Although not very large on a pan-European scale, BES is nevertheless Portugal’s third-largest bank – over EUR 80 billion consolidated assets at half-year 2014 – and can thus be considered “too big to fail” (“TBTF”) for that country’s banking system. And yet, the bank is not being rescued via a traditional TBTF taxpayer bailout – as would have probably happened before or during the financial and sovereign crises.

The new EU bank resolution and recovery regime will be effective as of early next year (with the full bailin provisions one year later) but the BES rescue follows the EU state-aid rules finalized last year which call for burden-sharing by private investors – shareholders and subordinated creditors – before public funds are disbursed. In essence, the rescue of BES should work according to the new rulebook, to some extent contradicting market skeptics who still claim that taxpayer bailouts would continue to be used first for systemically important banks at the cliff’s edge.

Scope Ratings considers that once the new resolution regime is in place across the EU the bank rescue process will become even more clear and predictable, with very positive consequences for market confidence and the stability of bank strategies.

The regulatory action for a bank as large as BES – including the split between a “good” and a “bad” bank -- being structured and announced over just one weekend (not dissimilar from similar situations in the US) should be an additional factor enhancing the confidence of market participants in the future effectiveness of bank rescue processes.

Consequently, far from seeing a negative contagion effect for EU banking systems in general, we see the BES rescue as a positive development flagging the new post-crisis realities of the European banking landscape. The forthcoming transition to the Banking Union’s Single Supervisory Mechanism (SSM) should further strengthen this aspect by removing in time the risk of supervisory “benign neglect” at some national levels.

At the same time the BES rescue illustrates the importance of banks having sufficient frontline bailinable debt (GLAC or MREL) for successful resolution. At this time this not being the case with BES the Portuguese government is temporarily funding the Resolution Fund (later to be reimbursed by private bank funds).

Without getting into all the details of BES’ financial and operational weaknesses, we consider the structure of this group as atypical not only for European banks in general but also for Portuguese banks. Stemming from historical reasons, the Portuguese bank’s holding company was based in Luxembourg – thus not being supervised by the Portuguese authorities. Even as a minority shareholder, ESFG was exercising material influence on the bank – including large credit exposure to owners’ interest from the bank which turned out to be a “black hole”.

While the impact of the Angolan exposure has yet to be determined for BES, we note that other Portuguese banks also have material exposures to the same market, from which they have been deriving significant earnings in recent years.

We assume that Novo Banco – the “good” bank of BES – will sooner or later be considered a strategic investment by a large banking group (potentially elsewhere in Europe), as it will continue to command a significant market position in the retail and commercial banking market in Portugal – itself a slow recovery story.

Scope Ratings notes that its bank rating methodology and subsequent European bank ratings – published earlier this year -- have been based on resolution and creditor bailin ahead of taxpayer bailout-based support (and in effect replacing it from 2016). The BES rescue seems to validate this approach.