, commercial partners,
employees and public funds out.

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due, paid for by the domestic resolution financing arrangement or the Single Resolution
Fund, respectively.42

The protection of creditor rights under the EU framework

BRRD

The BRRD obliges Member States to provide for a right to appeal before domestic
courts.43 However, in order not to endanger the fulfilment of the resolution goals,44 the
appeal is not meant to suspend the resolution decision.45 Furthermore, a wrongful
resolution decision shall not affect any subsequent administrative acts or transactions.
. . . In that case, remedies for a wrongful decision or action by the resolution authorities
shall be limited to compensation for the loss suffered by the applicant.46 The BRRD
framework thus does not provide for a possibility to wind up the decision, it limits
creditors claims to monetary damages.47 As under the BRRD, resolution stays on the
national level, a direct action before the European Court of Justice is not possible: only in
the context of a preliminary ruling procedure,48 could it be discussed whether domestic
legislation is in compliance with EU law.
SRM

The SRM Regulation stipulates that decisions taken by the Board can be challenged
before the ECJ.49 However, it is questionable whether this allows for actions to be
brought by creditors directly on the European level: as non-privileged applicants in the
Action for Annulment, they would have to be directly affected by the decision of the
Board.50 While it could be argued that the resolution scheme already defines the loss
placed on creditors and the national implementation is rather automatic, a more formal
interpretation might point to the fact that it is only the national authorities
42 BRRD, art 75; SRM, art 76(1)(e).
43 BRRD, art 85(3).
44 BRRD, Recital 91.
45 BRRD, art 85(4)(a).
46 BRRD, art 85(4).
47 cf Babis (n7) 393.
48 TFEU, art 267.
49 SRM, art 86; SRM, Recital 120. The Appeal Panel that is to be established under SRM, art 85(1) only decides on specific
questions that do not involve creditor rights, cf SRM, art 85(3).
50 TFEU, art 263(4). It is likely that the decision of the Board will be seen as a regulatory act so that the requirement of
individual concern does not apply; for an overview on the debates around TFEU, art 263(4), cf A Dashwood and Others, Wyatt
and Dashwoods European Union Law (6th edn, 2011) 162; D. Chalmers et al., European Union Law (3rd edn 2014) 446.

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As regards, the legal protection creditors can seek against bank resolutions, two
levels have to be distinguished: first, compliance with the legal safeguards provided for by
BRRD (see BRRD section) and SRM (see SRM section) is subject to judicial
review. Second, creditors could try to claim a violation of their fundamental right to
property.

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implementation that has legal effects on the creditors.51 If the latter stance is taken,
creditors would again be limited to the claim for monetary damages as provided for in
the BRRD.52
Protection of the fundamental right to property

Summary

The EU framework provides creditors with the possibility to challenge the resolution
when the safeguards, including the no creditor worse-off clause, are not complied with.
However, claims must be brought before national courts and are limited to payment of
damages. Whether direct actions before the ECJ are admissible is as doubtful as is the
success of individual applications to the ECtHR. Creditors might therefore wish to seek
for other possibilities of redress on the international level.
51 cf SRM, art 18(9); for the requirement of direct concern, cf Case T-289/03 BUPA and ors v Commission [2008] ECR II-81 para
81: the contested measure must directly produce effects on the legal situation of the person concerned and its implementation
must be purely automatic.
52 Pursuant to art 5 SRM, the SRM only builds on the framework established in accordance with the BRRD; The SRM in art
87(4) assumes the possibility of national court proceedings when it provides that the Board shall compensate a national resolution
authority for the damage which it has been ordered to pay by a national court.
53 cf TEU, art 6; ECHR, Prot 1, art 1; Charter of Fundamental Rights of the European Union, art 17; and the provisions of
domestic constitutions, eg Grundgesetz [Germany], art 14; Human Rights Act [UK], Sch 1, Part II; French Constitution, arts 1, 34;
Declaration de Droits de lHomme et du Citoyen [France], art 17; Italian Constitution, art 42; Spanish Constitution, art 33.
54 The supremacy of EU law in general does not allow for a review by domestic constitutional courts, cf Declaration 17 annexed
to the Treaty of Lisbon, and, fundamentally, Case C-6/64 Flaminio Costa v ENEL [1964] ECR 585, 593; Case C-11/70 Internationale
Handelsgesellschaft [1970] ECR 1125. For similar approaches in domestic law, see, eg, Bundesverfassungsgericht [Germany], Solange
II (Re Wuensche Handelsgesellschaft), 22 October 1986, [1987] 24 CMLR 225; Conseil dEtat [France], Raoul Georges Nicolo [1990]
27 CMLR 173; Constitution of Ireland, art 29(6).
55 cf above SRM section.
56 The ECtHR has limited its jurisdiction on EU law to cases of manifestly deficient protection of fundamental rights in the EU:
Bosphorus v Ireland, ECHR 2005-VI, 107, 150. cf C Costello, The Bosphorus Ruling of the European Court of Human Rights:
Fundamental Rights and Blurred Boundaries in Europe (2006) 6 HRL Rev 87, 90. However, the envisaged accession of the EU to
the ECHR (art 6(2) TEU) may lead to a broader review of EU acts by the ECtHR. Cf B Rudolf, Die neue europaische
GrundrechtsarchitekturAuftrag fur Anwalte (2011) Anwaltsblatt 153, 158.
57 On the differentiation between political risks and economic risks, cf AM Schneuwly, International Investment Law and its
Instruments: Managing Risks to Investors and Host States (August 2012) Working Paper 5http://ssrn.com/abstract2203474
accessed 18 May 2015; R Dolzer and C Schreuer, Principles of International Investment Law (2nd edn, OUP 2012) 21.
58 Dennis Grainger and ors v UK, ECHR, app 34940/10, 10 July 2012, para 395http://hudoc.echr.coe.int/4accessed 18 May 2015.
Cf M Waibel, ECHR leaves Northern Rock Shareholders Out in the Cold EJIL talk! (3 August 2012) 5http://www.ejiltalk.org4
accessed 18 May 2015.

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Beyond a violation of the substantive provisions of the resolution regimes, creditors

might claim that a resolution decision infringes their fundamental right to property.53
They might raise this objection in an annulment proceeding before the ECJ54 (if this is
held to be admissible)55 or in an individual application to the ECtHR.56 As, however, the
right to property, in general, does not entail a right to be relieved from economic risk,57 a
resolution that does not leave the creditors worse off than the otherwise imminent
insolvency is unlikely to be found a violation of the right to property. Furthermore, the
ECtHR has so far been reluctant to go into a detailed analysis of bank resolutions: in its
judgment on the Northern Rock bail-out, it granted the British government a wide
margin of appreciation to decide upon the compensation for shareholders who suffered
losses due to a bank nationalization.58

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3. Jurisdiction of international investment tribunals in bank resolution disputes

59 The following analysis will be limited to the application of the bail-in tool as this has the most immediate impact on creditor
rights (cf above Bank resolution under BRRD and SRM section).
60 On the compensation in investment disputes, cf B Sabahi, Compensation and Restitution in Investor-State Arbitration (OUP
2011); I Marboe, Calculation of Compensation and Damages in International Investment Law (OUP 2009).
61 M Waibel, Sovereign Defaults before International Courts and Tribunals (OUP 2011) 328; MW Muller, Elemente einer
konstitutionellen Theorie des internationalen Investitionsschutzrechts in B Fassbender and A Siehr (eds), Suprastaatliche
Konstitutionalisierung (Nomos 2012) 215.
62 cf Dolzer and Schreuer (n 57) 130; Muller (n 61) 228.
63 Under the Treaty of Lisbon, the EU has obtained the competence to conclude new Bilateral Investment Treaties (art 207
TFEU) and already started negotiations over Trade and Investment Agreements, most prominently with Canada and USA. The
BITs concluded by Member States, however, remain in force; cf Regulation (EU) No. 1219/2012 of the European Parliament and of
the Council of 12.12.12 establishing transitional arrangements for bilateral investment agreements between Member States and
third countries, art 3. Arts 711 of the same document allow Member States to amend existing and to conclude new bilateral
investment treaties, subject, however, to some notification requirements and participation rights of the EU Commission.
64 cf C Brown, Introduction in C Brown (ed), Commentaries on Selected Model Investment Treaties (2014) 1, 2; R Dolzer and YI
Kim, Germany in C Brown (ed), Commentaries on Selected Model Investment Treaties (OUP 2014) 289, 319. In the following
analysis, reference will be made to the Model BITs of Austria (2008), France (2006), Germany (2009), Italy (2003), Latvia (2009),
the Netherlands (2004), and the United Kingdom (2008).
65 While there is no formal doctrine of precedent in international investment law, tribunals tend to refer to older proceedings
and to distinguish cases; cf C Schreuer and M Weiniger, A Doctrine of Precedent? in P Muchlinski and Others (eds), The Oxford
Handbook of International Investment Law (OUP 2008) 1188, 1189; Dolzer and Schreuer (n 57) 33.
66 Fedax NV v Venezuela, ICSID Case No ARB/96/3, Decision of the Tribunal on Objections to Jurisdiction [Jurisdiction], 11 July
1997; Award, 9 March 1998.
67 Ceskolovenska Obchodn Banka AS v The Slovak Republic [CSOB], ICSID Case No ARB/97/4, Decision of the Tribunal on
Objections to Jurisdiction [Jurisdiction I], 24 May 1999; Decision of the Tribunal on Respondents Further and Partial Objection to
Jurisdiction [Jurisdiction II], 1 December 2000; Award, 29 December 2004.
68 Firemans Fund Insurance Company v Mexico, ICSID Case No ARB(AF)/02/01, Decision on the Preliminary Question, 17 July
2003; Award, 17 July 2006.
69 Deutsche Bank AG v Democratic Socialist Republic of Sri Lanka, ICSID Case No ARB/09/2, Award, 31 October 2012; Dissenting
Opinion Makhdoom Ali Khan, 23 October 2012.

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The remaining part of this article discusses whether and to what extent international
investment tribunals provide another forum for (international) creditors to
challenge resolution decisions.59 While claims under investment treaties are limited to
damages,60 claimants often prefer this international adjudication forum over domestic
court proceedings.61 Investment arbitration is based on a global net of investment
agreements in which states guarantee the nationals of the other signatory favourable
investment conditions, including most favoured nation treatment, fair and equitable
treatment, and limitations on the governmental power to expropriate. While currently
there are over 3,000 independent investment treaties, their provisions are to a large extent
similar, allowing for a comparative interpretation and methodology.62 Moreover, there
are plans for a more unified European approach towards investment that could draw on
the Member States current investment policy.63 To get an overview on the investment
protection available to creditors of European banks, it is therefore useful to look at the
Model Investment Treaties of some EU Member States.64
In recent years, more and more financial disputes have successfully been
brought before international investment tribunals.65 Jurisdiction has been
established over promissory notes,66 loans secured by a government,67 subordinated
debentures,68 hedging agreements,69 and, most prominently and controversially,

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Bilateral investment treaties

Investment treaties usually determine the scope of protection ratione materiae by two
provisions: a wide definition of investment (see Definition of investment section) is
complemented by a territorial link criterion (see Territorial link section).
Definition of investment

BITs commonly define investment as every kind of asset,75 adding a list of assets that can
particularly be considered to be an investment. These lists are slightly different among
the various investment treaties. Some refer explicitly to corporate bonds, loans and debt
instruments,76 others mention debt participation in companies.77 All of the examined
model BITs refer in some way to obligations or claims to moneyat least if they have
an economic value78 or have been used to create such.79 The liabilities subject to bail-in
70 Abaclat and ors v Argentina, ICSID Case No ARB/07/5, Decision on Jurisdiction and Admissibility, 4 August 2011; Dissenting
Opinion Georges Abi-Saab, 28 October 2011; Ambiente Ufficio SPA and ors v Argentina, ICSID Case No ARB/08/9, Decision on
Jurisdiction and Admissibility, 8 February 2013; Dissenting Opinion Santiago Torres Bernardez, 2 May 2013; Giovanni Alemanni
and ors v Argentina, ICSID Case No ARB/07/8, Decision on Jurisdiction and Admissibility, 17 November 2014; Concurring
Opinion J Christopher Thomas, 17 November 2014. Another claim has been submitted with regard to Greeks sovereign debt
restructuring: Postova Banka, AS, and ISTROKAPITAL SE v Hellenic Republic, ICSID Case No ARB/13/8, pending.
71 This has already been discussed with regard to the bail-in scheme applied in the recapitalization of Bank of Cyprus and
Popular Bank of Cyprus in 2013; cf M Mendelson and M Paparinskis, Bail-ins and the International Investment Law of
Expropriation: In and Beyond Cyprus (2013) 28 JIBFL 475.
72 On (limited) exceptions where nationals can make use of the multilateralization of investment protection, cf SW Schill, The
Multilateralization of International Investment Law (CUP 2009) 197.
73 See above Carve-outs section.
74 In more detail, cf Gleeson (n 25) 5.
75 Austria Model BIT, art 1(2); France Model BIT, art 1(1); Germany Model BIT, art 1; Italy Model BIT, art I.1; Latvia Model
BIT, art 1.1; Netherlands Model BIT, art 1(a).
76 Austria Model BIT, art 1(2)(c); Italy Model BIT, art I.1b.
77 UK Model BIT, art 1a(i); Germany Model BIT, art 1(b); Latvia Model BIT, art 1.1b; Netherlands Model BIT, art 1(a)(ii).
78 Netherlands Model BIT, art 1(a)(iii); UK Model BIT, art 1(a)(iii); Latvia Model BIT, art 1.1c; France Model BIT, art 1(1)(c).
79 Germany Model BIT, art 1(c).

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sovereign bonds.70 Bank resolution disputes could be another step in international

investment law turning into a forum for global financial disputes.71
In order for jurisdiction of an investment tribunal to be established, two requirements
must be fulfilled: first, the claimant must fall under the personal scope of an investment
treaty (ie be a national of one of the contracting states). Therefore, in general, only
international creditors could refer to investment claims against bank resolutions.72
Second, the asset in question must constitute an investment. Under the EU framework,
all bank liabilities that are not covered by the carve-out clause are subject to bail-in.73
While, according to the waterfall approach, going concern liabilities are written off first,
also corporate bonds, deposits and short-term credits could be affected.74 The following
Bilateral investment treaties discusses whether these liabilities could be regarded as
investments under the definition provided for in investment treaties and in the ICSID
Convention, a framework for investor-state arbitration (see The notion of investment in
Article 25 ICSID convention section).

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are likely to be covered by one of the provisions. In any case, reference could still be made
to the general provision that every kind of asset can be an investment.80
Territorial link

The notion of investment in Article 25 ICSID convention

The fact that liabilities subject to bail-in fall into the material scope of an investment
agreement, does not necessarily imply that international creditors can seek investment
protection before an international tribunal. While there are no further requirements for
arbitration before the Stockholm Chamber of Commerce or the International Chamber
of Commerce and for ad hoc arbitration under the UNCITRAL Rules, some BITs allow
only for arbitration under the auspices of the International Center for Settlement of
Investment Disputes (ICSID).86 Moreover, ICSID arbitration is often described as the
most efficient system in terms of enforcement.87 Here, Article 25 ICSID Convention88
limits the jurisdiction of tribunals to disputes arising directly out of an investment. This
80 N Bernasconi-Osterwalder and L Johnson, Belgiums Model Bilateral Investment Treaty: A Review, 115http://www.iisd.org/
publications/belgiums-moedel-bilateral-investment-treaty-review4 accessed 18 May 2015.
81 Austria Model BIT, art 1(2); Germany Model BIT, arts 1, 8; Italy Model BIT, art I.1; Latvia Model BIT, art 1.1; France Model
BIT, art 1(1).
82 See Z Douglas, The International Law of Investment Claims (OUP 2009) 175.
83 See, eg, T Adrian and HS Shin, The Changing Nature of Financial Intermediation and the Financial Crisis of 200709 (April
2010) Federal Reserve Bank of New York Staff Reports, no 439 5www.newyorkfed.org/research/staff-reports/sr439.pdf4 accessed
18 May 2015.
84 Abaclat, Jurisdiction (n 70) para 376; Ambiente, Jurisdiction (n 70) para 423.
85 Fedax, Jurisdiction (n 66) para 40.
86 For example, France Model BIT, art 8, UK Model BIT, art 8 (preferred alternative).
87 Under art 54(1) ICSID Convention, awards are immediately enforceable in all ICSID Member States without being subject to a
review by national courts as under art 5 New York Convention; cf JD Mortenson, The Meaning of Investment: ICSIDs Travaux
and the Domain of International Investment Law (2010) 51 Harv Int LJ 257, 265. With regard to the annulment proceeding under
art 52 ICSID Convention, it has, however, been disputed whether this makes the ICSID Convention the more efficient framework
for investment arbitration; cf F Baetens, Enforcement of Arbitral Awards: To ICSID or not to ICSID is not the Question in T
Weiler and I Laird (eds), Investment Treaty Arbitration and International Law (Juris 2011) 211.
88 Convention on the Settlement of Investment Disputes between States and Other States (ICSID Convention) 14 October 1966
(amended 10 April 2006).

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The examined BITs, however, limit the scope of application to assets invested in the
territory of the host state.81 This territorial link criterion will be of high relevance in
cases of intermediation chains, which are typical for the provision of capital in
international finance. Some guidance might be taken from previous arbitral decisions on
underwriting and secondary market transactions of bonds.82 In these cases, it was argued
that the payment lacked a sufficient territorial link as it was not directly transferred to the
issuer.83 The tribunals, however, dismissed this argument. In the above-mentioned
decisions on Argentinas sovereign debt restructuring, tribunals held that the point of
reference must be the economic operation as a whole.84 In an earlier decision on
promissory notes issued by the Republic of Venezuela, it was held that the decisive
criterion to establish a territorial link must be whether a provision of funds leads to
credit benefit in the host state.85 This rather broad approach makes it likely that the
territorial link criterion will also be established in prospective bank resolution disputes.

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The Salini criteria

While earlier awards already considered some criteria as typical for investments,90 the
tribunal in Salini held the criteria of contribution, duration, risk and contribution to the
host states development to be mandatory with regard to the wording of investment and
the preamble of the ICSID Convention that emphasizes the developmental impact of
investments.91 To this list, the tribunal in Helnan Hotels added the requirement of
regularity of profit and return.92
The contribution criterion comes the closest to the notion of every kind of assets
in BITs as it requires a commitment of money and other assets93 that can generally
take every form.94 Under this wider notion, all liabilities in question could be
considered contributions. Sometimes, the criterion has, however, been understood as
setting a substantiality requirement, excluding minor contributions.95 This approach is
not undisputed as economic definitions of investment used by the International
Monetary Fund tend not to differentiate in terms of substantiality and a minimum
requirement of US$100,00 contained in ICSIDs first draft was not included in the final
version.96 Tribunals sticking to it would have to determine the substantiality of the
liability in question on an individual basis.
In a similar vein, portfolio investments have been seen as excluded from Article 25
ICSID Convention as they did not constitute a contribution to the host states
development.97 It was argued that they did not have a positive overall impact on the host
89 Salini Construttori SPA and Italstrade SPA v Marocco, ICSID Case No ARB/00/4, Decision on Jurisdiction, 23 July 2001, para
52; Abaclat, Diss Op (n 70) para 40; Ambiente, Diss Op (n 70) para 263.
90 Fedax, Jurisdiction (n 66) para 43.
91 Salini, Jurisdiction (n 89) para 52.
92 Helnan International Hotel A/S v Egypt, ICSID Case No ARB/05/8, Decision on Jurisdiction, 17 October 06, para 77; cf S
Manciaux, The Notion of Investment: New Controversies (2005) 6 JWIT 1, 2.
93 Malaysian Historical Salvors, SDN, BHD v Malaysia, ICSID Case No ARB/05/1, Decision on the Application for Annulment, 16
April 2009, para 57.
94 Deutsche Bank, Award (n 69) para 297.
95 cf C Schreuer, The ICSID-Convention: A Commentary (1st edn, CUP 2001) art 25, para 122.
96 Mortenson (n 87) 297.
97 On this criterion, cf OE Garca-Bolvar, Defining an ICSID Investment: Why Economic Development Should be the Core
Element (2012) 3 Invest Treaty News 3, 7.

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provision has stimulated a heated debate in both case law and literature: the scale of
interpretations offered ranges from attributing almost no inherent meaning to Article 25
to understanding it as providing a very clearly and narrowly defined framework of
investment protection.89
For the latter approach, five criteria are commonly set out that assets have to comply
with in order to be regarded as investments under Article 25 ICSID Convention (the so
called Salini criteria). Their implications for bank resolution disputes will be discussed,
in The Salini criteria section, before some more flexible approaches to the notion of
investment are described that seem to prevail in recent case law and literature (see A
broader understanding of investment section).

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98 M Sornarajah, The International Law on Foreign Investment (3rd edn, 2012) 196.
99 M Dekastros, Portfolio Investment: Reconceptualising the Notion of Investment under the ICSID-Convention (2014) 14
JWIT 286, 312 with further reference to OECD and ECB documents; cf also E Gaillard, Identify or Define? Reflections on the
Evolution of the Concept of Investment in ICSID Practice in C Binder and Others (eds), International Investment Law for the 21st
century (OUP 2009) 403, 414.
100 Dekastros (n 99) 313 makes the even broader argument that the admission of portfolio investments should preclude states
from denying them protection.
101 Dekastros (n 99) 305 et seq.
102 Mendelson and Paparinskis (n 71) 476.
103 B Legum and C Mouawad, The meaning of investment in the ICSID-Convention in PHF Bekker and Others (eds),
Making Transnational Law Work in the Global Economy: Essays in Honor of Detlev Vagts (CUP 2010) 326, 327.
104 Manciaux (n 92) 12; Deutsche Bank, Award (n 69) para 304; Consorzio Groupement LESI DIPENTA c Republique algerienne,
ICSID Case No ARB/03/08, Sentence, 10 January 2005, para 73(iii).
105 Saluka Investments BV v Czech Republic, UNCITRAL, Partial Award, 17 March 2006, para 209; Dekastros (n 99) 314.
106 The 2012 proposal of the BRRD exempted debt with a maturity of less than 1 month, cf Proposal COM/2012/0280 final
012/0150 (COD), XVI.
107 Salini, Jurisdiction (n 89) para 53; cf Jan de Nul NV and Dredging International NV v Egypt, ICSID Case No ARB/04/13,
Decision on Jurisdiction, 16 June 06, para 93.
108 Mortenson (n 87) 298.
109 Legum and Mouawad (n 103) 327; cf also FS Mishkin and Others, The Economics of Money, Banking & Financial Markets
(Pearson 2013) 207.

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states economy as they could be withdrawn easily in a financial crisis.98 An economic

evaluation, however, shows that during the last financial crisis, particularly in the USA,
portfolio investments had a rather stabilizing impact.99 Moreover, the fact that states
introduce a resolution regime aimed at stabilizing systemically important financial
instruments by bailing in portfolio investors money shows that they presume these funds
still to be present despite financial struggles.100 Furthermore, the ICSID Conventions
travaux preparatoires again show that attempts to explicitly exclude portfolio investments
failed.101
The duration criterion could exclude short- to medium-term debt.102 Particularly,
deposits are often committed for no defined period of time and can be withdrawn at any
moment.103 However, tribunals are likely to refer to the period the creditor planned to
commit the funds for rather than the actual time passed since the money was
deposited.104 Often, a longer connection might be expected; at least, it might be difficult
to prove the contrary.105 Since the resolution framework in its final version does not
include a general minimum period for debt to fall under the scope of the bail-in tool,106
tribunals might apply the criterion of duration in order to rule out very short-term
liabilities. Again, drawing the line might be difficult: while the Salini tribunal saw 25
years107 as the minimum duration of an investment, in the Deutsche Bank case, 1 year
was considered sufficient. Again, it is questionable whether such requirements can be
read into the mere notion of investment. Also, a proposed 5-year minimum duration
was not accepted in the final version of the ICSID Convention.108
While debt securities regularly pay a coupon and thus create a regular profit, demand
deposit accounts that do not pay interest might be excluded by the regular profit and
return criterion.109 Given the $100,000 threshold, it seems, however, rather unlikely that
demand deposits will be subject to bail-in.

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A broader understanding of investment

Even those, however, might be regarded as investments by tribunals following a broader

approach towards Article 25 ICSID Convention. With reference to definitions provided in
dictionaries,114 economic literature115 and by the IMF,116 it has been argued that the notion
of investment was neither seen as restricted to long-term, substantial contributions at the
time of drafting of the ICSID Convention nor now.117 Moreover, a too rigid approach to
the notion of investment was criticized due to the fact that the ICSID Convention left it
open to states to limit the investment protection by making reservations,118 submitting
notifications,119 or narrowly defining investment in their BITs.120
The fact that the definitions in contemporary BITs show a wide understanding of
investment could, on the contrary, stimulate a broader interpretation of Article 25 of the
ICSID Convention as well: The more treaties were concluded based on the same (or
similar) definitions by an increasing number of states . . . the more artificial it appeared to
turn to an amorphous understanding of the term in traditional economic literature.121
110 E Ferran and LC Ho, Principles of Corporate Finance Law (2nd edn, OUP 2014) 372.
111 Joy Mining Machinery Limited v Egypt, ICSID Case No ARB/03/11, Award on Jurisdiction, 6 August 2004, para 57; cf Waibel
(n 70) 726.
112 Dekastros (n 99) 317.
113 Fedax, Jurisdiction (n 66) para 43.
114 Legum and Mouawad (n 103) 339.
115 Dekastros (n 99) 287, 309. cf also A Baum and N Crosby, Property Investment Appraisal (Blackwell 1995) 8 (explicitly
including bank deposits).
116 Dekastros (n 99) 310.
117 Mortenson (n 87) 310; Dekastros (n 99) 293: The Salini standard completely dissociates the economic notion of investments
from the legal one, it subsumes several descriptive criteria which have been put forward by literature, takes them out of their
context and creates a new, very restrictive and inflexible legal definition of investment.
118 cf Mortenson (n 87) 293.
119 ICSID Convention, art 25(4). cf Abaclat, Jurisdiction (n 70) para 364; Ambiente, Jurisdiction (n 70) para 475.
120 Mortenson (n 87) 280; cf also Biwater Gauff (Tanzania) Ltd v Tanzania, ICSID Case No ARB/05/22, Award, 24 July 2008,
para 312; Deutsche Bank, Award (n 69) para 294.

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On a more general account, it could be questionable whether pure debt financial

instruments and loans entail a substantial element of risk: the idea of debt finance is that
a principal is repaid either at a fixed time or on demand of the creditor.110 The only
remaining risk would then be the risk of the banks default that could be regarded the risk
involved in any commercial contract.111 Against this, however, it can be argued that
the default risk of a systemically important financial institute is closely linked to the
economic and political factors in the host state and thus to the temporal aspect of the
commitment and its location.112 Furthermore, the very introduction of the resolution
regime into the host states legislation by itself creates a risk of state interference with debt
securities and deposits already before an actual default. Some tribunals and
commentators even argued that every violation of property in fact shows the risk it is
exposed to.113 If one follows this approach, besides Additional Tier 1 instruments that
entail a participation in the going-concern risk of the enterprise, most liabilities subject to
bail-in can be considered investments under Article 25 ICSID Convention. Only small
and very short-term liabilities as well as demand deposits would be excluded.

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Based on these concerns, tribunals have understood the Salini criteria rather as
interpretative guidelines than as mandatory requirements122 and put more emphasis on
the investment definition in the applicable BIT.123 The objective wording of Article 25 of
the ICSID Convention is then understood as only setting outer limits to abstruse
results.124 This broader, more flexible approach makes it even more likely that the
liabilities subject to bail-in are regarded as investments under Article 25 ICSID as well.
Summary

4. A substantive investment law framework for bank resolution?

In this case, tribunals will then examine whether the resolution is in conformity with the
standards of investment protection provided for in the investment treaty. As they will
assess the entire resolution process, compliance with the EU law provisions does not
exempt the resolution decision from violating investment law. This could lead to a
problem of substantive fragmentation between EU law and investment law if Member
States, by implementing EU provisions, risked being found in violation of their
obligations towards investors.125 However, an analysis of the protection against
expropriation (see Expropriation section) and of the standard of fair and equitable
treatment (see Fair and equitable treatment section) shows that this is not likely to
occur: only resolution decisions that also violate the EU framework can be considered a
violation of investment treaty standards (see Summary section).
Expropriation
International investment agreements normally limit states general entitlement to
expropriate by subjecting it to requirements.126 An expropriation (see Definition of
121 Dolzer and Schreuer (n 57) 65.
122 For example, CSOB, Jurisdiction I (n 67) para 90; Biwater Gauff, Award (n 120) para 316; Schreuer (n 95) art 25, para 122:
These features should not necessarily be understood as jurisdictional requirements but merely as typical characteristics of
investments under the Convention; and C Schreuer, The ICSID-Convention: A Commentary (2nd edn, OUP 2009) art 25, paras
171ff: The development in practice from a descriptive list of typical features towards a set of mandatory legal requirements is
unfortunate. The First Edition of the Commentary cannot serve as authority for this development; Gaillard (n 99) 407; Mortenson
(n 87) 272.
123 This approach is a revival of the subjective approach that was followed in Fedax, Jurisdiction (n 66) para 25. In favour of
some sort of subjective approach Azurix Corporation v Argentina, ICSID Case No. ARB/01/12, Decision on Jurisdiction, 8
December 2003, paras 59ff, AES Corporation v The Argentine Republic, ICSID Case No ARB/02/17, Decision on Jurisdiction, 26
April 2005, paras 58ff; Generation Ukraine Inc v Ukraine, ICSID Case No ARB/00/9, Award, 16 September 2003, s 8.1; Mihali v Sri
Lanka, ICSID Case No ARB/00/2, Award, 15 March 2002, paras 375ff; Dekastros (n 99) 294 (with further reference). Legum and
Mouawad (n 103) 355; Mortenson (n 87) 315.
124 Ambiente, Jurisdiction (n 70) paras 437, 470.
125 On previous clashes, cf J Kleinheisterkamp, European Policy Space in International Investment Law (2012) 27 ICSID Rev
416, 420.
126 Dolzer and Schreuer (n 57) 98.

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The assessment of a number of Model BITs by EU Member States has shown that the
assets subject to bail-in are likely to fall into the substantive scope of an investment
agreement. Moreover, at least most liabilities will also be considered investments under
Article 25 of the ICSID Convention. Therefore, foreign creditors of European banks
under resolution are likely to be able to bring investment claims.

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expropriation section) is only justified when it is for a legitimate public purpose (see
Legitimate public purpose section), non-discriminatory (see Non-discrimination
section), and against compensation. Tribunals, however, found that compensation was
not necessary when a taking of property occurs in the context of a legitimate regulatory
action (see Compensation section).
Definition of expropriation

Legitimate public purpose

Tribunals have been generous in identifying a legitimate public purpose and only rarely
excluded abusive expropriations.132 Here, reference can be made to the goals of banking
regulation as set out in BRRD and SRM and particularly the aim to avoid significant
adverse effects on financial stability by increasing market confidence and reducing
contagion in the financial system.133
Non-discrimination

The requirement of non-discriminatory treatmentprohibiting different treatment of

investors that are in a comparable situation134might raise doubts with regard to the
differentiation between creditors.135 While the waterfall approach can be justified by the
different risks that creditors on different levels take, the carve-out of secured creditors is
legitimized by the preferential treatment they would receive in insolvency.136 The
exception of very short-term creditors and of providers of goods and services can be
justified by the function of the bail-in: short-term creditors do not show any involvement
127 Norwegian Shipowners Claims (Norway v USA), Permanent Court of Arbitration, [1921] 1 RIAA 307, 333 (cancellation of
contract); Methanex v United States, UNCITRAL, Award, 03 August 2005, 7: the restrictive notion of property as a material
thing is obsolete.
128 JW Salacuse, The Law of Investment Treaties (OUP 2010), 290; U Kriebaum, Expropriation in M Bungenberg and Others
(eds), International Investment Law (Nomos 2015) 20 5http://ssrn.com/abstract22959794.
129 A Reinisch, Expropriation in Muchlinski (n 65) 410, 442; Salacuse (n 128) 297.
130 As in the Cyprus case where 37.5% of deposits over E100,000 have been converted to equity, cf I Jack and T Cassels, Cyprus:
An Analysis of the Impact of the Resolution Methodology on Stakeholders Claims Including the Emergency Liquidity Assistance
(2013) 8 CMLJ 450, 451.
131 cf Kriebaum (n 128) 34; SD Myers, Inc v Canada, UNCITRAL, Partial Award, 13 November 2000, para 283; Waste
Management, Inc v Mexico (Number 2), ICSID Case No ARB(AF)/00/3, Award, 30 April 2004, para 141; Gami Investments, Inc v
Mexico, UNCITRAL, Final Award, 15 November 2004, Final Award, para 126; Metalclad, Award (n 129) para 103.
132 Kriebaum (n 128) 63 with further references.
133 Gleeson (n 25) 3.
134 Kriebaum (n 128) 70.
135 Mendelson and Paparinskis (n 71) 478.
136 Bliesener (n 7) 200.

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The notion of expropriation is interpreted broadly in international law: it is not limited

to the direct taking of physical assets127 but encompasses all measures that have the effect
of taking of any form of investment.128 The cancellation or conversion of debt is likely to
be considered a direct expropriation as the legal title to the original property is lost.129
The fact that creditors may keep parts of their investment130 or get shares in return does
not alter this finding: partial expropriations have been acknowledged when the property
in question could be disassembled into one part that is taken and another that remains
with the investor.131

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in the business of the institution; the functioning of the going-concern has to be upheld
in order to keep the recapitalized institute workable.137 Between depositors below and
above the E100,000 threshold,138 there is no legally relevant difference in treatment: every
depositor is exempted from the bail-in up to the amount of E100,000. Thus, no
discrimination occurs.
Compensation

137 Bliesener (n 7) 205.

138 Mendelson and Paparinskis (n 71) 478.
139 M Waibel, Creditor Protection in International Law in Bekker and Others (n 103) 431, 452.
140 Reinisch (n 129) 433: widespread consensus that regulatory measures pursued for legitimate objectives cannot be regarded as
indirect expropriation.
141 Firemans Fund (n 68) para 214.
142 Firemans Fund (note 68) para 198.
143 BRRD, art 32(1); SRM, art 18(1).
144 BRRD, art 34(1)(g); SRM, art 15(1)(g). cf also above No creditor worse off than in insolvency section and, more general,
Thole (n 7) 222.
145 Saluka, Partial Award (n 105) para 272.
146 Dennis Grainger (n 58) para 39.
147 Y Shany, Toward a General Margin of Appreciation Doctrine in International Law? (2005) 16 EJIL 907.
148 Mendelson and Paparinskis (n 71) 478.

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While investment agreements in general require compensation for expropriation,

tribunals allowed for an exception where property is only incidentally affected by
governmental action (collateral effects doctrine)139 or taken for regulatory purposes,
including general taxation, forfeiture for crime and regulation with respect to public
order or human health.140
In the Firemans Fund case, the tribunal established that the cancellation of debt
securities in a bank recapitalization can be exempted from the requirement of
compensation as well.141 It emphasized, however, that the administrative act in question
had as its only goal the prevention of a banks imminent insolvency and that it was only
to the investors benefit as they would have been likely to suffer even greater losses in the
banks liquidation.142
If carried out according to the EU law framework, a bank resolution under BRRD and
SRM meets these requirements as well: the resolution decision is only to be taken when
the bank is failing or likely to fail.143 Furthermore, the resolution aims at preventing all
participants from greater damage and contains an explicit no creditor worse-off
clause.144 When determining whether these requirements are met, it is likely that
tribunals grant the resolution authorities a certain margin of appreciation as did the
Saluka tribunal145 and the ECtHR in Northern Rock146 when deciding on the
justification of bank resolution measures.
If a good faith control147 should, however, come to the conclusion that the failure
clearly was not imminent or that creditors suffered greater losses than in insolvency,
tribunals will find compensation to be due. In the case of a violation of the no creditor
worse-off clause, tribunals are likely to take into consideration that claims against a nearly
insolvent bank are almost worthless148 and accept the liquidation value standard

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provided for in the EU framework.149 When the liquidation is, however, found to have
occurred although the institution was not likely to fail, compensation might be higher: it
would have to refer to the position the claimant would be in had the wrongful act not
occurred,150 ie the going-concern enterprise value . . . in addition to the compensation
based on the liquidation value.151 As this case is not dealt with in the EU framework,
tribunals here might go beyond the compensation awarded by domestic courts or the
ECJ.
Fair and equitable treatment

Legitimate expectations and the problem of retroactivity

Legitimate expectations will be grounded in the legal order of the host state as it stands at
the time the investor makes the investment.155 Thus, they could be violated by a
retrospective change in the law.156 Under this provision, a bail-in could be problematic if
it is to the detriment of creditors who acquired financial instruments before the entry into
force of the resolution framework and were thus not aware of the risk that the
instrument entails.157 While the 2012 proposal of the BRRD tried to overcome this
problem by stipulating a late entry into force of the bail-in,158 the final version of the
framework does not provide for this safeguard.
However, even if tribunals found a retrospective application to have occurred, they
might see it as justified. Owing to the no creditor worse-off clause (which is enforceable
149 BRRD, art 74(2)(a); SRM, art 20(17): cf Bliesener (n 7) 221.
150 Case Concerning the Factory at Chorzow (Germany v Poland), Merits, 13 September 1928, 17 PCIJ Series A, 1, 47: wipe out all
the consequences of the illegal act and re-establish a situation which would, in all probability, have existed if that act had not been
committed.
151 Bliesener (n 7) 221.
152 Dolzer and Schreuer (n 57) 130. cf also A Diehl, The Core Standard of International Investment Protection (Wolters Kluwer
2012).
153 S Schill, Fair and Equitable Treatment in S Schill (ed), International Investment Law and Comparative Administrative Law
(OUP 2010) 151, 158.
154 Tecnicas Medioambientales Tecmed, SA v Mexico States, ICSID Case No ARB (AF)/00/2, Award, 29 May 2003, para 154; LG&E
Energy Corp, LG&E Capital Corp, LG&E International Inc v Argentina, ICSID Case No ARB/02/1, Decision on Liability, 03 October
2006, para 127; Occidental Exploration and Production Company v Ecuador, LCIA Case No UN3467, Final Award, 01 July 2004, para
185; CMS, Award (n 129) para 289; critical MTD Equity Sdn Bhd and MTD Chile SA v Chile, ICSID Case No ARB/01/7, Award, 25
May 2004, para 116; K Vandevelde, A Unified Theory of Fair and Equitable Treatment (2010) 43 NYU J Int Law Politics 43, 67.
155 Dolzer and Schreuer (n 57) 145; Salacuse (n 128) 232.
156 Schill (n 153) 174.
157 Gleeson (n 25) 23; Huertas (n 28) 73.
158 cf BRRD proposal (n 106) 18: That date [2018 instead of 2014] takes into account the observed maturity cycle of existing
debt.

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The standard of fair and equitable treatment is the most frequently invoked standard152
of international investment law. It has been described as the embodiment of the rule of
law153 with procedural and substantive dimensions. These include the protection of the
legitimate expectations that were taken into account by the foreign investor154 (see
Legitimate expectations and the problem of retroactivity section) and the requirements
of transparency, due process and proportionality (see Transparency, due process, and
proportionality section).

Michael Wolfgang Muller  Creditor protection in bank resolution

293

by the expropriation standard159), creditors are in no different situation than they would
have been before in case of an insolvency.160 Moreover, tribunals acknowledge the right
of a sovereign state to determine its legal order161 and therefore might allow for the
recalibration of the economic and legal system in response to a severe crisis.162 If this
reasoning were adopted, the bank resolution would not be found in violation of the
standard of fair and equitable treatment.
Transparency, due process and proportionality

159 cf above Compensation section.

160 Bliesener (n 7) 211.
161 CMS, Award (n 129) para 277; Saluka, Partial Award (n 105) para 305; Parkerings-Compagniet AS v Republic of Lithuania,
ICSID Case No ARB/05/8, Award, 11 September 2007 paras 332333.
162 Salacuse (n 128) 233.
163 Salacuse (n 128) 237; Vandevelde (n 154) 84; Champion Trading Company, Ameritrade International, Inc v Egypt, ICSID Case
No ARB/02/9, Award, 27 October 2006, para 164.
164 Diehl (n 152) 444; Vandevelde (n 154) 84; Schill (n 153) 171; Metalclad, Award (n 129) para 93; Glamis Gold, Ltd v USA,
UNCITRAL, Award, 8 June 2009, para 616.
165 AES, Award (n 123) ss 9.3.369.3.73; International Thunderbird Gaming Corporation v Mexico, UNCITRAL, Arbitral Award,
26 January 2006, para 200; Grand River Enterprises Six Nations, Ltd, et al v USA, UNCITRAL, Award, 12 January 2011, paras 222
236; Metalclad, Award (n 129) para 91.
166 Schill (n 153) 169; Saluka, Partial Award (note 105) para 304.
167 BRRD, art 32(4); SRM, art 18; cf above Bank Resolution under BRRD and SRM section.
168 BRRD, art 34(1)(b); SRM, art 15(1)(b).
169 BRRD, art 48; SRM, art 17.
170 BRRD, art 34(1)(g); SRM, art 15(1)(g); Bliesener (n 7) 209.
171 BRRD, art 32(1)(b); SRM, art 18(1)(b).
172 Thole (n 7) 227.
173 Bliesener (n 7) 225.

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Moreover, the standard of fair and equitable treatment requires transparency both as to
what law is in force163 and within administrative and judicial decision-making.164
Furthermore, under the standard of due process, investors have to be involved in the
proceedings and be given a right to challenge decisions.165 Finally, decisions that conflict
with investors rights may not be disproportionate.166
Under these standards, the whole resolution procedure could be subject to review by
arbitral tribunals. The cornerstones of this procedure are set, when BRRD and SRM
stipulate the criteria that must be fulfilled before resolution is started,167 limit the
authorities discretion by the principle of seniority168 and the waterfall approach,169 and
offer creditor protection by an enforceable no creditor worse-off clause.170 Furthermore,
a bail-in may only be carried out when private initiatives and other public resolution
tools cannot reach the goal of bank recapitalization.171 While the administrative
procedure as set out in the framework, thus, is likely to be found transparent and
proportionate, it could be criticized that creditor protection is limited to retrospective
control: investors are neither consulted during the resolution process nor can they have
the resolution decision unwound. This drawback is, however, likely to be justified by the
necessity to carry out the complex procedure of bank recapitalization under economic
and time pressure,172 and by the serious systemic implications the unwinding of a bail-in
could have.173

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If this reasoning is accepted, tribunals will come to the conclusion that the resolution
framework in general provides for a sufficient procedural protection for creditors. This
leads, again, to the question whether the authorities and courts dealing with the bank
resolution acted in conformity with the procedural requirements and made a convincing
account of why they held the bail-in procedure to be necessary. All this becomes subject
to review under the fair and equitable treatment standard.
Summary

5. Conclusion
This article has examined the legal protection of creditors in a bank resolution under the
new EU framework, in particular in the case of a bail-in. It has argued that besides
proceedings before domestic courts, the ECJ and the ECtHR, foreign creditors can resort to
investment arbitration to enforce the safeguards provided for in the framework. At least
most of the assets subject to bail-in are likely to be considered investments under both
contemporary BITs and the ICSID Convention. The substantive provisions of investment
treaties allow for compensation to be awarded when the resolution is carried out too early,
disproportionately, intransparently or in violation of the no creditor worse-off clause.
As in financial disputes investment arbitration has often been preferred to domestic
court proceedings, it is not unlikely that claims are brought in the context of resolution
procedures. The trend of international investment law to become a framework for
international financial disputes, is, however, based on a broad notion of investment in
contemporary investment treaties. In the process of renegotiating or concluding new
investment treaties, states (and the EU under Article 207 TFEU) have to be aware of this.174

174 On examples to exclude financial market regulation from investment treaties scope of application, cf A van Aaken and J
Kurtz, Prudence or Discrimination? Emergency Measures, the Global Financial Crisis and International Economic Law (2009) 12
JIEL 859, 892.

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The standards of expropriation and fair and equitable treatment allow for a substantive
review of the resolution process by international investment tribunals. While they draw
attention to disputed questions concerning issues of non-discrimination, valuation of
compensation and retroactivity, it is likely that the resolution framework as such is not
found to be in violation of these provisions. However, creditors can make use of
investment arbitration in order to enforce compensation for violations of the framework.
In particular, claims can be brought, when the resolution is carried out before the
requirements are met, is disproportionate or infringes the no creditor worse-off clause.