Financial Institutions in Distress–When Banks Need an Investor

Abstract This article addresses the scenarios in which a financial institution runs into a distressed situation and seeks an investor. Banks are special entities. On the one hand, they are large corporates, many of which are also listed entities. General rules of corporate law apply. On the other hand, they constitute a deeply regulated industry and especially in a crisis the regulator will be closely involved. The intensity of such involvement will depend on the intensity of the crisis. Banks are very sensitive entities and confidence is their biggest asset. Any search for an investor must take that into account. There are various ways a bank can find an investor: it can sell assets, increase its capital or orchestrate a share deal or merger in various ways. The bank might also consider preparing for exit through resolution using one of the resolution tools under Directive 2014/59/EU (BRRD) or can be subject to a facilitated merger. Below, these options will each be assessed in more detail. However, first, we will explore when a bank is actually considered to be in distress.